07.07.14

Unhonorable Discharge. The Motor City has listed hundreds of contracts with services providers and companies that it no longer intends to honor—in effect creating an entire new class of creditors in its massive municipal bankruptcy. Some of those creditors provide services that Detroit no longer supports, including public health, workforce development, and other human services—services now outsourced—leaving it to U.S. Bankruptcy Judge Steven Rhodes to affirm or deny Kevyn Orr’s request to terminate the contracts as part of the trial beginning next month on its plan of adjustment. The pre-Independence Day document only lists contracts the city is rejecting, so that any business or organization whose contract is on the list to be rejected has an option to file a claim with the federal court for any amount of money which it believes is owed to it—and, simultaneously, becoming eligible to receive about 10 cents on the dollar for the amount owed. Part of the goal for the Motor City is to clean up its records so that no old contracts may be raised after bankruptcy as potential financial liabilities for the Motor City post-bankruptcy.

Appealing the Odds. Judge Julia Smith Gibbons of the U.S. Sixth Circuit Court of Appeals has ordered the U.S. District Court for the Eastern District of Michigan to hear Detroit municipal bond insurer Syncora Guarantee Inc.’s appeal of a challenge to a decision by U.S. Bankruptcy Judge Steven Rhodes last August finding the Motor City’s casino tax revenues to be part of the so-called municipal bankruptcy estate, and therefore subject to the automatic stay. Judge Gibbons ordered the review to be completed by Bastille Day. The insurer had appealed that decision – which the U.S. District Court stayed—leading Syncora to request the mandamus last month. Judge Gibbons ordered the lower court to hear the appeal ahead of the confirmation plan trial, scheduled to commence this month, noting that “Although mandamus is an ‘extraordinary remedy,’ these are extraordinary circumstances, and we do not evaluate Syncora’s petition in a vacuum…If the bankruptcy court confirms the city’s plan of adjustment before Syncora obtains judicial review of the merits of its appeal, Syncora may be left with no option but to seek an emergency stay of that plan…In a [municipal] bankruptcy case of such scope and complexity, that is not the proper way to adjudicate appeals that implicate legal questions of fundamental importance to the bankruptcy proceedings,” noting that absent such a judicial clarification, Kevyn Orr – and the court – would not know what resources were available to repay creditors. Judge Gibbons added: “The question presented in Syncora’s appeal, whether a substantial revenue stream is rightly considered property of the bankruptcy estate, is precisely the type of issue that should be reviewed before the bankruptcy court confirms the plan of adjustment.”

Is Detroit Contagious? Michigan Gov. Rick Snyder named a state overseer the day before Independence Day to assume control of Lincoln Park, a distressed Detroit suburb of 38,000 in Wayne County; the announcement came in the wake of a rejection by the city’s leaders of a consent agreement with the state. Gov. Snyder named Brad Coulter to serve as emergency manager, stating: “Brad Coulter’s extensive experience in finance and restructuring, including his understanding of government structure and municipal services, makes him a strong choice as emergency manager for Lincoln Park…”I know Brad will work collaboratively with city officials to address the financial emergency and to ensure Lincoln Park residents receive the critical services they expect and deserve.” Mr. Coulter is an independent contractor with O’Keefe & Associates, a turnaround consulting firm based in the Detroit area, according to the state. Before that, he was a director at Amherst Partners, where he specialized in turnarounds of middle-market companies. Michigan had declared the municipality to be in a financial emergency last April 14th―providing the municipality with four options under the state’s law for municipalities in fiscal distress: bringing in an emergency manager; entering into a consent agreement with the state; asking for permission to file for municipal bankruptcy protection, Chapter 9; or to seek appointment of a neutral evaluator. The municipality’s officials reportedly opted for a consent agreement, but the city’s council members later rejected the decision on a 4-3 vote, so that Michigan State Treasurer Kevin Clinton then ordered an emergency manager to assume control over the city. Michigan’s state review team reported it had discovered a trend of overspending from the general fund, a declining general fund balance, and a rising deficit. In addition, the evaluators found that Lincoln Park took $2.5 million from its water and sewer fund to make its FY2013 pension payments. Lincoln Park has experienced steep drops in property tax revenues over the past few years—with assessed values falling 31 percent over the last four years. The city’s general fund revenue fell about 20 percent over the last four years, whilst S&P last December dropped the city’s credit rating seven notches from A-plus to BB.

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