The Detroit Division of the Eastern District of Michigan Bankruptcy Court will hold hearings on the City of Detroit’s eligibility for bankruptcy protection. The key questions revolve around the City’s insolvency.
Insolvency under the bankruptcy code means that the debtor’s assets exceed its liabilities. In addition, revenue and expenditures will come into play for the decision making.
Detroit is bankrupt. Or is it?
U.S. Bankruptcy Judge Steven Rhodes will make the crucial call on whether the city is officially eligible for Chapter 9 bankruptcy protection after a series of court hearings starting Tuesday.
His decision will determine whether the city can expeditiously rid itself of billions in debt and liabilities that are sucking cash from core services such as police and fire protection and trash collection. The legal process could help Detroit chart a path toward financial sustainability, finally positioning the city to fight crime, reduce blight and turn on the streetlights.
But it also could set the stage for a litany of controversial cuts, including reducing pension payments, selling Detroit Institute of Arts property and forcing bondholders and other creditors to accept pennies on the dollar.
What’s more, Rhodes’ decision on whether to authorize the largest municipal bankruptcy in U.S. history could set legal precedent on contentious issues that other struggling municipalities are watching closely.
Rhodes has consistently signaled a desire to ensure the case doesn’t devolve into a legal quagmire, leading outside experts to predict it’s likely he’ll sign off on the city’s eligibility.
“If there’s ever a city that needed Chapter 9, it’s Detroit,” said Kenneth Schneider, a local bankruptcy attorney who is not involved in the case.
Still, Detroit attorneys must fend off more than 200 objections to the city’s July 18 bankruptcy filing from creditors and individuals who argued that the city does not meet the criteria outlined by Congress for municipalities to file for bankruptcy.
Rhodes will conduct the first set of hearings Tuesday and Wednesday to consider legal arguments on the city’s bankruptcy eligibility. That will be followed by a full eligibility trial starting Oct. 23 to examine factual issues.
“I suspect you’ll hear a bunch of creative legal arguments,” University of Michigan bankruptcy law professor John Pottow said.
Attorneys involved in the case and outside experts say the process will deliver dramatic moments with fresh insight into the city’s financial health and the deliberative process that led to the bankruptcy filing.
Detroit emergency manager Kevyn Orr is expected to testify during the eligibility trial, marking his first court appearance in front of Rhodes. Union attorneys will be able to publicly grill him on his stated plan to pursue “significant” cuts to pensions and retiree benefits as part of a restoration plan due by the end of the year.
Orr spokesman Bill Nowling declined to make attorneys for Jones Day, which is representing Detroit, available for comment for this report.
Rhodes will examine several crucial issues to determine whether Detroit can officially enter bankruptcy. Here are five questions that likely will be argued before him:
Is the city insolvent?What does the law say? The city must be failing to pay its bills on time or simply unable to do so.
What do the creditors say? Detroit has plenty of cash to pay its bills, hasn’t sold enough assets to pay its obligations or hasn’t proved that it’s insolvent. The city’s pension funds, which have objected, say Orr’s assertion that they have unfunded liabilities of about $3.5 billion is a bogus figure. Michigan Council 25 of the American Federation of State, County and Municipal Employees, the city’s largest employee union, argued that Orr’s decision to stop paying the city’s unsecured debt service is not sufficient proof that the city is out of money.
What does the city say? Detroit is the definition of insolvency.
In a document filed in court in September, the city said Detroit was “cash insolvent, budget insolvent and service delivery insolvent” and never will have enough cash to pay off $18 billion in debt and long-term liabilities.
Detroit Free Press: http://www.freep.com/article/20131014/NEWS01/310140008/Detroit-Chapter-9-bankruptcy-eligibility-AFSCME-Jones-Day-Kevyn-Orr-Steven-Rhodes
