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Detroit Bankruptcy Judge to Consider Eligibility Objections, Swaps Dispute

Monday, August 26, 2013
By Nora Macaluso

LANSING, Mich.--Judge Steven W. Rhodes will hear arguments Oct. 23 on whether Detroit met the required criteria to file for bankruptcy protection (In re City of Detroit,Bankr. E.D. Mich., No. 13-53846).

Meanwhile, he is considering a bond insurer's bid to block a settlement the city reached with bank creditors that would free up casino revenue for city pensions.

Scores of Detroit creditors, including the city's biggest unions, filed objections to the bankruptcy filing ahead of a court-imposed Aug. 19 deadline, arguing that the filing violates the Michigan constitution's provision protecting pensions, that the law authorizing the city to hire the emergency manager who filed the petition is invalid, and that city representatives did not negotiate in good faith with unions before seeking bankruptcy protection.

Rhodes gave Detroit attorneys until Sept. 6 to file responses to the arguments.

The city is attempting to use bankruptcy “to illegally impair the constitutionally protected pension rights” of city employees and retirees “in direct violation of the Michigan constitution,” the Detroit Fire Fighters Association, Detroit Police Lieutenants & Sergeants Association, and the Detroit Police Command Officers Association said in an Aug. 19 court filing. In addition, “the city's failure (and, indeed, in many instances, its refusal) to negotiate in good faith with the Detroit public safety unions prior to the filing” should also make it ineligible, the unions said.

The unions have argued that meetings held with Emergency Manager Kevyn Orr were informational in nature, rather than serious negotiations (25 BBLR 1074, 8/8/13).

Michigan Attorney General Bill Schuette stopped short of objecting to the filing, though he said the pension protections in the Michigan constitution “must be honored, respected and followed.”

“No reasonable person can disagree that the City of Detroit is bankrupt and that federal bankruptcy proceedings under the leadership of Emergency Manager Kevyn Orr is the only avenue to rebuild the Motor City,” Schuette said in an Aug. 19 statement.

Uphill Battle for Eligibility Objections
Attorneys observing the case said the arguments about constitutionality and state authorization face an uphill battle, and might be better raised after the city comes up with a reorganization plan. “Bankruptcy settlement proposals don't always look like what the ultimate plan of reorganization looks like,” Douglas Bernstein, a partner with Plunkett Cooney in Birmingham, Mich., told BNA Aug. 22.

Municipal bondholders did not file objections. “I think they probably realized that it's an uphill battle,” Bernstein said. “The process can be a long one, and definitely an expensive one,” so creditors need to determine how to use their resources, he said.

The validity of Public Act 436, Michigan's emergency manager law, is a potential complication to the case, Bernstein said. There are also challenges to the law, under which Gov. Rick Snyder (R) appointed Orr and approved the bankruptcy filing.

Swaps Challenge; Retiree Committee; Property Taxes
In other developments in the case:

--Bond insurer Syncora Guarantee Inc. is challenging a proposed settlement agreement between the city and UBS AG and Bank of America that allows Detroit to keep casino revenue tied to swaps contracts with the banks. Syncora, insurer of the contracts, argues that it is not a party to the settlement and should not be forced to accept terms giving it less than the contracts' full value. Rhodes has scheduled a Sept. 9 hearing on the issue.

--A nine-person committee, including representatives of the United Auto Workers union and a retiree chapter of the American Federation of State, County and Municipal Employees, was appointed to represent the interests of city retirees during the bankruptcy process.

--In what Plunkett Cooney's Bernstein called an “unexpected twist,” Rhodes raised questions about confidentiality agreements the city required creditors to sign before allowing them to view financial information. City attorneys offered to consider making the information available if certain material, such as employee compensation and Social Security numbers, is removed. They also cited a confidentiality agreement with pension consulting firm Milliman Inc. Rhodes said that if Milliman objected to the release of any information, “they need to come to court next week and talk with me about it.” A status hearing is scheduled for Aug. 28.

--A nine-person committee, including representatives of the United Auto Workers union and a retiree chapter of the American Federation of State, County and Municipal Employees, was appointed to represent the interests of city retirees during the bankruptcy process.

--Rhodes lifted an automatic stay of property tax appeals “to the extent necessary to permit appeals of city property tax assessments to proceed in the ordinary course.”

--Rhodes appointed Robert Fishman, of Shaw Fishman Glantz & Towbin LLC in Chicago, as fee examiner for the case.

--Nearby Oakland County moved to protect itself from losing some tax dollars during the bankruptcy process. The county Art Institute Authority passed a resolution Aug. 20 terminating its obligation to continue funding the Detroit Institute of Arts if the city sells items in its collection or diverts funds for the museum as part of the bankruptcy process. A tax on county residents helps fund the DIA.

In the end, a reorganization plan must put Detroit on a path to sustainable recovery, said James Spiotto, a partner with Chicago-based Chapman and Cutler LLP. “The debate over pensions is an unfortunate debate,” Spiotto told BNA Aug. 22. The city may not be able to keep the promises it made to workers, and pension plans may have to accept that the best interests of all parties may be met by putting the city on a path to growth, Spiotto said.

More information on the Detroit bankruptcy is available at

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