Detroit bankruptcy: The war shifts to the courts
State officials say they hope that Detroit will emerge from bankruptcy by September 2014, but labor unions and bondholders are gearing up for what is more likely to be a prolonged legal battle.
(Page 2 of 2)
“In a Chapter 11 bankruptcy, you have certain requirements that could allow [petitioners] to try and modify retiree benefits. But that’s not the case in Chapter 9. Collective bargaining contracts can be rejected without any protection whatsoever,” says Randye Soref, a bankruptcy attorney in Los Angeles with Polsinelli, a firm that handled several municipal bankruptcies in California.Skip to next paragraph
In Pictures Detroit's dilemma
Subscribe Today to the Monitor
Moreover, outside Chapter 9, Detroit would be vulnerable to not having its plan confirmed and having another party in control of its restructuring. Under Chapter 7, the city would be vulnerable to liquidation.
“But neither of those things can happen in a Chapter 9, which means the city holds more cards than they do in a private sector filing,” says Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco who helped a number of local governments in California avoid bankruptcy. “The judge can’t impose a plan on the city and no one else decides what they can do.”
While negotiating with creditors is still allowed during bankruptcy proceedings, Orr’s proposal calls for the city’s general obligation bondholders to be treated as unsecured creditors, which allows them to receive pennies on the dollar. For their part, bondholders say Detroit is obligated to pay the full bond amount, which suggests they, too, will seek to slow down the proceedings in court.
Ingham County Circuit Judge Rosemarie Aquilina’s injunction against Detroit’s bankruptcy is “unprecedented,” because it came after the city filed its petition. The ensuing legal battles will likely be treated as a “side circus” to the federal bankruptcy judge who ultimately is assigned the case, says Mr. Sweet.
“I don’t see a federal judge ordering [Detroit] out of bankruptcy because of something a state judge said,” he adds.
Still, what the court fights will likely do is prolong Detroit’s bankruptcy proceedings well past the September 2014 deadline target. Sweet says that, in California, municipalities seeking to file Chapter 9 waited as long as a year or more to even get an eligibility hearing. “And those cities are puny compared to what you have in Detroit,” he says.
“Having distractions at a time when people would want to be focused on how to get through it quickly is not constructive,” he adds. “That’s not to say they can’t be moving forward in bankruptcy while addressing these other issues in state court. But you’re fighting a war on two fronts. It could make it take longer.”