Detroit — U.S. Bankruptcy Judge Steven Rhodes adjourned Detroit’s second bankruptcy hearing Friday afternoon after creating a committee to represent city retirees and hearing feedback from lawyers about the expedited deadlines he’s set for the case.
The judge also said he wants a mediator to resolve disputes as the case proceeds and a fee examiner to ensure the city’s legal fees are appropriate. He also heard from a city attorney who said Detroit intends to file a plan to adjust its debt by Dec. 31, months ahead of schedule.
Rhodes said he would not decide who should serve on the retirees’ committee, leaving that the power in the hands of U.S. trustee officials who also are to create deadlines for the panel. The judge also said he “commends and accepts” the city’s offer to pay for the committee’s expenses.
The judge also said a second committee should be considered for civil claims and other “litigation pending or contemplated to be filed.”
City lawyer Heather Lennox told Rhodes that Detroit wants the retiree committee so the city can negotiate cuts with retirees, who are largely unrepresented by their unions.
“Given the pressing financial crisis the city faces, we want a clearly authorized representative who can speak for the city’s retirees,” Lennox told the judge.
There are about 23,500 retirees with vested pension benefits. Those benefits are targeted for cuts during the city’s bankruptcy case.
Earlier Friday, another city lawyer, David Heiman, told Rhodes the city intends to present its “plan of adjustment” by year’s end. The plan is a major pillar of the biggest municipal bankruptcy filing in U.S. history.
“Time is our enemy,” Heiman told Rhodes. “The facts are not going to change no matter how long we wait.”
First, the city has to pass an eligibility fight that will revolve around whether members of Emergency Manager Kevyn Orr’s restructuring team negotiated in good faith with creditors. Some creditors are vowing a fight, alleging the bankruptcy was not authorized because it would slash constitutionally protected pension benefits.
Rhodes indicated he is mulling whether to speed up deadlines in the case. He has set an Oct. 23 trial to decide whether Detroit is eligible for Chapter 9 bankruptcy relief.
Two Detroit pension funds already have argued Gov. Rick Snyder was prohibited from authorizing the bankruptcy case because it could lead to cuts in constitutionally protected pension benefits.
The judge proposed using an independent examiner for the city’s legal fees, noting scrutiny of those expenses is anticipated.
“It is easy to predict there will be intense media and public scrutiny of the city’s professional fees,” Rhodes said. “This is entirely natural and proper and, frankly, the court encourages the public to remain fully informed of all aspects of the case.”
Rhodes mulled whether he will allow for a limited discovery period, which would include depositions. Rhodes tentatively set an Aug. 19 deadline to file eligibility objections.
Meanwhile on Friday, a lawyer representing the city’s pension funds criticized the lack of negotiations before the city filed Chapter 9 bankruptcy last month and claimed the city is not broke.
Attorney Robert Gordon said there were several meetings with Orr’s teams and due diligence sessions but no negotiations. He also said the pension funds are still awaiting actuarial calculations that could illustrate the funds’ financial health.
“This is not a mom-and-pop convenience store situation,” Gordon told Rhodes.
Gordon also tried to slow the pace of the city’s bankruptcy case and faulted the perception that the city is broke.
“That is a catchy sound bite,” Gordon told the judge. “The city is meeting its payroll obligations. While everything needs to move with due speed — we understand that — it should not be used as an excuse to move faster than reasonable.”
The stakes are high, he added, but current employees and retirees shouldn’t be steamrolled.
Earlier, Heiman told the judge that “significant differences” remain between the city and unsecured creditors who risk losing billions.
The talks are “civil and friendly yet when it comes to the point of saying ‘how do you view our proposal?’ no one likes it and that’s not surprising,” Heiman said. “Our proposal requires significant across-the-board debt relief.”
Orr is offering a $2 billion debt settlement to holders of $11.5 billion in unsecured debt.
Talks continue, Heiman added.
“We have had discussions in the last week and have discussions even scheduled today and next week,” Heiman said.
“How would you characterize your client’s willingness to continue to try to bridge those differences?” Rhodes asked.
“I would say more than a willingness,” Heiman said. “There is a commitment not only by Kevyn Orr but other people in the city.”
In a nod to the rarity of Chapter 9 cases, Rhodes opened the proceedings Friday with a primer on the court’s limited role in the city’s restructuring.
“It is important to note the very limited role a bankruptcy court and judge play in a municipal bankruptcy case under Chapter 9,” Rhodes told dozens of lawyers.
Rhodes also emphasized that he is not responsible for city services or hiring or firing officials.
“City officials are not accountable to this court,” Rhodes said. “The court has no role in running the city or the services it provides. Complaints, compliments and suggestions should continue to be directed to the city.”