Nearing the Final Lap. U.S. Bankruptcy Judge Steven Rhodes yesterday stated he would file a new scheduling order to provide some additional time for the Motor City’s creditors and retirees to negotiate, and that he would provide some additional time for the city’s 170,000 creditors to vote on Detroit’s proposed plan of adjustment, likely deferring the currently scheduled June 16th confirmation hearing. In addition, in the wake of a request from the city in court yesterday, Judge Rhodes will consider their request that he hold a hearing two weeks from today on the city’s proposed swap settlement with UBS and Bank of America Merrill Lynch, with the Motor City’s attorney requesting that Judge Rhodes expedite the hearing. Under the proposed terms of the agreement, UBS AG and Bank of America’s Merrill Lynch Capital Services have agreed to support Detroit’s plan of adjustment. The two banks are expected to be joined by the state of Michigan, also a creditor, in allowing the city to impose cuts on creditors who object to the city’s efforts to shed $9 billion in debt. The Motor City will argue before the skeptical U.S. Bankruptcy Judge Rhodes that suing the banks to invalidate the interest rate swaps would risk incurring time and financial resources it does not have and cannot afford, with spokesperson Bill Nowling noting: “We could spend $40 (million)-$50 million litigating this and lose and still cost the taxpayers $280 million…There’s still a degree of uncertainty, regardless of what the judge says.” Nevertheless, retirees and union leaders vowed yesterday to fight any plan by Detroit to use the proposed a new settlement with the two banks to force them to take massive cuts in the city’s bankruptcy.
Liability Insurance. Judge Rhodes yesterday delayed ruling on whether the city of Detroit should underwrite the $602,250 insurance policy for members of a committee of retirees representing former city employees, noting that while sympathetic to concerns of committee members, he was leaning unfavorably—expressing apprehension that the proposed cost could come at the expense of critical resources that could better be used to pay for police officers, EMS workers, or firefighters in the “service delivery insolvent” city, adding that the amount sought seemed “grossly disproportionate” to what would actually be needed: “Every dollar that goes to an insurance policy is one less dollar that can go to services…I’ve already said at some point, the city has to stop making bad financial decisions. This is the time.” In its own peculiar way, the session in Judge Rhodes’ courtroom yesterday demonstrated the Solomon-like choices that will mark the looming trial: In this case, the city of Detroit had requested the formation of the nine-person Retiree Committee—at least in part because of the lesson learned from the Central Falls municipal bankruptcy, where the only parties unrepresented in its chapter 9 proceedings were some of its retirees—with the end result that some of the poorest and most vulnerable creditors of that Rhode Island municipality took disproportionately deep cuts which then-receiver Judge Flanders was uncertain were sufficient to get by on—an apprehension discussed with Kevyn Orr last year in Detroit: who will stand up for the city’s most vulnerable creditors? In this case, the committee members, volunteers, claim they need the insurance policy in case they are sued up to six years after the bankruptcy ends. Making Judge Rhodes’ decision even more trying, one of the committee’s attorneys yesterday testified that the resignation of some of the committee’s members would follow should the insurance be rejected, noting for the court that seven were retained in their individual capacity, not representatives of labor unions, and would not be able to afford the legal costs of a lawsuit that could be filed up to six years after the bankruptcy ends. Perhaps, as Judge Rhodes said yesterday, one inherent protection for the committee would be that his court would have jurisdiction over future litigation under the Barton Doctrine, which requires any party bringing a suit against a court-appointed trustee, receiver or creditor committee, to first get permission to file it from the court where the appointment was made.
Don’t Stop Thinking about Tomorrow. Yesterday the Detroit City Council voted unanimously to put a proposed downtown improvement district to a vote of area property owners—mayhap learning of opportunities based on the successful experiences of Chicago, New York, Denver, Washington, D.C., and many other municipalities which have created such districts, formed and paid for by local property owners, to finance security and beautification efforts in neighborhoods and downtowns. The vote yesterday to create a Downtown Business Improvement Zone (BIZ) came as a successor to the previous Motor City Clean Downtown program, started in 2006, which had raised more than $16.5 million, but for which funding was expected to lapse this year. Thus, yesterday’s vote represented the culmination of leadership efforts by business owners, such as Compuware Corp., Rock Ventures LLC, and Blue Cross Blue Shield of Michigan, to create a permanent revenue stream and expand the old Clean Downtown efforts beyond just one part of downtown. In the wake of the council vote, the next step will be for the new districts’ 253 property owners to vote whether to impose new taxes on themselves at a rate of approximately $4 million annually, with most property owners eligible to vote, and the outcome binding on all, except owner-occupied residential buildings and nontaxable properties, such as those owned by nonprofit groups and the government, and votes based on a weighted formula that will take into account floor space (60 percent) and assessed value of the property (40 percent)—and requiring a super majority of 60 percent to pass. How much a property owner would pay is based on the same formula, under which, if adopted, the 30 largest downtown property owners would pay more than 75 percent of the expected annual budget; more than one-third would pay less than $1,000 per year. The vote will be a mail-in ballot administered by the City Clerk’s office, with ballots mailed this Friday and property owners given until April 7 to return their ballots. If passed, the tax would appear on summer property tax statements.