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Primary Issues to be Decided in the City of Detroit Chapter 9 Bankruptcy Case

On July 18, 2013, the City of Detroit filed the largest municipal bankruptcy in the history of the United States. Since the filing, the Bankruptcy Court has entered 22 orders, including orders (a) affirming that challenges to the City’s authorization to file bankruptcy may be brought only in the Bankruptcy Court, (b) establishing dates and procedures for challenges to the City’s eligibility under Chapter 9 of the United States Bankruptcy Code, (c) setting a deadline for the City to file a plan for the adjustment of the City’s debts, (d) directing the appointment of a committee of retired employees, and (e) appointing as mediator the Chief Judge of the District Court for the Eastern District of Michigan. The following are some of the most critical of the many issues that will be decided in the City of Detroit’s Chapter 9 bankruptcy case: 1. Eligibility — Under Section 109(c) and 921(c) of the Code, the Bankruptcy Court may dismiss the Chapter 9 bankruptcy petition if the City did not file in good faith or if the petition does not meet the requirements of the Code. Several creditors are asserting that the Chapter 9 case should be dismissed because the City of Detroit (a) did not negotiate with creditors in good faith before the bankruptcy filing, (b) is not actually insolvent, and (c) was not properly authorized to file the Chapter 9 bankruptcy petition. The Bankruptcy Court has set an expedited timetable for determining eligibility issues, with trial scheduled to begin on October 23, 2013. In comparison, the eligibility of the City of Vallejo, CA was not finally determined until over a year after Vallejo’s Chapter 9 bankruptcy filing. 2. Retiree obligations — The City of Detroit estimates its unfunded pension liabilities at $3.5 billion, plus another $5.7 billion in other post-employment benefits. The City plans to treat these obligations as general unsecured debts subject to adjustment. The Bankruptcy Court has directed the United States Trustee’s Office to appoint a Committee of Retired Employees. The Michigan Attorney General, pension funds, and unions are also likely to oppose any cuts to the City’s pension obligations and have argued that the Michigan Constitution prohibits the City from taking any action to impair the City’s pension obligations. 3.Rejection of union contracts — The Bankruptcy Code permits the City to reject its collective bargaining agreements in bankruptcy. While collective bargaining agreements are granted heightened protection in corporate bankruptcy cases, Section 901 of the Code excludes these protections in Chapter 9 municipal cases. 4.General Obligation (“GO”) Bonds — The City owes approximately $530 million in GO Bond liabilities. GO Bonds are backed by the full faith, credit, and resources of the City of Detroit and are supported by the City’s taxing authority. The City has indicated that it will treat GO Bonds as general unsecured debts. 5.Sale of assets held by the Detroit Institute of Arts (“DIA”) — The City of Detroit has retained Christie’s Appraisals, Inc. to value the holdings of the DIA. While the City has not indicated that it plans to sell art work held by the DIA, the DIA has retained a law firm and has indicated that it would litigate in bankruptcy court to protect its holdings. The City may also be evaluating other City-owned cultural assets, including Belle Isle and the Detroit Zoo. Although a bill that sought to safeguard the DIA and other cultural assets did not pass the Michigan Legislature, the Michigan Attorney General issued an opinion before the Chapter 9 filing stating that the DIA art collection is held in a charitable trust for the people of Michigan and cannot be sold to satisfy Detroit’s debts. 6.Confirmation of a Plan of Adjustment — Section 941 requires that the City file a plan for the adjustment of the City’s debts at the time fixed by the Bankruptcy Court. The Bankruptcy Court has set March 1, 2014 as the deadline for the City to file its plan. If the plan is confirmed, creditors will be bound by the terms of the plan and the City will emerge from Chapter 9 bankruptcy with reduced debt obligations. To be confirmed, the City must propose a plan that complies with the requirements of the Code, including requirements that the plan must be (a) fair and equitable with respect to each class of creditors that have not accepted the plan, (b) feasible, and (c) in the best interests of creditors.

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