Detroit files for bankruptcy
Detroit—The city of Detroit filed the largest municipal bankruptcy case in U.S. history Thursday afternoon, culminating a decades-long slide that transformed the nation’s iconic industrial town into a model of urban decline crippled by population loss, a dwindling tax base and financial problems.
The 16-page petition was filed in U.S. Bankruptcy Court in Detroit.
Gov. Rick Snyder’s office was making plans this afternoon to hold a Friday morning news conference at the Maccabees Building, 5057 Woodward in Midtown, according to a source. It’s the same location where the governor declared a financial emergency for Detroit on March 1.
Under state law, Snyder is required to approve a Chapter 9 filing. As of Wednesday, Snyder said he had not received any such request from Detroit Emergency Manager Kevyn Orr. Sources close to the governor said the situation is fluid, adding that Snyder intends to study Orr’s recommendations and related documents “for a couple of days” before making his decision.
A bankruptcy filing would come as an Ingham County judge is preparing Monday to hear arguments from retirees to block any attempt by Snyder to authorize a bankruptcy. A filing would produce an automatic stay of all pending litigation and would cap a month of intense talks between Orr’s team and creditors, which largely have failed to restructure as much as $20 billion in debt and long-term liabilities.
News of an imminent filing prompted lawyers for the city’s pension funds to request an emergency hearing this afternoon in Ingham County Circuit Court to block a bankruptcy authorization.
Orr’s spokesman, Bill Nowling, could not be reached for comment. And state officials contacted by The News on Thursday declined to discuss the matter.
A Chapter 9 filing would leave the restructuring to Orr and a federal bankruptcy judge and could take years, experts say, despite hopes by the governor and Orr that the case can be wrapped up in a year. A bankruptcy judge could trump the state constitution by slashing retiree pensions, ripping up contracts and paying creditors roughly a dime on the dollar for unsecured claims worth $11.45 billion.
During a month of negotiations, Orr has reached a settlement with only two creditors: Bank of America Corp. and UBS AG. They have agreed to accept 75 cents on the dollar for approximately $340 million in swaps liabilities, according to a source familiar with the deal.
The bankruptcy plan is expected to closely follow Orr’s restructuring proposal that was unveiled to creditors on June 14 — a proposal that drew criticism from some creditors who said the cuts were too deep and did not include the sale of city assets, including Belle Isle and a Detroit Institute of Arts collection worth billions. He proposed paying most of the money owed to secured creditors while pension funds, unions and unsecured bondholders would receive, in some cases, 10 cents on the dollar.
The filing is expected to trigger a costly, long and precedent-setting battle by creditors and Detroit’s bankruptcy case could become a template for the treatment of pensions in the largely uncharted world of municipal bankruptcies.
Unsecured creditors could take the biggest hit in bankruptcy court. Orr wants them to share a $2 billion payout on approximately $11.5 billion worth of debt, which includes an estimated $9.2 billion in health and pension benefits and $530 million in general-obligation bonds.
Instead of paying creditors in full, Orr would use $1.25 billion over the next decade to buy police cars and fire trucks, replace broken street lights, tear down burned-out homes, fight blight and improve city services.
Orr wants to stabilize the city, woo new residents, provide essential city services for Detroiters, lower property taxes and transfer costly departments, including the water department to an outside group.
Once the nation’s fourth largest city, Detroit was hailed as an industrial hub with nearly 2 million people. Today, after a half-century of residential flight, high unemployment, a significant reduction in state funding, plummeting income and property taxes, corruption and chronic mismanagement, the bankruptcy filing solidifies the city's standing as a model of urban decline.
The filing would serve as a grim reminder of the bankruptcies that hit the auto industry four years ago. Unlike the cases of General Motors and Chrysler in 2009, the White House offered no financial help.
Snyder’s staff is making plans to explain the bankruptcy decision during appearances on Sunday morning talks shows, including Face the Nation and Meet the Press, according to one source.
A Chapter 9 petition could be filed by Detroit over the weekend. The first-day papers would be expected to explain why the city is eligible to file Chapter 9 bankruptcy, namely that Detroit is insolvent and that good-faith negotiations have failed to solve the financial problem.
The city would have to file a plan of adjustment that explains how the city would treat its debt and explain how Detroit would handle future tax revenue and spending. It’s possible, experts say, that Orr could elect to file his restructuring plan with the city’s initial Chapter 9 petition.
The case would be assigned by Alice Batchelder, chief judge of the 6th U.S. Circuit Court of Appeals, which spans Michigan, Ohio, Kentucky and Tennessee. Any judge in the four-state region could be assigned the case, though Batchelder will weigh potential political concerns and decide who has the time and capability to handle a complex, large case.
Some legal experts predict the case would be filed in Detroit but assigned to a judge from outside the city to avoid any potential conflicts of interest.
From The Detroit News:
http://www.detroitnews.com/article/20130718/METRO01/307180103#ixzz2ZQv5OdLD
