12.17.13

Doubling Up on Appeals. U.S. Bankruptcy Judge Steven Rhodes, just three days after U.S. District Court Judge Dolly Gee (City of San Bernardino, Ca. v. California Public Employees Retirement System (CALPERS), #5:2013cv01952, yesterday allowed appeals of the two key provisions of his Detroit decision — finding Detroit eligible for bankruptcy and its pension systems subject to cuts to retirees — to proceed to the U.S. 6th Circuit Court of Appeals. This means that the processes going forward in both Detroit and San Bernardino to move ahead in putting together respective plans of adjustment will be handicapped by uncertainty about whether the 9th and 6th U.S. Circuits Courts of Appeal will accept the appeals—and, if so, whether they will affirm or make critical changes to the U.S. Bankruptcy Court’s decisions in ways that will fundamentally alter the decisions. At the very list, the twin decisions will impose new layers of cost, time, uncertainty, and delay.

In Detroit, yesterday, U.S. Bankruptcy Judge Steven Rhodes, held that his decision finding the Motor City eligible for chapter 9 bankruptcy and that pensions may be impaired as part of any plan of recovery may be appealed directly to the 6th U.S. Court of Appeals, bypassing the U.S. District Court. Judge Rhodes made the decision after listening briefly to arguments from lawyers for the city’s two unions, retirees, and others. He said he could determine as early as today to ask the appeals court to take up the matter in an expedited fashion―a request that would not, in any way, bind the appeals court. The AFSCME attorney urged Judge Rhodes to request an expedited decision from the appeals court, because his ruling would impact other struggling municipalities around the country: “This is an issue of national importance…We’re seeing already across the country the impact it’s having…[AFSCME] sees the issue as one of national importance as cities and other governments across the nation pay attention to how pension benefits are decided for cities in financial messes.” Attorney Lisa Fenning, a former U.S. bankruptcy judge in California, who represents Detroit’s two pension funds, told Judge Rhodes that an expedited appeals process would not hinder Detroit’s ongoing mediation with its creditors or the city’s ability to submit its restructuring plan to the court: “We’re not trying to slow down the confirmation process…We think they need to go in tandem.” The attorney representing the City of Detroit advised Judge Rhodes that the Motor City’s sole focus was to get its plan of adjustment confirmed by the court, and she testified the city would support an expedited appeals process if it did not detract from that process: “The city is dedicated to proceeding as rapidly as possible moving toward a plan of adjustment that will, hopefully, have broad creditor support.”

Impact on Recovery. Judge Rhodes’ decision yesterday imposes a new layer of costs and uncertainties on the city and cannot help but to impede Emergency Manager Kevyn Orr’s efforts to negotiate an agreement among the city’s 100,000+ creditors to pare $18 billion in debt. Notwithstanding attorney Fenning’s claim that while the city’s two pension plans are fighting the eligibility ruling and whether the city’s pensions are subject to impairment, the unions are also committed to negotiating with the city in the meantime, telling the court: “We are not trying to slow down the process.” Detroit’s attorney had argued that appeals should wait until after the Motor City files its detailed plan of adjustment—which Kevyn Orr has ambitiously tasked for completion by the first week in January―including what cuts it plans for creditors and how Detroit would continue to operate post-bankruptcy. But how can that proceed when the city’s resources must now be diverted to the appeals process, when there is abruptly a risk that some of the city’s creditors will not, in fact, be subject to any impairment, surely altering their interest to genuinely negotiate, and surely affecting the perceptions of all the other creditors—not to mention the implications for Detroit to have a viable future economy. Indeed, Detroit’s bankruptcy teams had wanted all appeals of Detroit’s bankruptcy eligibility put on hold until after Judge Rhodes had approved the city’s proposed plan of adjustment. In contrast, the city’s pension funds told Judge Rhodes they want an expedited appeal and a decision by March or April―jeopardizing any speedy timetable desired by the State of Michigan and City of Detroit. Moreover, with the pension funds’ attorney stating the funds are prepared to fight the city’s bankruptcy eligibility and pension ruling all the way to the U.S. Supreme Court, it would seem clear that a significant amount of time and dwindling financial resources Detroit had hoped to put to use to get the city out of municipal bankruptcy and back to a viable future are in jeopardy. While Counselor Fenning yesterday told Judge Rhodes:  “We’re not trying to slow down the confirmation process…We think the two things have to go in tandem;” every day and dollar consumed by this next round of judicial proceedings leaves Detroit ever further in debt: it makes the hole from which it must devise a way to emerge all the deeper. Detroit’s attorney yesterday told Judge Rhodes the city supports taking the appeal directly to the 6th Circuit and bypassing U.S. District Court because the case “involves a matter of public importance” — namely the treatment of retiree pensions: “The city is committed to proceeding as rapidly as possible and moving onto a plan of adjustment that has broad support…Anything that detracts from that is not something we support.”

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