Detroit bankruptcy trial resumes; final major settlement expected this week

Oct 15, 2014

After a week-long recess, Detroit’s bankruptcy trial resumed Tuesday.

City lawyers spent more than two weeks making their case for Detroit’s proposed plan of adjustment to restructure its debts in bankruptcy. They rested last week.

Now, objecting creditors get their chance to argue that plan doesn’t meet the requirements of the municipal bankruptcy code.

Laura Bartell, a professor of bankruptcy law at Wayne State University, said the trial has gone “swimmingly” for the city so far.

"I think that the opponents have been falling down, settling, coming on board,” Bartell said. “And the judge has given every indication that he is skeptical about any arguments that the plan is not confirmable.”

Judge Steven Rhodes will ultimately decide whether or not to confirm the plan.

But even as it prepares to make its case to derail the plan, Detroit’s last major holdout creditor--the bond insurer Financial Guaranty Insurance Corporation (FGIC)—is also deep in behind-the-scenes mediation to reach a settlement with the city.

City lawyers told Judge Rhodes Tuesday that they expect to announce a settlement between the parties later this week.

FGIC has a $1.1 billion debt claim, stemming from a terrible pension financing deal it insured in 2005.

Bartell said we know little for certain about what’s going on in mediation—leaks have been few, and talks are taking place in New York.

But if a settlement is announced Thursday as expected, it will likely closely resemble the one Detroit struck with another bond insurer, Syncora.

“That is, it would involve some cash, some bonds, and some city properties, probably parking facilities,” Bartell said.

Bartell said if there is a settlement, Judge Rhodes could confirm the plan of adjustment as soon as next month--though it would still likely what's called a "cramdown" over the objections of a handful of creditors.

In theory, that could allow the plan to take effect if the city fulfills its terms—finally wrapping up the bankruptcy process—sometime early next year.