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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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New York State Takes Steps Toward Establishing Bankruptcy Alternative for Cash-Strapped Municipalities

New York State Governor Andrew Cuomo, along with other state lawmakers, recently announced plans to establish a financial restructuring board to help financially distressed municipalities. The board would consist of ten members, six of whom would be appointed by the Governor, and would be tasked with making recommendations on improving finances and the management and delivery of municipal services. The board would have the ability to give participating municipalities up to $5 million to make any recommended changes.

In addition to financial oversight assistance, the board would also have the authority to serve as a binding arbitration panel to assist municipalities and their unions in resolving contract issues in an expedited process, provided both the municipality and the union agree to submit to arbitration. The financial oversight board is an attempt by state lawmakers to provide an alternative resolution process that does not include a bankruptcy filing.  The recent bankruptcy...

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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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California Public Policy Center Estimates CA Debt in Excess of $1.1 Trillion

A recent study by the California Public Policy Center concluded that the combined debt owed by California’s state and local government entities is likely to exceed $1.1 trillion dollars. The CPPC totaled the debt of state government ($132.6 billion), public school districts ($49.7 billion), city governments ($68.1 billion), county governments ($22.1 billion), redevelopment agencies and “special districts” ($110.4 billion) and unfunded state and local government pension obligations (from $265.1 to $586.4 billion). 

In addition to the eye-popping total, the report also raises interesting points about the nature and amount of the state’s debt.

CPPC argues that current estimates of California’s pension obligations vastly underestimate the scale of the amount of unfunded obligations. State estimates generally assume a rate of return on pension fund investments of 7.5%. CPPC believes a rate of 5.5% or even 4.5% is more realistic. Correcting for this error adds $321.3 billion to pension...

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SEC Charges Harrisburg, PA with First Ever Municipal 10(b) and 10(b)(5) Violations

Politics undoubtedly influence the public narrative surrounding a municipality’s slide into bankruptcy. Last week, however, the Securities and Exchange Commission served notice that public officials need to be careful of what they say. For the first time ever, the SEC charged a municipality, Harrisburg, Pennsylvania, with violations of Section 10(b) of the Exchange Act and Rule 10(b)(5) for making materially misleading statements.

While Harrisburg filed a Chapter 9 petition in October of 2011, the petition was dismissed on the grounds that the bankruptcy filing was not authorized under Pennsylvania law. Instead, a receiver was appointed to implement a “recovery plan” and take control of the city’s finances. The city remains under the control of the receiver.

The charges from the SEC cover a two-year period, from January 2009 through March 2011 and relate to statements made by Harrisburg officials, including a “State of the City” address made in April 2009 by the mayor. According to the...

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CREW Los Angeles Panel Recap

Goodwin Procter partner and MuniBK contributor Deborah Schrier-Rape recently acted as a moderator for the Commercial Real Estate Women Los Angeles (“CREW Los Angeles”) panel entitled, “Public Finance in a Sea of Challenge: A Look at What Has Come and What is to Come.” The panelists discussed what public financing transactions are getting done with tax laws in flux and cities contemplating municipal bankruptcy, and what the prospects are for public finance going forward.

Speakers at this CREW Los Angeles monthly luncheon included: Marla Bleavins, Project Manager at Los Angeles World Airports; Stephen E. Heaney, Managing Director of Stifel Nicolaus & Company, Incorporated; Barbara Lloyd, Managing Director of KPMG Corporate Finance LLC; and, Andrea Caruso Townsend, Of Counsel at Squire Sanders. 

Please click here to access a portion of the power point presentation that guided the discussion.

CREW Los Angeles is an organization seeking to advance the careers and success of women...

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Goodwin Procter Partner Lewis Feldman to Speak at 9th Annual Wharton Restructuring and Distressed Investing Conference on February 22

On February 22, Goodwin Procter partner and MuniBK contributor Lewis Feldman will participate in the 9th Annual Wharton Restructuring and Distressed Investing Conference entitled, “Health of Nations: Distress, Recovery, or Revival”  which is the largest restructuring and distressed investing-focused school-run conference in the United States. This year the conference will be held at the Hyatt at the Bellevue in Philadelphia, Pennsylvania.

Lewis will be featured as a speaker in the panel entitled, “Financial Restructuring: Muni Storm on the Horizon” along with Jamie Baird, Managing Director, Blackstone; Sean Gumbs, Senior Managing Director, FTI Consulting; James E. Pass, Managing Director, Portfolio Manager, Guggenheim Investments; and, Rebecca Rhynhart, Budget Director, City of Philadelphia. William J. Nolan, Senior Managing Director, FTI Consulting will moderate the panel which will discuss the indicators of distress, venues, key players, legal framework and municipal bond markets, and...

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Goodwin Procter Partner Deborah Schrier-Rape To Moderate Commercial Real Estate Women Los Angeles Panel on February 13

On February 13, Goodwin Procter partner and MuniBK contributor Deborah Schrier-Rape will moderate the Commercial Real Estate Women Los Angeles (“CREW Los Angeles”) panel entitled, “Public Finance in a Sea of Challenge: A Look at What Has Come and What is to Come.” The panel will discuss what public financing transactions are getting done with tax laws in flux and cities contemplating municipal bankruptcy, and what the prospects are for public finance going forward.

Speakers at this CREW Los Angeles monthly luncheon will include: Marla Bleavins, Project Manager at Los Angeles World Airports; Stephen E. Heaney, Managing Director of Stifel Nicolaus & Company, Incorporated; Barbara Lloyd, Managing Director of KPMG Corporate Finance LLC; and, Andrea Caruso Townsend, Of Counsel at Squire Sanders.

CREW Los Angeles is an organization seeking to advance the careers and success of women in commercial real estate by providing opportunities for business development and professional growth.

To find...

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Goodwin Procter Partner Lew Feldman Comments on California Redevelopment Bonds in The Bond Buyer

Goodwin Procter partner Lew Feldman was recently quoted in an article in The Bond Buyer entitled, “California Preventing Former RDAs From Spending Bond Proceeds” by Keeley Webster.

The article reports that according to data compiled by a local official, about $1.5 billion in California redevelopment agency bond proceeds are in limbo. State government and local officials are engaged in a debate as to whether agencies had any right to issue the bonds as they were issued in the period after Governor Brown announced his proposal to eliminate redevelopment but before lawmakers passed the legislation to do so.

To read the full article, click here.

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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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CalPERS Slams San Bernardino Bankruptcy as “Sham”

CalPERS has fired back at the city of San Bernardino and its pendency plan for operating during the Chapter 9 case, calling it  “criminal” and a “sham.” A copy of the pendency plan can be found here. Since filing for bankruptcy, the city has stopped making its bi-weekly payments to CalPERS. As a result, San Bernardino now owes CalPERS approximately $8 million. 

While CalPERS may cast aspersions on the city’s motivation, financially, the city is faced with either making the CalPERS payment or making its payroll. Even though the hit to CalPERS is 0.00329% of its overall portfolio, CalPERS has a legitimate concern that any acquiescence to San Bernardino’s refusal to pay will set a negative precedent for future Chapter 9 cases. As there are pending municipal bankruptcies underway throughout the state, CalPERS does not want to undermine its position that it is a priority creditor for the municipalities of California. 

The legal issue is whether the pensions of government workers take...

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Bond Buyer California Public Finance Conference Video Recap Part IV

In the final segment of MuniBK’s panel, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22nd annual California Public Finance Conference, panelists examine and discuss:

  • Consensus building, compromise and deal-making;
  • Constraints on parties’ ability to make a deal because certain provisions key to Chapter 11 are inapplicable to Chapter 9;
  • Whether states can help municipalities avoid Chapter 9;
  • How municipal bankruptcies impact bond pricing;
  • Jurisprudential impact of Chapter 9 decisions on bankruptcy courts; and
  • How to judge success of municipal bankruptcy cases.
     

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Bond Buyer California Public Finance Conference Video Recap Part III

The third video segment of MuniBK’s panel, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22nd annual California Public Finance Conference focuses on:

• Challenges faced by municipalities that have a “top line” problem;
• An analysis of certain types of municipal debt and a municipality’s willingness to pay;
• Elements of "fairness" including pension reform and retiree benefits;
• The “firewall” between general obligation bonds and special revenue bonds in Chapter 9; and
• Legal fees and other costs of restructuring.
 

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Bond Buyer California Public Finance Conference Video Recap Part II

The second video segment of MuniBK’s panel “OpporMUNIties in Chapter 9: What Distressed Investors Should Know,” featured at the Bond Buyer’s 22nd annual California Public Finance Conference focuses on the nuts and bolts of a Chapter 9 filing including:

  • The ability of a municipality to impair contracts in Chapter 9;
  • The limitations on a bankruptcy court in a Chapter 9 proceeding;
  • Some key differences between Chapter 9 and chapter 11;
  • Challenges to eligibility in a Chapter 9 case;
  • Creditor negotiations and benefits of filing;
  • A discussion about the Jefferson county filing; and
  • What do to once a municipality is determined to be a valid Chapter 9 debtor.

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Bond Buyer California Public Finance Conference Video Recap Part I

Goodwin Procter recently sponsored the Bond Buyer’s 22nd annual California Public Finance Conference and led a breakfast round table discussion on current topics in Chapter 9 municipal bankruptcy cases. Over the next few weeks, the MuniBK blog will post video segments from the panel entitled, “OpporMUNIties in Chapter 9: What Distressed Investors Should Know.”

The first video segment introduces the panelists and moderator:

Lewis Feldman, Partner, Goodwin Procter LLP

Emanuel Grillo, Partner, Goodwin Procter LLP

Christopher Klein, Chief Judge, United States Bankruptcy Court for the Eastern District of California, overseeing Stockton's current Chapter 9 filing

William Nolan, Senior Managing Director-Corporate Finance, FTI Consulting Inc.

Part I also examines:

  • Chapter 9 cases owing to project failure vs. “top line" problems;
  • Roles “typical” distressed investors may play in chapter 9 cases; and,
  • How quickly distressed municipalities can recover and move forward.

 

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