U.S. Bankruptcy Judge Steven Rhodes yesterday froze all lawsuits against Detroit, stating: “My orders enhance the likelihood of Chapter 9 reorganization, speeds the bankruptcy case and cuts costs to taxpayers.” His decision removes key obstacles to Detroit’s historic Chapter 9 filing to be decided in federal bankruptcy court. Judge Steven Rhodes issued his order yesterday after hearing two hours of arguments from lawyers representing the city and creditors who alleged the bankruptcy filing was not valid and was designed to slash retiree benefits. In his order, Judge Rhodes stayed all litigation against the city and ruled that his federal bankruptcy court has jurisdiction to decide whether Detroit’s Chapter 9 filing violates the state constitution’s protections for vested pension benefits. As one observer tellingly noted: “The decision sets a crisp tone and signals that the Detroit traditions of denial, delay, and circular politicking are poorly suited to a speedy process driven by a federal judge.” The judge also decided that an automatic stay triggered by Detroit’s Chapter 9 filing extends to Emergency Manager Kevyn Orr, Gov. Rick Snyder and members of the restructuring team as well as state Treasurer Andy Dillon.
During yesterday’s arguments, city lawyers argued Detroit would be “irreparably harmed” if retirees were able to block the Chapter 9 filing. City lawyer Heather Lennox argued the city would be “prevented from accessing necessary protections” of a Chapter 9 bankruptcy filing. Judge Rhodes appeared to concur with those apprehensions, stating that lawsuits against the city during bankruptcy “are costly, expensive, and inefficient” and can cause “prejudice” to the debtor, underlying his clear determination to accelerate the municipal bankruptcy process. Each day the process can be reduced preserves desperately needed funds and resources for whatever Detroit emerges.
Judge Rhodes did not specifically determine whether Michigan Governor Rick Snyder was prohibited from authorizing the city’s bankruptcy filing, leaving any further appeals to be made to U.S. District Court, not the 6th U.S. Circuit Court of Appeals.
Let the Show Begin. With the potential derailment and threat of competing litigation in Michigan state courts out of the way, Judge Rhodes now must move on to the main event: is Detroit eligible to file Chapter 9? Attorney Robert Gordon, who represents the city’s pension funds, yesterday argued: “There simply has not been a valid bankruptcy petition.” Attorneys for labor unions and the city’s two pension funds have argued the bankruptcy filing endangers earned pension benefits for nearly 20,000 retirees and 10,000 current city workers in violation of the state constitution.
Chief U.S. District Judge Gerald Rosen also will mediate in the case, according to a federal court filing, which states: “Chief Judge Rosen may, in his discretion, direct the parties to engage in facilitative mediation, under his direction, with such other mediators as he may designate. The fees and expenses of any such mediators shall be shared by the parties as directed by Chief Judge Rosen.”
Over its course, these proceedings not only will help determine the future for the city of Detroit and its 700,000 citizens, but also will have significant implications for every state and local leader because of the implications for state and local credit markets and the sanctity of public pension funds—and the balance between federal power and state constitutions.
Thinking about Detroit’s Tomorrow. Even as much of the nation was focused on the court proceedings yesterday, the Michigan Economic Development Corp. approved the process for $450 million in private activity bonds to finance construction of a new hockey arena in Detroit and 45-block entertainment district planned for the blighted Cass Corridor. Gov. Snyder touted the $650 million new hockey arena as an example that big Detroit development projects will continue to move forward amid Chapter 9 bankruptcy, noting: “How many tremendously good things are going on in Detroit? That’s why I think this project is so wonderful. There is a very bright future….We are addressing a specific situation in Detroit with bankruptcy. It’s about getting a fresh start with the city of Detroit’s government,” adding that the long-term impact of the new arena will “create a better environment” for the city. The project includes acquisition of land, construction of the events center, the acquisition and installation of furnishings and equipment, and further development of the surrounding district. The investment for the project is estimated at $650 million. The Detroit Downtown Development Authority plans to use $284.5 million in property taxes captured within its downtown district to pay part of the bonds. The rest will be picked up by Olympia Development.