The City of Detroit’s bankruptcy lawyers have responded to the nearly 6000 objections in the city’s bankruptcy reorganization plan.
Detroit’s bankruptcy lawyers drafted a 256 page response detailing responses to the massive amount of responses and providing a detailed account of the city’s arguments to favor its bankruptcy filing.
Detroit’s bankruptcy lawyers and its creditor’s bankruptcy lawyers are now preparing for what should shape up to be a very lengthy bankruptcy trial overseen by Judge Steven Rhodes.
The bankruptcy lawyers anticipate a heated battle in court as more and more creditors and stakeholders come forward questioning the current proposal for settlement.
Kevyn Orr, Detroit’s emergency manager, made a statement over the weekend encouraging pensioners and creditors to accept the offered settlement as state and private funding to assist in the settlement will be withdrawn without an agreed upon settlement.
DETROIT — The City of Detroit forcefully defended its bankruptcy restructuring plan in a court filing over the Memorial Day holiday, arguing that pensioners deserve better treatment than unsecured financial creditors and that a plan to spin off the city-owned Detroit Institute of Arts is legal.
With more than 600 official objections to Detroit’s plan of adjustment so far, the city’s 256-page response offers a snapshot of an epic summer trial over whether the plan is fair, legal and feasible.
Separately, the museum moved to protect itself in court, arguing in its own filing that its artwork is legally protected from the auction block and threatened a court battle if the city pursues a sale. It said it will support the city’s plan to allow the transfer of ownership of the Detroit Institute of Arts to an independent non-profit. But the museum’s threat to challenge any sale in court sets up the museum as a potential obstacle for the city if the current restructuring proposal collapses.
Bankruptcy Judge Steven Rhodes will determine whether the restructuring plan should be implemented in a 17-day trial currently scheduled to start July 24.
Notably in the document filed late Monday, the city defended its plan to pay pensioners as much as 60 cents on the dollar for their unfunded liabilities, compared with 10 cents on the dollar for unsecured financial creditors.
Detroit emergency manager Kevyn Orr’s proposal amounts to 4.5% cuts to the monthly pension checks of civilian retirees and no future increases while police and fire retirees would get no monthly cuts and smaller future increases.
If civilian retirees vote no on the plan of adjustment — ballots are due July 11 — their cuts would increase to 27%.
Orr’s plan would allow the city to reinvest $1.4 billion over 10 years in services, including blight removal, sorely needed information technology upgrades and new police officers and fire fighters.
Detroit argued in the court filing that it must protect retirees from the “personal hardship” that would accompany greater cuts and must ensure that its active work force has “ongoing motivation and cooperation.”
Retirees “often depend on their pension income to provide basic living needs and expenses” and didn’t “make knowing investment choices” like the sophisticated investors that loaned money to the city, Detroit argued.
“In light of that consideration, the marginal harm that will result from each dollar of pension cuts is far greater than the harm that will result from each dollar of cuts imposed on bondholders,” the city argued.
In its response, the city also:
• Defended its plan to claw back as much as 20% of each individual retiree’s excessive pension annuity payments from 2003-13, comparing the situation to a scam.
The excessive distributions “had more in common with a Ponzi scheme than a retirement plan,” the city argued.
Not insignificantly, Rhodes is considered a national expert in Ponzi schemes.
• Described current conditions in the city as “deplorable” and requiring major reinvestment.
“City residents are not stockholders whose equity interests can be stripped in a corporate restructuring,” the city argued. “Rather, their ongoing participation in the structure of the City — as job creators, employees, taxpayers or in other roles — is crucial to the future recovery of the City and the long term interests of all of the City’s stakeholders.”
In a caveat of sorts, though, the city also argued that retirees aren’t getting substantially better treatment than other creditors, considering that the city plans to pay only 10 cents on the dollar to eliminate its retiree health care liabilities.
Although pension debt and health care debt are legally considered separate, cuts to both claims affect the same people, the city argued.
The city also argued that its plan to devote an extra $816 million over 20 years in non-profit donations, state of Michigan funding and Detroit Institute of Arts-raised funds to pensioners is legal. Dubbed a grand bargain, the plan allows the DIA to spin off as a private charitable trust, shielding its art from a potential sale.
Bond insurers Syncora and Financial Guaranty Insurance Co. argued that the grand bargain is a “fraudulent transfer” of the DIA at a steep discount.
In its own filing, the DIA cites Michigan law and more than a century’s worth of historical evidence to argue that its art is held in a “charitable trust,” “public trust” and “implied trust” for the benefit of Detroiters and Michiganders. It also said the city is bound by promises made to donors and restrictions relating to gifts of art that prohibit the sale of art to pay city debt.
