Bankruptcy & Pensions. U.S. Bankruptcy Judge Steven Rhodes has delayed hearing objections to Detroit’s bankruptcy case based on arguments the city wants to slash vested pension benefits in violation of the state constitution, stating that those challenges could be raised after he decides whether the city is eligible for bankruptcy relief, perhaps once the city files a plan to adjust Detroit’s $18.5 billion debt. At this point, Emergency Manager Kevyn Orr only needs to prove that he plans to adjust the city’s debts, according to an order filed late Monday in federal court. Potential cuts to retiree pensions have been hotly contested by city retirement funds, unions, and others since the city filed Chapter 9 bankruptcy July 18. Judge Rhodes this week also accelerated Detroit’s bankruptcy case, moving the case up by one month the first phase of a trial to decide whether the city is eligible for bankruptcy relief, writing: “The court fully recognizes and appreciates the extraordinary importance of the pension rights of the city’s employees and retirees in this case and of how the city will ultimately propose to treat those rights….It is an important question not only to the city’s employees, retirees and unions, but also to all of the parties in the case.”
To date, there have been 109 objections filed by creditors, including several claiming the case violates Michigan’s constitution, which bars reducing vested city pensions. Judge Rhodes has scheduled a hearing on objections involving legal issues on Sept. 18, more than a month earlier than the original Oct. 23 hearing, and two days before the special session of the Michigan Municipal League at its annual meeting in Detroit; any objections involving material facts will be heard on October 23rd. In his orders, Judge Rhodes wrote: “The court further concludes that a prompt oral argument on these legal issues will promote just, speedy and efficient determination of the city’s eligibility to be a debtor. That means most of the objections that will be heard on Sept. 18 will be from city unions and employees. Experts predict the eligibility fight to focus on creditor claims that Emergency Manager Orr failed to negotiate the city’s restructuring in good faith and that the July 18 bankruptcy was unauthorized. The schedule could help Mr. Orr meet his goal of having the city emerge from bankruptcy court by early fall 2014, the end of his time-limited appointment, because, under Michigan’s emergency law, an emergency manager can be removed by the City Council after 18 months. Under federal bankruptcy law, the key hurdles to overcome for a municipality to be eligible for Chapter 9 relief involve demonstrating the city is insolvent, proving that a filing was authorized by state law, and that Mr. Orr’s restructuring team negotiated in good faith with creditors, and that the city must desire to effect a plan to adjust its debts.
At the Sept. 18 hearing, objectors will have to divide up 120 minutes of time for opening arguments and 30 minutes for rebuttals. The city and state Attorney General Bill Schuette will get 120 minutes for opening arguments and 30 minutes for rebuttals. Attorney General Schuette has said he will fight to protect pensioners from having their retirement benefits cut in the Chapter 9 restructuring, based upon the provision in Michigan’s constitution prohibiting cuts in pension benefits, creating an ironic difference between Mr. Orr, the emergency manager appointed by Governor Rick Snyder, and the Governor’s Attorney General—in addition to the federalism conflict between the federal municipal bankruptcy law and the Michigan constitution. Mr. Scheutte will have to be nimble, as he must represent Gov. Rick Snyder in legal challenges to Gov. Snyder’s authorization of Mr. Orr to file for municipal bankruptcy.
Gambling on Progress. Judge Steven Rhodes seems to be a man in a great hurry: this morning he will get an update on a proposed settlement that could give Detroit immediate access to casino revenues it has pledged as collateral on a pension debt interest-rate transaction, with creditors scheduled on the status of private interviews and legal “discovery” related to the “swaps” settlement. Under Mr. Orr’s proposal, Detroit would pay 75 cents to 82 cents on the dollar to exit a $344 million transaction in which the city received fixed interest rates on its pension debt. In addition, Emergency Manager is expected to participate in a private deposition later this week with lawyers for creditors, who are expected to question the emergency manager about the details of the proposed agreement with UBS and Bank of America Merrill Lynch. Several creditors have objected to the deal. Judge Rhodes will not rule on the issue today, but has scheduled a major hearing for Sept. 9 to hear arguments about the deal. At that point, he hopes to approve or reject the accord. Separately, Judge Rhodes will also address a motion by Detroit to authorize officials to redact personal information from a confidential city database that was provided to major creditors as a way of discovering financial data about the city. In the wake of Judge Rhodes’ questioning of the secrecy of the city’s data base last week, the Emergency Manager agreed to stop requiring creditors to sign a confidentiality agreement to access the digital system.