Courts

Judge Rules That Detroit Is Eligible for Bankruptcy


Detroit is officially bankrupt.

At a Tuesday hearing, Judge Steven Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan sided with the city, granting it bankruptcy protection. The decision gives pensioners and creditors—who have vehemently objected to the filing—less recourse, preventing them from taking their claims against the city to state court.

Cities seeking Chapter 9 bankruptcy must meet three conditions: prove the city is insolvent, obtain the state’s approval for the filing, and show that the city negotiated with creditors “in good faith”—or, if not, that doing so wasn’t possible. Judge Rhodes said his 140-page ruling will address in detail why he found that the city had met the criteria, according to reporters covering the proceedings.

On the first condition, Rhodes found that Detroit was and is insolvent. He enumerated the city’s deteriorating finances:

Skipping bond payments in October, Rhodes said, showed just how dire the situation was:

On state approval for the filing, Rhodes found that the decision by Detroit emergency manager Kevyn Orr and Governor Rick Snyder to file for Chapter 9 protection didn’t violate Michigan’s constitution. The state’s authority to give Orr the power to propose drastic changes to debt payments may be unpopular, but it’s irrelevant as to whether the city can file for bankruptcy.

On one of the most contentious issues to arise since the July bankruptcy filing—whether or not the city can cut pension funds—Judge Rhodes was clear: Pensions are contracts, just as other types of debts are. The decision was a blow to pensioners, who argued that the state constitution doesn’t allow the city to cut pensions in bankruptcy.

On the third and final condition—whether the city negotiated in good faith with its creditors—Rhodes came to an interesting conclusion. He found that Detroit didn’t negotiate in good faith. Orr’s proposal was vague, he found, and didn’t give creditors enough time to respond.

And, he said, Orr misled pensioners about just how underfunded the pensions are. (Those calculations had been in contention.)

But the judge did find that with so many different creditors, good faith negotiations were “impracticable,” so the bankruptcy could proceed.

Rhodes assured everyone, especially the pensioners, that Orr won’t be able to slash debts with abandon. The judge said he won’t rubber-stamp pension cuts.

Rhodes offered his opinion on the sale of assets, such as the Detroit Institute of Arts’s collection: Such decisions, he said, must “take extreme care.”

Before this all moves forward, though, the city and the judge will have this to contend with:

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Weise is a reporter for Bloomberg Businessweek in Seattle. Follow her on Twitter @kyweise.


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