Judge: Detroit eligible for Chapter 9 bankruptcy

A federal judge has ruled Detroit is eligible for Chapter 9 bankruptcy protection to help dig out from under $18 billion in debt and that city pension payments can be cut to help make that happen. Emergency Manager Kevyn Orr is expected to hold a news conference at about noon at the Coleman A. Young Municipal Center and meet with The News’ editorial board at 1 p.m.

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The city’s largest union signaled its intent to appeal Detroit’s eligibility for Chapter 9 bankruptcy relief.

The American Federation of State, County and Municipal Employees filed the notice of appeal minutes after U.S. Bankruptcy Judge Steven Rhodes said Detroit was eligible for Chapter 9 relief.

AFSCME lawyer Sharon Levine said the union wants to take the appeal to the U.S. 6th Circuit Court of Appeals, the first step in a path many expect will lead to the U.S. Supreme Court.

Detroit is eligible for Chapter 9 bankruptcy relief, a judge ruled Tuesday, a move that threatens retiree pensions and other assets of the city.

“It is eligible but it also has an opportunity for a fresh start,” U.S. Bankruptcy Judge Steven Rhodes said.

Calling Detroit a once proud and prosperous city, Rhodes issued his order following a 90-minute speech that summarized the city’s woes and long slide into bankruptcy.

“The city does not have enough money to care for its residents, let alone pay its debts,” Rhodes said. “Municipalities cannot print money.”

Rhodes expressed concern about the impact his ruling will have on retirees.

“I implore with all urgency those who implement the social safety net, the governor, city, civic and business leaders to focus greater attention on the real need that will arise because of the city’s bankruptcy,” Rhodes said.

The ruling is expected to be appealed immediately by creditors.  Rhodes asked them to file notice quickly.

“We think this is a huge loss for the people of Detroit,” AFSCME lawyer Sharon Levine said afterward, vowing an appeal.

The union, the city’s largest, has asked for permission to appeal directly to the U.S. 6th Circuit Court of Appeals. That could be the first stop in a path many experts believe will lead to the U.S. Supreme Court.

Rhodes issued his ruling after concluding vested retiree pensions can be cut in bankruptcy court, and are no different than any other contract.

Any pension cuts would be outlined in a plan of adjustment that the city will file by March 1.

The judge also faulted the city for failing to negotiate in good faith with creditors. But he concluded negotiations were impracticable.

Detroit should have filed bankruptcy years ago and it was a foregone conclusion that the city was headed for a Chapter 9 filing, U.S. Bankruptcy Judge Steven Rhodes said.

That does not, however, mean the city’s bankruptcy petition was not filed in good faith, he said.

“Was it a foregone conclusion? Of course it was,” Rhodes said.

The city probably should have filed years earlier, he added.

It was impracticable for Detroit to negotiate with 100,000 creditors before deciding to file bankruptcy July 18, the city’s bankruptcy judge said Tuesday.

That is a key element Detroit needed to satisfy in order to be eligible for Chapter 9 bankruptcy.

U.S. Bankruptcy Judge Steven Rhodes, however, said Detroit failed to hold good-faith negotiations with creditors ahead of the filing. He said a June 14 restructuring proposal shared with creditors was vague and follow-up meetings with creditors were presentational and not real negotiations.

Selling assets, such as masterpieces at the Detroit Institute of Arts, does not make sense for an insolvent city and does not address long-term financial and structural problems, the city’s bankruptcy judge said today.

U.S. Bankruptcy Judge Steven Rhodes referenced the DIA collection while justifying his decision that Detroit is insolvent.

“When the expenses of an enterprise exceed its revenue, a one-time infusion of cash, whether from an asset sale or borrowing, only delays inevitable financial failure unless the enterprise reduces expenses or enhances income,” Rhodes said.

In his quickest analysis today, Detroit’s bankruptcy judge said the city is insolvent, a key requirement of Chapter 9 bankruptcy law.

U.S. Bankruptcy Judge Steven Rhodes said there was overwhelming evidence that the city was unable to pay debts before filing bankruptcy July 18. He also pointed to Police Chief James Craig’s testimony about woeful city services and deplorable conditions inside police precincts, the high crime rate and absence of leadership.

Creditors suffered several blows early Tuesday when Detroit’s bankruptcy judge shot down objections aimed at kicking the city out of court.

U.S. Bankruptcy Judge Steven Rhodes overruled several challenges, including one arguing the state emergency manager law was unconstitutional.

He also overruled objections that the city’s bankruptcy petition should have included a condition shielding vested retiree pensions from possible cuts.

 

Vested retiree pensions are not entitled to extraordinary protections and are identical to contracts, which can be impaired in bankruptcy court, a judge said Tuesday.

“It has long been understood that bankruptcy law entails the impairment of contracts,” U.S. Bankruptcy Judge Steven Rhodes says.

Rhodes made the comment before announcing whether Detroit is eligible for Chapter 9 bankruptcy protection.

The judge said objectors’ arguments “does not demonstrate that pensions are entitled to any” additional protection like other contracts.

When the state constitution was updated in the 1960s, he said drafters could have shielded pensions from bankruptcy “but did not.”

Drafters also could have insisted the state guarantee vested retiree pensions.

Rhodes added some caution.

“This court will not lightly or casually exercise power…to impair pensions,” #Detroit bankruptcy judge says.

U.S. Bankruptcy Judge Steven Rhodes tried heading off a common complaint from residents and bankruptcy lawyers before ruling whether Detroit is eligible for bankruptcy relief.

“The popularity of the decision to appoint an emergency manager is not a matter of eligibility,” Rhodes said.

Emergency Manager Kevyn Orr was appointed by Gov. Rick Snyder in March and his powers trump the elected mayor and city council.

Rhodes has spent more than 35 minutes recounting decades of financial and economic problems that preceded Detroit’s bankruptcy filing July 18.

He also signaled his ruling would touch on the sanctity of public retiree pensions.

“Resolving the issue now will likely expedite the resolution of this bankruptcy case,” Rhodes said.

U.S. Bankruptcy Judge Steven Rhodes will rule momentarily whether Detroit is eligible for bankruptcy relief and will justify his decision in a roughly 140-page memo.

Rhodes opened the 10 a.m. hearing recapping Detroit’s decades-long decline.

“To reverse this decline and attract new residents and revitalize and reinvigorate, #Detroit needs help,” Rhodes told lawyers today.

He recapped city’s decision to stop paying some creditors.

“If the city had not not deferred payments, it would have run out of cash by June 30, 2013,” Rhodes said. “Let me repeat that.”

He did.

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U.S. Bankruptcy Judge Steven Rhodes took the bench at 10 a.m. and is expected to rule momentarily whether Detroit is eligible for Chapter 9 bankruptcy protection.

Rhodes has said he will rule from the bench and issue a written decision soon after. His decision will cap a nine-day trial that ended last month and could set the stage for Detroit to file a plan to slash more than $18 billion in debt.

 

1203bkProtest2U.S. Bankruptcy Judge Steven Rhodes is expected to cover four bases when he announces at 10 a.m. whether Detroit is eligible for Chapter 9 bankruptcy protection.

In order to qualify for bankruptcy, Detroit must prove it is insolvent, bargained with creditors in good faith, had proper authorization to file for relief and wants to reduce its debts.

Retiree groups, pension funds and labor unions fought over each requirement during a nine-day trial that ended last month.

Rhodes will announce his ruling from the bench and issue a written opinion soon after.

It is unclear whether the judge will address the constitutionality of the state’s emergency manager law. Objectors argue the law is unconstitutional and, therefore, Gov. Rick Snyder was not empowered to authorize the city’s July 18 bankruptcy petition.

Also unclear: whether the judge will address whether the state constitution protects vested public-employee pensions in bankruptcy court.

David Sole pickets in front of federal court before today's ruling on Detroit's  eligibility for bankruptcy. David Coates/The Detroit News

David Sole pickets in front of federal court before today’s ruling on Detroit’s eligibility for bankruptcy. David Coates/The Detroit News

By 9 a.m., more than a dozen protesters began to gather outside of the federal court house in downtown Detroit to await news of whether Detroit is eligible for Chapter 9 bankruptcy relief. One man, David Sole, carried a sign while wearing a T-shirt that read: “Hands off my pension. Make the banks pay!”

Also among those demonstrating were organizers from Moratorium Now, a group that has been fighting the state’s emergency manager law and Detroit”s historic bankruptcy filing.

Abayomi Azikiwe, 56, a Moratorium Now organizer, said the bankruptcy filing had nothing to do with government leaders’ interest in the betterment of the city, but rather in appeasing banks, whose predatory lending practices were big contributors to the city’s financial crisis.

The bankruptcy, Azikiwe said, is “setting a dangerous precedent on all employees in Michigan.”

By 9:30 a.m., the crowd swelled to at least 50.

There were no signs of protestors outside federal court downtown early Tuesday two hours before U.S. Bankruptcy Judge Steven Rhodes announces whether Detroit is eligible for bankruptcy protection.

But there were plenty of reporters.

Six satellite TV trucks were parked along Lafayette outside federal court and a pack of reporters waited for glimpses of lawyers involved in the case. There also is a white tailgating-style tent offering protecting the media from expected rain and snow.

Protesters seen outside the federal courthouse in late October. (Daniel Mears/ The Detroit News)

Protesters seen outside the federal courthouse in late October. (Daniel Mears/ The Detroit News)

Federal court officials are bracing for a crush of reporters, lawyers, jurors, bankruptcy attorneys — and 60 schoolkids on a tour — Tuesday when U.S. District Judge Steven Rhodes announces whether Detroit is eligible for Chapter 9 bankruptcy relief.

As many as 100 reporters from newspapers, radio, websites and TV networks in New York, including reporters from Brazilian and Japanese news outlets, are expected to cover the ruling, which could have implications on the nation’s municipal bond market and sanctity of public retiree pensions.

The 10 a.m. hearing is coinciding with a busy day at the bustling courthouse and the crowds could pose challenges for bankruptcy lawyers and others who are flying in from across the country to hear a key decision in the biggest municipal bankruptcy in U.S. history.

There likely will be a logjam getting into the courthouse and delays for attendees going through security checkpoints. About 200 prospective jurors are due to arrive at 8:15 and fight for space in line with 100 lawyers attending an 8 a.m. special Federal Bar Association meeting.

The 60 schoolkids are scheduled for a tour of the 1930s-era courthouse. The tour was set one month ago, a court spokesman said.

Rhodes gave eight days advance notice of the bench ruling, relieving all parties from having to monitor the federal court website around the clock for a published eligibility decision.

“It was nice that we didn’t have to be glued to our computer on Thanksgiving, but it’s making much more of a spectacle out of this,” said Ryan Plecha, attorney for two city retiree associations.

Robert Snell
Robert Snell is the Detroit News federal courts reporter. He can be reached at rsnell@detnews.com or (313) 222-2028.