Detroit could be on the fast track to complete the final, crucial phase of its historic bankruptcy case, as settlements with key creditors line up and city workers and retirees demonstrate overwhelming support for cost-saving retirement benefit changes.
While a small, hard-core group of creditors continues to hold out for a better deal, the support among workers and retirees may help push through the city’s plan to adjust $18-billion of debt and exit the biggest Chapter 9 municipal bankruptcy in U.S. history. It has moved the possibility of a “cram down,” where a bankruptcy plan is imposed on objecting creditors, to center stage.
“To be candid, I’ve always thought at the end of the day what choice does Judge (Steven) Rhodes have but to confirm this plan?” said Randye Soref, a senior partner at law firm Polsinelli in Los Angeles. “What happens if he doesn’t? What’s the alternative?”
Rhodes posted a schedule in federal court last month that starts the proceedings on Aug. 14, with as many as 28 hearing days stretching until Sept. 23. On Monday, though, he raised the idea of shortening the confirmation hearing just before voting results showed city workers and retirees approved the adjustment plan.
Detroit filed for bankruptcy in July 2013 after decades of dwindling population and a declining manufacturing base left the city of approximately 688,000 struggling to pay its bills.
Because of the desire by city officials and many key creditors to move Detroit toward exiting bankruptcy soon, the holdout parties may face an uphill battle.
“It’s been a long stream of settlements and that’s what Chapter 9 is designed to do, is broker all these things up front,” said Soref.
Several classes of city creditors support the plan, including thousands of current and retired city workers, who would see cuts to their retirement benefits, according to vote results released on Tuesday.
That support could enable Rhodes to “cram down,” that is, impose the plan on hold-out creditors, which include some bond insurers and bondholders and two miscellaneous classes of creditors known as a “convenience class,” if he determines the plan is fair and feasible.
Carole Neville, an attorney at law firm Dentons, who is representing a court-appointed retirees committee in the case, said she had never seen a so-called convenience class of creditors reject a bankruptcy plan before.
“I think it adds some additional legal obstacles,” Neville said, noting the creditor class, which includes city vendors, unions and tort claims against Detroit, could argue along with other hold-out creditors that the plan does not meet cram-down requirements.
Melissa Jacoby, a professor at the University of North Carolina law school, said that without more settlements a cram down is the only way Detroit’s plan could be confirmed.
Cram downs are more typical in corporate bankruptcies, and Detroit’s case would set a precedent for forcing settlement terms on hold-out municipal creditors.
In a report on Friday, Moody’s Investors Service said a potential risk to the cram down is whether the city’s proposed treatment among the unsecured creditors could be considered discriminatory, given the differential treatment among the pensioners and owners of the city’s general obligation and pension debt.
Since the hearing schedule was posted, Detroit has reached settlements over the treatment of about $163.5-million of limited-tax general obligation bonds and over collective bargaining issues with its police union. Those deals joined previous settlements with the city’s two retirement systems and other major creditors.
“In my last order I did say if parties settled that may be cause to reduce the hours each side is allotted,” Rhodes said at a Monday status hearing.
The judge last month assigned 98 hours each to the plan’s supporters and its opponents.
Syncora Guarantee Inc and another bond insurer, Financial Guaranty Insurance Co, have vowed to fight their “unfair” treatment under the plan, particularly compared to Detroit retirees, whose pension cuts would be mitigated by money from foundations, the Detroit Institute of Arts and the state of Michigan.
Syncora continues to press for boosting the city’s proposed minimal recovery on the bond insurer’s $400-million exposure, which is mainly on city pension debt.
Rhodes on Wednesday temporarily set aside Syncora’s request to delay the confirmation hearing’s start date to Sept. 29. The bond insurer cited a lack of full documentation of Detroit’s settlements with some creditors, saying its ability to prepare for the hearing is “significantly prejudiced” without the documents.
Lawyers for the city contended a delay is unnecessary and potentially costly.
Detroit will likely file a revised plan in court on Friday, a city spokesman said. That plan may flesh out details from recent settlements.
Jacoby said the big question will be if the plan unfairly discriminates.
“That will depend on both the legal standard the court adopts and the presentation of issues,” she said. “Those are still live issues in the case and the voting hasn’t affected it.”
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