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Detroit's bankruptcy trial is over; judge to rule on restructuring plan November 7th

Oct 27, 2014

Detroit’s bankruptcy trial wrapped up Monday with closing arguments.

At issue: whether the city’s plan of adjustment to restructure its debt is “fair and equitable” to its various creditors, as required by Chapter 9 of the municipal bankruptcy code.

Judge Steven Rhodes must also decide if the plan is “feasible”—whether Detroit can balance its books and avoid slipping back into bankruptcy.

Bruce Bennett, an attorney for the Jones Day law firm representing the city, spent hours trying to convince Rhodes the plan meets both criteria.

More from WDET’s Sandra Svoboda at Next Chapter Detroit, a Michigan Radio partner in the Detroit Journalism Cooperative:

Finishing the bankruptcy trial is important for the city’s image, Bennett said.

“Even today many people who read articles which have reported the parade of settlements [Detroit has reached settlements with all major creditors in out-of-court mediation] … don’t fully understand the extent of progress already made or fully understand that the end really is in sight,” Bennett.

He repeatedly praised the relatively short time frame from filing to today’s closing arguments.

“It was a priority very early on for the debtor, the emergency manager, the entire professional team that we were going to put his case on a fast track,” Bennett said. “We think we’ve succeeded in this regard with your help. … The fact that we’re going to have an ultimate conclusion in this kind of time frame is terrific.”

The Plan of Adjustment now is “very broadly consensual” Bennett said, with all major financial creditors supporting it.

Bennett went on to defend the legality of the various settlements, including the one known as the “grand bargain.”

That deal, included in the plan of adjustment, will use more than $800 million in private and state funds to minimize pension cuts to Detroit retirees—though they still have to take some losses, with some categories of pensioners losing more than others.

By voting to approve the grand bargain, pensioners as a group gave up their lawsuit challenging any pension cuts as illegal under Michigan’s state constitution. They also gave up any effort to get the city to sell pieces of the Detroit Institute Arts’ collection to pay off creditors.

That will allow the city to transfer ownership of the museum’s assets to a charitable trust, where it will be shielded from any future claims from creditors.

That led to an exchange between Bennett and Judge Rhodes:

“There really isn’t a dispute that the DIA is a nationally recognized cultural institution that contributes to the city. It contributes to the image of the city. It contributes to the city’s rehabilitation. It might even contribute to bringing residents back,” Bennett said. “It is most assuredly a reasonable decision for Detroit to make to keep a world class art museum.”

Judge Rhodes interrupted Bennett’s statement to pose a question.

“What do we say to the pension claimant whose pension is impaired as a result of that decision?” the judge asked.

“We say to pension claimants in this what we say to other creditors,” Bennett said. “There’s no law that says a pension creditor has to be paid by causing a city to sell its assets.”

Bennett argued that the city did what it could to “monetize” assets without selling them off. He also refuted creditor arguments that Detroit should raise taxes to pay off debts, saying that’s “not sensible” for a city already burdened with high taxes.

Finally, Rhodes asked Bennett to list the “two or three top risks” to the plan’s feasibility. Bennett’s response:

"Everyone recognizes that there has to be flexibility in implementing the (restructuring initiatives) going forward, and it’s impossible sitting here in 2014 to decide exactly how money is appropriated in like 2018 or 2019 should be spent [the plan budgets for $1.7 billion to be invested in city services over the next 10 years]. I know that your Honor has confidence in Mayor Duggan and his administration – it’s a very impressive group. We don’t know how long they’re going to stay. We have to make guesses about who’s going to be there in the future. I would say the risks that are controllable are sticking with the plan and using the money, the huge amount of budget surpluses are projected and earmarked … earmarked for critical investments in critical areas."

Following Bennett, lawyers for some Detroit creditors who have settled with the city—including the Official Committee of Retirees, the pension systems, and the Detroit Police Officers Association—also urged Rhodes to approve the plan of adjustment.

But a handful of individuals did argue against approval—specifically, that the city’s plan to “claw back” some annuity payments from retirees goes too far.

Again from Next Chapter Detroit:

After attorneys supporting the city’s plan spoke, individual objector John Quinn, an attorney, argued against adopting it. He objects specifically to pension cuts and the “clawback” of some annuity savings fund monies from general service retirees.

Here’s the background: the annuity savings fund was a program that allowed non-uniform city employees (everyone but police and fire) to invest 3, 5 or 7 percent of their after-tax income in a fund co-mingled with the general pension funds. The annuities had a guaranteed rate of interest regardless of how the fund actually performed.

As part of the bankruptcy negotiations between the city and creditors, several employee and retiree groups agreed to allow a partial recoupment of “excessive” interest payments on the annuity savings fund. The provision was in the plan that the pensioners approved in their vote on the Plan of Adjustment. The recouped funds would be put back into the pension fund to make up what the city calls “excess interest payments” made to pensioners who have collected their annuity savings funds.

With closing arguments over, the trial phase of Detroit’s bankruptcy case officially wrapped up.

Judge Rhodes said he planned to issue his ruling November 7th. Rhodes said if he does confirm the plan, he will also hold a hearing to discuss how the plan should be implemented.

Wayne State University bankruptcy law professor Laura Bartell thinks it’s very likely Rhodes will approve the plan. However, Detroit won’t actually exit bankruptcy until the plan’s terms are “consummated.”

“When they issue all of the bonds that they’re supposed to issue, pay the money that they’re supposed to pay, [and] do what they plan says they have to do on the effective date…that’s when they emerge from bankruptcy,” Bartell said.