| July 25
July 25 Detroit could be on the fast track to
complete the final, crucial phase of its historic bankruptcy
case, as settlements with key creditors line up and city workers
and retirees demonstrate overwhelming support for cost-saving
retirement benefit changes.
While a small, hard-core group of creditors continues to
hold out for a better deal, the support among workers and
retirees may help push through the city's plan to adjust $18
billion of debt and exit the biggest Chapter 9 municipal
bankruptcy in U.S. history. It has moved the possibility of a
"cram down," where a bankruptcy plan is imposed on objecting
creditors, to center stage.
"To be candid, I've always thought at the end of the day
what choice does Judge (Steven) Rhodes have but to confirm this
plan?" said Randye Soref, a senior partner at law firm
Polsinelli in Los Angeles. "What happens if he doesn't? What's
Rhodes posted a schedule in federal court last month that
starts the proceedings on Aug. 14, with as many as 28 hearing
days stretching until Sept. 23. On Monday, though, he raised the
idea of shortening the confirmation hearing just before voting
results showed city workers and retirees approved the adjustment
Detroit filed for bankruptcy in July 2013 after decades of
dwindling population and a declining manufacturing base left the
city of approximately 688,000 struggling to pay its bills.
Because of the desire by city officials and many key
creditors to move Detroit toward exiting bankruptcy soon, the
holdout parties may face an uphill battle.
"It's been a long stream of settlements and that's what
Chapter 9 is designed to do, is broker all these things up
front," said Soref.
Several classes of city creditors support the plan,
including thousands of current and retired city workers, who
would see cuts to their retirement benefits, according to vote
results released on Tuesday.
That support could enable Rhodes to "cram down," that is,
impose the plan on hold-out creditors, which include some bond
insurers and bondholders and two miscellaneous classes of
creditors known as a "convenience class," if he determines the
plan is fair and feasible.
Carole Neville, an attorney at law firm Dentons, who is
representing a court-appointed retirees committee in the case,
said she had never seen a so-called convenience class of
creditors reject a bankruptcy plan before.
"I think it adds some additional legal obstacles," Neville
said, noting the creditor class, which includes city vendors,
unions and tort claims against Detroit, could argue along with
other hold-out creditors that the plan does not meet cram-down
Melissa Jacoby, a professor at the University of North
Carolina law school, said that without more settlements a cram
down is the only way Detroit's plan could be confirmed.
Cram downs are more typical in corporate bankruptcies, and
Detroit's case would set a precedent for forcing settlement
terms on hold-out municipal creditors.
In a report on Friday, Moody's Investors Service said a
potential risk to the cram down is whether the city's proposed
treatment among the unsecured creditors could be considered
discriminatory, given the differential treatment among the
pensioners and owners of the city's general obligation and
Since the hearing schedule was posted, Detroit has reached
settlements over the treatment of about $163.5 million of
limited-tax general obligation bonds and over collective
bargaining issues with its police union. Those deals joined
previous settlements with the city's two retirement systems and
other major creditors.
"In my last order I did say if parties settled that may be
cause to reduce the hours each side is allotted," Rhodes said at
a Monday status hearing.
The judge last month assigned 98 hours each to the plan's
supporters and its opponents.
Syncora Guarantee Inc and another bond insurer, Financial
Guaranty Insurance Co, have vowed to fight their "unfair"
treatment under the plan, particularly compared to Detroit
retirees, whose pension cuts would be mitigated by money from
foundations, the Detroit Institute of Arts and the state of
Syncora continues to press for boosting the city's proposed
minimal recovery on the bond insurer's $400 million exposure,
which is mainly on city pension debt.
Rhodes on Wednesday temporarily set aside Syncora's request
to delay the confirmation hearing's start date to Sept. 29. The
bond insurer cited a lack of full documentation of Detroit's
settlements with some creditors, saying its ability to prepare
for the hearing is "significantly prejudiced" without the
Lawyers for the city contended a delay is unnecessary and
Detroit will likely file a revised plan in court on Friday,
a city spokesman said. That plan may flesh out details from
Jacoby said the big question will be if the plan unfairly
"That will depend on both the legal standard the court
adopts and the presentation of issues," she said. "Those are
still live issues in the case and the voting hasn't affected
(Reporting By Karen Pierog and Lisa Lambert; Editing by David
Gaffen and James Dalgleish)