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Let’s Watch Those Attorneys’ Fees: Another First in Detroit

Judge Steven Rhodes, who is overseeing Detroit’s Chapter 9 bankruptcy, appears set to take the unprecedented step of appointing an examiner to review professional fees in the case. 

Judge Rhodes proposed the use of an examiner prior to a hearing held on August 2, and, following that hearing, entered an order opening up a one week comment period in which parties could make suggestions for who the examiner should be. The use of fee examiners is on the rise in complex bankruptcy cases, having been used in the Lehman Brothers and General Motors bankruptcies, among others. 

The move by Judge Rhodes is notable because reviewing the retention and fees of a Chapter 9 debtor’s professionals is generally not within a bankruptcy court’s power. In most bankruptcy cases, a debtor must apply to the bankruptcy court for authorization to retain professionals, including attorneys, financial advisors and accountants. Once retained, those professionals may generally be paid out of a debtor’s estate, and...

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Detroit News Roundup

Friday’s hearing in Detroit provided some indication of how the Detroit’s high-profile bankruptcy case will proceed moving forward. Judge Rhodes agreed to the creation of a committee of retired workers but left the U.S. Trustee to decide who its members would be, leaving open the possibility that organized labor would be represented.

Judge Rhodes also set a schedule going forward, ordering a hearing on the city’s eligibility to be a bankruptcy debtor on October 23, and indicating that the specific issues that will be addressed are whether Governor Rick Snyder's authorization for Chapter 9 bankruptcy filing was proper under the Michigan Constitution and whether the city has bargained in good faith with creditors. The city indicated it would file a plan by the end of the year while pensioners complained the cases were moving forward too quickly. Interested parties also have seven days to respond to his proposed mediator, Chief District Judge Gerald Rosen, of the U.S. District Court...

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A Back Door Bailout for Detroit?

Chapter 9 is designed to "provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts." Much like Chapter 11, this can be accomplished in a variety of ways (other than a conversion of debt to equity), and a municipality has great latitude in proposing a plan of adjustment in order to accomplish the goals of Chapter 9. 

Chapter 9 does not imply a bailout by the federal government, or a takeover of the troubled municipality. Such an approach would be an offense to the notion of state sovereignty, a sacrosanct concept in the Chapter 9 realm. 

Recent news stories indicate that Detroit may attempt to push its retirees into the exchanges created by the Affordable Care Act (a/k/a Obamacare). The impact of this, depending on each individual retiree's income level, could be to shift the burden to federal taxpayers. Thus, rather than addressing one of Detroit's key problems: unfunded pension liabilities for retirees...

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Can P3s Save the Public Sector?

Detroit’s recent bankruptcy filing, the largest Chapter 9 filing in U.S. history, highlights the potential consequences faced by our nation’s increasingly cash-strapped municipalities. Municipal bankruptcy filings remain relatively rare; approximately 40 governmental bodies (including utility authorities and special districts) have filed for Chapter 9 protection since 2008, which tracks the average of 8 filings per year since 1937. Nevertheless, Detroit’s experience proves that even major cities can quickly succumb to the pressures imposed by dwindling revenues and rising debt.

Given the country’s sluggish recovery from the Great Recession, as well as unrelenting increases in public pension and other long-term municipal debt, many public agencies are revisiting the viability of public-private partnerships, or “P3s,” as a financial salve. Structured correctly, a P3 can help a municipality maximize financing resources, increase return on investment, and expand and modernize services and...

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Judge Orders Detroit Bankruptcy Filing Withdrawn

On Friday, Michigan State Circuit Court Judge Rosemarie Aquilina ordered the city of Detroit’s emergency manager, Kevyn Orr, to withdraw a federal bankruptcy petition filed on behalf of the city earlier this week, calling the law which allowed Michigan Gov. Rick Snyder to authorize the filing “unconstitutional.” The ruling was issued as part of a lawsuit  filed by  two retirement systems for the city to block the Chapter 9 filing.

On Thursday, July 18, 2013, the city of Detroit filed for the largest municipal bankruptcy in history, with an estimated $18 billion of debt. Mr. Orr, an attorney brought in by Gov. Snyder, recommended the filing. Mr. Orr has stated that he hopes to have Detroit emerge from Chapter 9 by later summer or early fall.  He previously characterized Detroit’s general obligation bonds as unsecured debt.

 

 

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Detroit Files for Chapter 9

The city of Detroit filed for bankruptcy protection in the Bankruptcy Court for the Eastern District of Michigan on Thursday. Detroit’s bankruptcy is the largest Chapter 9 case in U.S. history. The filing comes just over three months after Governor Rick Snyder appointed Emergency Manager Kevyn Orr to try to solve the city’s apparently intractable debt woes.

As Orr stated in a declaration filed with the Court, “[a]fter decades of fiscal mismanagement, plummeting population, employment and revenues, decaying city infrastructure, deteriorating city services and excessive borrowing that provided short term band-aids at the cost of deepening insolvency, the city of Detroit today is a shadow of the thriving metropolis that it once was.” The city’s debt had swollen to over $18 billion by Orr’s count, with 38 cents of every city dollar going to service legacy debt. The city’s filing will give it an opportunity to formulate a proposal to make its debt burden more manageable.

A fight over the...

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Detroit Roundup: There’s Good News and There’s Bad News (Mostly Bad News)

Detroit received a rare bit of good news as word emerged that the city’s emergency manager, Kevyn Orr, is close to reaching an agreement with two of the city’s secured creditors to accept concessions on repayment of their debt. Although it was unclear which creditors were involved, the amount of debt involved, or the extent and nature of the concessions, any relief from Detroit’s financial woes was welcome news.

Unfortunately, the positive news was too little too late to enhance Standard & Poor’s view of Detroit’s financial prospects. The ratings agency took the unusual step of applying a “superdowngrade” to Detroit’s bond rating, cutting it four levels to CCC- and continuing to list its outlook as negative. The downgrade came in anticipation of bondholders being asked to accept diminished payouts as part of the city’s attempt to restructure its debt.

These developments, days ahead of Detroit’s meeting with labor groups and creditors, combined with the emergency manager’s refusal to...

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Is Detroit Jefferson County All Over Again?

Now that Jefferson County is wrapping up its Chapter 9 proceeding, an examination of the components that led to its downfall is in order. As the New York Times aptly wrote, “Jefferson County’s problems involve corrupt politicians and bad luck, but they also include a longstanding reluctance to face facts…” 

Sound familiar to Detroit? While observers can focus on the past, Detroit should follow Jefferson County’s latest lead: compromise. 

The key to any successful resolution of Detroit’s distress will be frank confrontation. Put everyone in a room and let them yell and scream about what they are owed and who has superior claims. Then, get to the real business of starting to craft a compromise that might work. Such a discussion may be on the horizon, with recent reports indicating that key constituents are trying to schedule a meeting for mid-June. 

The proposed offer to Detroit creditors, reportedly ten cents on the dollar, may be too little for major stakeholders to seriously consider...

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Orr Will Announce His Decision on Chapter 9 Petition in Five Weeks

Detroit's Emergency Manager Kevyn Orr recently announced that he will make his decision on filing a petition under Chapter 9 of the Bankruptcy Code in about five weeks. Within that timeframe, Orr will try to speak with the city's many labor unions and make progress on many other goals. 

Orr's plan involves designating a new police chief, restructuring the fire department via an outside expert, maximizing the efficiency of the public transportation system, speeding up demolition of blight, and analyzing the pension systems for potential modifications. He has placed a high emphasis on change and quick improvements based on evaluations of the city's  continually worsening financial state.  

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Detroit: At Least as Bad as Expected

In his first report as Detroit’s Emergency Manager, Kevyn Orr outlined the city’s problems. To those familiar with the situation, there were no surprises about the top level interrelated problems facing  Detroit: urban sprawl/blight, soaring and unsustainable union contracts and pension liabilities, a history of municipal “borrowing from Peter to pay Paul,” archaic infrastructure, and systemic municipal inefficiencies. The result is a current negative cash position of $162 million and the blunt assertion that debt payment on current obligations will not be made in order to prevent the city from running out of cash. Moreover, Detroit has in all likelihood lost its access to capital in the marketplace given its current credit ratings, the amount of outstanding debt, and its stated inability to repay the obligations. As a result, the solution must be a comprehensive overhaul of the current municipal system. 

Addressing problems of this magnitude will require widespread, comprehensive...

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Lessons for Bondholders

With Stockton now squarely within the parameters of Chapter 9 and Detroit continually troubled but hoping to avoid Chapter 9, are there any synergies or similarities between the two to serve as a warning for bondholders who will likely end up bearing some (and possibly all) of the losses in the restructuring of these municipalities?  Perhaps. 

There are certainly factors to examine in determining if and when a municipality will be able (or unable) to meet its obligations.

In Detroit, one of the key indicators that the city was in trouble was the number of people who have left the city and the socio-economic status of those who remain, which in many instances are simply the ones who can’t afford to leave. This translated into a decreasing tax base at a time when the same amount (or more) of municipal services (police, fire, etc) were still needed because the geographic area remained the same. 

In California, the issue is not population drain, but unsustainable municipal expenses due...

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I’m a Creditor of Detroit…Now What? (Part 2 of 2)

In Part 1 of this series, we examined some of the overarching issues that can make a Chapter 9 restructuring more challenging for creditors than a Chapter 11. The appointment of an emergency manager in Detroit makes it clear that Michigan is taking Detroit’s need to restructure seriously.

Detroit’s problems are well known:

So, what should the creditors of Detroit be asking the city on the precipice of its formalized restructuring?

  • Who will represent my interests and how can I get a seat at the table? The Bankruptcy Code allows a municipality to propose treatment of a creditor’s claim over that creditor’s objection if certain requirements...
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Detroit – Can You Really Manage a City Like a Business?

This guest post was contributed by Marti Kopacz, Founder and Managing Principal of Brant Point Advisors LLC.

Kevyn Orr, Detroit’s newly appointed emergency manager, is going to try. Restructuring professionals have long pondered the advantages and disadvantages of solving public sector problems with private sector strategies. As Orr prepares to take control of what may be the country’s most dysfunctional municipality, he has made it clear that the problem solving will be “data driven.” In other words, politics are way down on the list of considerations and maybe even not on the list at all.  Governor Snyder’s selection of Orr was superb: a top notch restructuring professional with Michigan ties (Michigan University and law school grad), deep familiarity with southeastern Michigan thinking as a result of his experience in the Chrysler restructuring, but without the complications of being a community “insider.”

Orr’s three-prong approach: maintain and grow city services, address...

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I’m a Creditor of Detroit…Now What? (Part 1 of 2)

Now that Michigan and Detroit have publicly admitted that Detroit is in world of financial trouble, creditors of Detroit must to ask themselves, “what’s next”?  Before addressing this question, it is important to understand some of the legal, political and practical obstacles that will face the city’s creditors. 

In a typical Chapter 11 bankruptcy case, the lines are easily and clearly drawn. In one corner are the debtors; in the other are the creditors. While there are varying types of creditors (secured, unsecured, subordinated and so forth), their interests and priorities are established by the Bankruptcy Code through the absolute priority rule. While there may be some litigation posturing in an effort to extract additional value for an “out of the money” constituency, generally, the rule of the day is compromise. Contrast this with Chapter 9 where there are additional complications:

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Detroit Likely to Get Emergency Manager

On Friday, Michigan Governor Rick Snyder published a formal declaration that a financial emergency exists in Detroit. As a result, unless opponents can convince the Governor to change his mind, a three-member emergency loan board appointed by the Governor will select an emergency manager. 

Governor Snyder’s announcement was, in effect, a confirmation of the state financial review team’s conclusion reached on February 19, 2013 that a financial emergency exists in Detroit because there is no satisfactory plan to resolve its extensive fiscal problems. The financial emergency process is occurring under Michigan’s 1990 emergency financial manager law, which became effective again in November after voters repealed a stronger financial manager law by referendum. A new law, passed in a lame duck legislative session and signed by Governor Snyder in December, does not become effective until March 27, 2013. The new law, once in effect, will give the emergency manager increased power, including...

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MuniBK News Roundup

Trial Date Set for Stockton Eligibility

After months of legal wrangling, the legal issues surrounding whether Stockton is eligible to file for Chapter 9 protection will come to a head in a four-day trial beginning on March 25. The trial essentially pits the interests of CalPERS, which contends it is entitled to continue to receive full payment under California law against certain bondholders and bond insurers, who contend that CalPERS’ claim should be treated as an unsecured claim and, therefore, receive the same treatment as the bondholders. 

While the similarity of the claims of creditors should be an issue reserved for confirmation of any plan of adjustment, the creditors seem poised to try to make it a central issue to Stockton’s eligibility to be a Chapter 9 debtor, as Stockton  is required to prove it has satisfied the state and federal hurdles to a Chapter 9 filing. Absent a last minute settlement, the outcome of the trial, which presiding Judge Christopher Klein has promised will...

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Under New Michigan Law, Bankruptcy is an Option for Cities

Michigan’s lawmakers passed new legislation that expands a local government’s options in bankruptcy.  Under the state’s old law, only an emergency manager, with the governor’s permission, could declare bankruptcy on behalf of a government entity. The new legislation allows for a local government to file Chapter 9 earlier in the process. The governor still needs to provide final approval, but in light of Detroit’s financial woes, legislators determined that other options should be available to assist in resolving Detroit’s insolvency. SB 865 provides that if a local government is in a state of financial emergency, the governing body has seven days to select one of four options:

  1. Opt for a consent agreement with the state;
  2. Appoint an emergency manager;
  3. Begin a neutral evaluation process with a mediator; or
  4. File for Chapter 9.

The law also gives the local governing body and the mayor the ability to vote out an emergency manager after one year and replace the manager with a mediator. If signed...

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