Will objections slow Detroit's trip through bankruptcy?

May 19, 2014

Detroit’s bankruptcy process has been speedy so far--but hit a few apparent stumbling blocks last week, as creditors filed a slew of objections to the city’s plan of adjustment.

They included representatives for some Detroit bondholders, who are upset about the proposed “grand bargain” to use more than $800 million to minimize pension cuts, and protect the Detroit Institute of Arts from possible liquidation.

That’s left some people wondering if the city and Judge Steven Rhodes can keep up the quick pace—and meet Emergency Manager Kevyn Orr’s goal of exiting bankruptcy by early fall.

City bondholders and their insurers (along with some independent legal experts) think the grand bargain is legally questionable. They say it would protect pensioners from the kind of steep cuts the plan of adjustment would force on bondholders—something they argue violates Chapter 9 of the US bankruptcy code.

Pensioners and some bondholders are the city’s two major unsecured creditor groups. Judge Rhodes could decline to confirm the plan of adjustment if he rules it’s not “fair and equitable to dissenting classes,” or if it “discriminates unfairly against a dissenting class.”

But Wayne State University bankruptcy law professor Laura Bartell says that Rhodes is the one who decides what those terms mean—and so far, he’s raised no objections to the grand bargain concept, or been sympathetic to bondholders’ efforts to prove the DIA’s assets are worth more than the city claims.

“I have no reason to believe that Judge Rhodes is going to conclude that giving more to pension classes than to financial bondholder classes is unfair or inequitable, or discriminates unfairly,” Bartell says.

But Rhodes has set a July trial date for the plan of adjustment, and Bartell says the multitude of objections will inevitably drag that trial out—even if they don’t ultimately derail the plan’s confirmation.

“I think the real question now is whether he can manage the trial in such a way to complete it within the time he originally set,” Bartell says. “And I think that’s a real issue.”

Other objectors include Oakland and Macomb counties, who are concerned about Orr’s plan for Detroit’s water department. Negotiations over Orr’s initial plan to spin the department off to a regional authority had broken down, though Rhodes ordered all parties back to court for mediation. The counties maintain the deal is too sweet for Detroit and hard on suburban ratepayers, and that the city hasn’t released crucial financial information.

Orr has also proposed leasing the water department to a private operator if Detroit and the county governments can’t reach a deal.

Another potential obstacle to a speedy resolution is outside the court’s—and the city’s—direct control. Lawmakers in Lansing need to approve state money to pay into the grand bargain.

Republicans have introduced a bill package that would pay in $195 million upfront to backstop the pension funds. The money would come with conditions, including an “oversight commission” to monitor the city’s finances for 20 years.

But some Republicans have balked at the grand bargain, calling it little more than a thinly-disguised bailout. Others have said the state needs to attach more and stricter conditions to any state funds for Detroit.

In court last week, Judge Rhodes pointedly noted that he'd heard some state lawmakers want to make the grand bargain money contingent on Detroit exiting bankruptcy by the end of September. He said legislators need to understand he can't guarantee that deadline.