Objections roll in on Detroit bankruptcy filing, to what effect?
Some 100 creditors of the city of Detroit, which has petitioned a federal court for bankruptcy, have now filed their objections to that course of action on grounds it would be unconstitutional 鈥� a move that bankruptcy experts says is likely to slow, but probably not halt, the city's efforts to get out from under its mammoth debt burden through bankruptcy.
The official objections filed Monday were primarily from public-sector unions, whose retirees and pensioners stand to lose mightily if the city's bankruptcy filing under Chapter 9 were to proceed. They argue that Detroit is not insolvent,聽despite its claim that it owes creditors billions of dollars, and they take issue with the debt assessment of Kevyn Orr, the emergency financial manager for the city appointed in May by Michigan Gov. Rick Snyder (R).
Mr. Orr says Detroit is saddled with at least $18 billion in debt, including $3.5 billion in underfunded pension liabilities and $5.7 billion in other retiree benefits. If the bankruptcy proceeds, it will be the largest of any city in US history.
The unions suggest that Orr is inflating the debt levels to support the political agenda of Governor Snyder, and they also worry that a federal bankruptcy court will void a statute in the state constitution that protects pensions from bankruptcy restructuring.
鈥淭he proposal is part of a deliberate strategy mapped out by lawyers now on the city鈥檚 legal team in which Chapter 9 is used as 鈥榣everage鈥� 鈥� a blunt instrument 鈥� to force [city] retirees and pension-vested workers into negotiating away their benefits, despite the protection afforded those benefits by the Michigan constitution, which dictates that such benefits should not be at risk in this process at all,鈥� Babette Ceccotti, attorney for the United Auto Workers (UAW), wrote in a court filing.
Many bankruptcy experts say the filing of Monday鈥檚 objections is more or less perfunctory and that US Bankruptcy Judge Steven Rhodes, who is presiding over the case, will not likely be swayed by arguments that Detroit's bankruptcy filing would be unconstitutional. They also say that federal law on bankruptcies will trump state constitutional requirements.
鈥淚 don鈥檛 think that, at the end of the day, it鈥檒l be persuasive,鈥� says Randye Soref, a bankruptcy attorney in Los Angeles, who believes the challengers are merely doing due diligence to have their objections heard.
鈥淵ou have to raise objections. If you don鈥檛 do that, then it just proceeds. So it鈥檚 no harm, no foul to the creditor or union to raise these objections. Because if it鈥檚 successful, it works; if not, they鈥檙e no worse off,鈥� Ms. Soref says.
What the challengers are likely to accomplish is to help run down the clock on Orr. He has said he wants his office to be cleared to proceed with Detroit's financial restructuring by November. That would give him until Sept. 25, 2014, to implement his plan to put Detroit on more solid financial footing. Under state law, Orr is allowed 18 months on the job; after his term expires, the City Council can vote, through a public referendum, to remove him. If it succeeds, Governor Snyder can appoint a new emergency manager, because the declared financial emergency would still exist.
鈥淭here is nothing prohibiting Mr. Orr from serving longer than 18 months, but he would need a new contract,鈥� says Bill Nowling, an Orr spokesman.
But the hearings to address the objectors' challenges 鈥渨ill use up time and resources [that Orr] will want to focus on other things鈥� related to the restructuring, says Soref. 鈥淚f I鈥檓 a creditor or a person who doesn鈥檛 want the bankruptcy, I鈥檒l do whatever I can to muck that up. The judge鈥檚 biggest role is to keep this on track and moving,鈥� she adds.
Judge Rhodes scheduled an Oct. 23 trial date to determine Detroit's eligibility for bankruptcy. The timing is unusually swift compared with previous high-profile municipal bankruptcies, says Michael Sweet, a bankruptcy attorney in San Francisco. Stockton, Calif., for example, had to wait nine months after it filed Chapter 9 to be designated bankrupt under law, which establishes a process for wiping the slate clean and settling debts (usually for cents on every dollar owed).
鈥淭he judge set a very aggressive calendar, but he clearly is intent on moving the process along quickly,鈥� Mr. Sweet says.
The main potential delay could stem from creditors' challenges to Orr鈥檚 numbers that show the city to be insolvent. For example, Orr calculates the underfunded pension liabilities are $3.5 billion. But the Police and Fire Retirement System and the General Retirement System both say they are unfunded by only $640 million. The pension systems say the city is not accounting for assets, none of which they specified.
鈥淚f people want to get into nuts and bolts of city鈥檚 finances, they鈥檙e going to want to see documents, and that could really cause some delay,鈥� Sweet says.
Mr. Nowling would not comment on what Orr would do if the court were to find that Detroit is not eligible for bankruptcy. Orr鈥檚 restructuring plan 鈥渞epresents the best plan possible鈥� for the city, he says, and 鈥渋t is the plan from which the city will make its case to creditors and stakeholders, whether in bankruptcy or, if necessary, out of bankruptcy.鈥�
