02.24.14

Getting Ready to Rumble.  U.S. Bankruptcy Judge Steven Rhodes this morning set an aggressive timeline between now and June 16th—the day he has determined for the critical hearing on the city’s plan of adjustment, which, if approved, would permit the Motor City to exit municipal bankruptcy, advising all parties: “Nothing herein excuses any party from the continuing obligation to participate in good faith in any mediation…Further, the court again strongly encourages all parties to negotiate with full intensity and vigor with a view toward resolving their disputes regarding the treatment of claims in the city’s plan of adjustment.” Under the Judge’s schedule, creditors will have a deadline of March 28th to file objections to the city’s plan of adjustment—and that date will mark the date upon which depositions on objections may begin—with the Judge determining the challenges would bisected into legal and factual objections—with a separate trial for each category. Judge Rhodes set a deadline of April 4th for the Motor City to respond to all objections, a date of April 14th for both a status hearing and to entertain objections to the disclosure statement, and the date of April 28th to hear legal objections to the plan of adjustment (which could include a battle over whether Detroit can legally be forced to sell Detroit Institute of Arts property). Judge Rhodes set a final pre-trial conference for June 11th; a trial date on the factual objections to the city’s plan for June 16th, and then set aside nine additional days throughout June for the trial if necessary. Finally, no slouch, Judge Rhodes announced he would hold a hearing tomorrow to consider an expedited pace of approval for the disclosure statement.

Accelerating Negotiations. Judge Rhodes noted in his written order today that his “Court again strongly encourages all parties to negotiate with full intensity and vigor with a view toward resolving their disputes regarding the treatment of claims in the City’s plan of adjustment.” (To exit bankruptcy, the city must win the approval of creditors representing two-thirds of its total debt and half of its creditor base, or, alternatively, the city could pursue a forcible restructuring or “cram-down” plan through which the federal court would approve the plan of adjustment over the objections of creditors. Noting the ongoing negotiations headed by Chief U.S. District Judge Gerald Rosen and a team of mediators, Judge Rhodes wrote: “Nothing herein excuses any party from the continuing obligation to participate in good faith in any mediation as ordered by Chief Judge Rosen…Further, the court again strongly encourages all parties to negotiate with full intensity and vigor with a view toward resolving their disputes regarding the treatment of claims in the city’s plan of adjustment.”

Looming Uncertainty. Even as Judge Rhodes set an accelerated timetable, the 6th U.S. Court of Appeals has accepted the request to hear direct appeals by seven groups of petitioners, including pension plans for Detroit’s police and firefighters, regarding the Motor City’s eligibility for bankruptcy: “Upon consideration of the petitions to appeal and the responses thereto, a direct appeal to this court is warranted,” the 6th U.S. Circuit Court of Appeals in Cincinnati wrote in its order filed on Friday, stating it would not expedite the appeals for the time being. U.S. Bankruptcy Judge Steven Rhodes last December ruled that Detroit was eligible to pursue its bankruptcy case. In his ruling, Judge Steven Rhodes said Detroit met federal requirements for chapter 9 municipal bankruptcy protection, primarily because it was insolvent and negotiations with its thousands of creditors were not practical. Judge Rhodes subsequently allowed the pension funds, city labor unions, retirees, and other parties objecting to his ruling to bypass the U.S. District Court and appeal before the federal appeals court. However, he recommended that the appeals court reject the appeals, so his court could to continue to work on resolving Detroit’s massive financial problems. The appeals challenged Judge Rhodes’ language in his decision that Motor City pensions could be cut as part of the city’s restructuring plan, arguing that the decision violated the Michigan Constitution, which protects public worker pensions from impairment. The petitioners had sought an expedited hearing.

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