Detroit retirees voted overwhelmingly to approve emergency manager Kevyn Orr's plan of adjustment.
That plan includes the unprecedented "grand bargain"--a mixture of public and private funds that will minimize cuts to city pensions, while protecting the Detroit Institute of Arts' assets from other city creditors.
But retirees aren't the only group of creditors who voted on the plan. Other groups did as well--and not all voted "yes."
That groups that voted "no" were, like city pensioners, other unsecured holders of Detroit's debt. Chief among them are two major bond insurers: Syncora Guaranty, Inc., and Ambac.
Together, those companies insure billions worth of Detroit bonds. And under Orr's plan, they'll take some step losses--much steeper than those some pensioners will take.
The companies will continue fighting the plan in bankruptcy court. They argue that the grand bargain unfairly favors retirees over bondholders, violating the rules of the Chapter 9 bankruptcy code.
And they've argued that Detroit should have to sell the DIA's world-class art collection to pay its debts.
Wayne State University bankruptcy law professor Laura Bartell says the bankruptcy code mandates that all groups within one creditor class receive "fair and equitable" treatment. The plan can't "unfairly discriminate" against any one group.
But the person who will ultimately define those terms is a federal judge--in Detroit's case, Judge Steven Rhodes.
And Bartell says Rhodes has already expressed sympathy for the plight of city pensioners.
“They’re people that have very limited ability to absorb a loss," says Bartell. "And he in fact suggested that he would not confirm a plan that imposed crippling losses on the pensioners."
Bartell adds that in a precedent-setting move, Rhodes ruled earlier that federal bankruptcy law trumped Michigan's constitutional guarantee for public pensions. But she argues that gives Rhodes even more incentive to protect pensions as much as possible.
"There is discrimination [in the plan]," Bartell says. "The question is whether that discrimination is 'unfair.'”
In a normal bankruptcy process, all creditor groups need to approve a plan of adjustment for it to move forward, and for a city to exit bankruptcy.
But there's a provision in bankruptcy law called a "cramdown." That could happen if the judge decides the plan is "fair and equitable," overriding the dissenting creditors.
“If there is a 'no' vote, the plan can still be confirmed over the objection of that class, as long as there is at least one class that votes 'yes,'" Bartell says. "And that has happened in this case."
Since Detroit is going through the largest and most complex municipal bankruptcy in US history, most legal experts have suggested a cramdown is the likely outcome.
Rhodes will ultimately decide the issue after a trial scheduled to start next month. So far, he's kept an unusually fast-paced court schedule for a municipal bankruptcy the size of Detroit's.
Gov. Snyder and some other officials have argued the case should be resolved as quickly as possible, so that Orr can leave his post in September and return the city to some level of local control.
Their stated goal has been for Detroit to exit bankruptcy sometime this fall.