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Sun March 9, 2014
Detroit bankruptcy judge delays reorganization plan trial, as city scrambles for creditor support
The judge overseeing Detroit’s bankruptcy case has pushed a scheduled trial on the city’s reorganization plan back by at least a month.
Judge Steven Rhodes had set a mid-June date trial date on the city’s proposed plan of adjustment. That plan is emergency manager Kevyn Orr’s basic road map for getting the city out of bankruptcy, and a key document in any municipal bankruptcy.
City lawyers had asked for the extension, reportedly to them more time to solicit votes for the plan.
All Detroit’s unsecured creditors—an estimated 67,000—get a chance to vote for or against the final reorganization plan. But they get to vote “in proportion to how much money they’re owed,” says University of Michigan professor and bankruptcy law expert John Pottow.
In this case, the biggest share of votes belongs to Detroit’s pensioners and bondholders.
“[They] have big, powerful votes,” Pottow says. So in order to get any kind of consensus on the plan--and avoid a lengthy and complicated “cramdown” process--the city needs to get as many of those creditors on board as possible.
Pottow says the city “might very well” put forth an amended plan of adjustment to win over more creditors. Bondholders in particular take big hits of 70-80% under Orr’s current plan.
Many creditors had objected to what they called Rhodes’ overly-aggressive timeline for the case, saying they needed more time to digest the plan and get crucial information from the city.
Pottow says that may be true to some extent—but other motivations are in play, too. “The truth of the matter is not that it takes them that long to read the plan,” he says. “It means that they’re still negotiating for what they can support, and what they can vote for.”
Rhodes has given every indication he wants the bankruptcy process to go as quickly as possible, and Pottow says it’s unlikely Rhodes will grant further extensions without a fight.
Several other major elements in the plan are still up in the air. They include a contentious proposal to give control of Detroit’s water department to a regional authority, and whether to settle with two banks over an interest rate swaps deal-gone-bad involving city pension debt.
And it remains to be seen whether state will provide about $350 million to backstop pension losses and protect the Detroit Institute of Arts’ assets. That state money would supplement funds that a number of foundations have pledged to achieve a “grand bargain” that both protects art and minimizes pension cuts.
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