Detroit becomes largest U.S. city to enter bankruptcy

Nathan Bomey, Brent Snavely and Alisa Priddle | Detroit Free Press

Show Caption Hide Caption Mayor: 'Tough day for all of us here in Detroit' Detroit Mayor Dave Bing says there is "going to be a lot of pain" for people following a judge's ruling that the city is eligible to fix its finances in bankruptcy court. (Dec. 3)

Pension reductions could be part of mix

City could sell assets%2C including Detroit Institute of Arts property

Judge would like to see a draft plan by the end of the year

DETROIT — The city of Detroit officially became the largest municipality in U.S. history Tuesday to enter Chapter 9 bankruptcy after a judge declared it met the specific legal criteria required to receive protection from its creditors.

The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities that have hampered Detroit from attacking pervasive blight and violent crime.

"It is indeed a momentous day," U.S. Bankruptcy Judge Steven Rhodes said at the end of a 90-minute summary of his ruling. "We have here a judicial finding that this once-proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start. I hope that everybody associated with the city will recognize that opportunity."

In a surprise decision Tuesday morning, Rhodes also said he will allow pension cuts in Detroit's bankruptcy. He emphasized that he won't necessarily agree to pension cuts in the city's final reorganization plan unless the entire plan is fair and equitable.

"Resolving this issue now will likely expedite the resolution of this bankruptcy case," he said.

Rhodes' verbal ruling, which precedes a 140-page written opinion to be issued Wednesday, gave Detroit the green light to enter Chapter 9 bankruptcy.

"The court finds that Detroit was and is insolvent," he said. "The court finds that the city was generally not paying its debts as they became due."

Rhodes said bankruptcy was a "foregone conclusion for a very long time. Cities often wait longer to file for bankruptcy than they should have, and the city of Detroit was no exception."

Rhodes said he will not issue a stay on the bankruptcy, meaning the case will proceed.

Even though Michigan Council 25 of the American Federation of State, County and Municipal Employees already has filed an appeal — and more will come in days ahead — the bankruptcy code provides for Chapter 9 to continue while appeals are pending that challenge, said Clark Hill lawyer Robert Gordon, who represents the city's pension funds and will be filing an appeal.

John Pottow, a University of Michigan bankruptcy law professor, said Rhodes clearly was urging the city to reach a consensual resolution with its creditors.

"Bottom line: He's pushing negotiation," Pottow said in e-mail.

Rhodes scolded the city for rushing through negotiations with creditors before its filing, noting they only had 30 days to offer a counter. Saying that amount of time is "simply far too short," Rhodes ruled the city did not satisfy good faith requirements to try to negotiate with creditors outside of bankruptcy court.

Lawyers for unions and retirees who fought to persuade the judge to reject Detroit's eligibility for bankruptcy found a silver lining in Rhodes' criticism of the city's negotiation efforts.

"The city has to step up now and negotiate more reasonable and more fairly," said Lynn Brimer, a lawyer for the Detroit Retired Police Members Association.

Despite criticism of Detroit's negotiations, Rhodes said negotiating in good faith was impractical for the city because its financial crisis was growing worse, and creditors filed several lawsuits that could have derailed a bankruptcy filing.

The city now will proceed with its plan to introduce a proposal to restructure its debt and reshape government operations.

Rhodes asked lawyers for Jones Day, the law firm that represents the city in bankruptcy court, if a first draft of the so-called "plan of adjustment" could be filed by the end of the year. Lawyer David Heiman responded, "We're not quite certain," adding it would be far in advance of the judge's March deadline.

Detroit Emergency Manager Kevyn Orr said his team plans to submit the plan of adjustment "in the coming weeks," file a disclosure statement early next year and work to exit Chapter 9 protection by the end of September.

"Time is of the essence, and we will continue to move forward as quickly and efficiently as possible," Orr said in a statement. "We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens."

The plan is expected to include controversial cuts to unsecured creditors and asset sales, including a potential spinoff of the water and sewer department and the possible sale of Detroit Institute of Arts property.

Rhodes said one-time infusions of cash will not provide for a sustainable financial future, but he did not rule out the possibility of approving asset sales.

In a press conference after the ruling, Orr message's to pensioners was this: "We're trying to be very thoughtful, measured and humane," but cuts are necessary.

Gordon, the lead lawyer for the city's two pension funds, said he believes the judge cares about residents and the plight of pensioners.

"I hope it plays out when a plan is proposed," he said of expected pension cuts. While the judge cautioned the city he would scrutinize proposed cuts in the restoration plan, Gordon did not interpret it as a warning to the city to protect the money.

Other lawyers representing retirees expressed disappointment that individuals were being lumped with bondholders and financial institutions.

Major creditors objecting to the bankruptcy included AFSCME; the United Auto Workers; Detroit's two pension funds; the city's public safety unions, retiree associations and a committee created to officially represent retirees during the bankruptcy.

AFSCME lawyer Sharon Levine said bankruptcy is a powerful and flexible tool.

"You can treat creditors differently," she said.

The ruling comes after an exhaustive nine-day bankruptcy eligibility trial that concluded Nov. 8. During that trial, Rhodes gave unions and retiree groups an opportunity make their argument that the city's bankruptcy case should be rejected.

Unions and retirees argued that Orr conducted no substantive negotiations with creditors and argued the city fell short of its duty to conduct "good faith" negotiations before filing for bankruptcy. No financial creditors objected to the filing.

By July 18, the day Detroit filed for bankruptcy, the city was being bombarded by lawsuits, facing dwindling cash flow and failing to deliver vital services — adding credence to Jones Day bankruptcy lawyer Bruce Bennett's argument that reaching a deal with more than 100,000 creditors would have taken too long.

"It was clear to Judge Rhodes that negotiations were not going to go anywhere," Laura Beth Bartell, a Wayne State University law professor, said in a recent interview.

Rhodes ruled the city is legally insolvent and obtained the necessary legal authorization from Michigan Gov. Rick Snyder to enter Chapter 9.

Brimer, who represents Detroit's retired police officers, said the fight isn't over.

"Perhaps it's fair to say the fight has just begun," she said.

Mayor Dave Bing sounded an optimistic note after the ruling, saying it will be beneficial in the long run.

"There's going to be a lot of pain for a lot of different people," he said. "But in the long run, the future will be bright."

Contributing: Joe Guillen, Detroit Free Press

4 main rulings on eligibility

Here's how U.S. Bankruptcy Judge Steven Rhodes ruled Tuesday on each criteria of the eligibility question as required under Chapter 9 of U.S. bankruptcy code.



Criteria Ruling Did the city obtain the state's approval to file for bankruptcy? Rhodes ruled that Michigan Gov. Rick Snyder legally gave the city the OK to file for bankruptcy in July. Is the city insolvent? "The court finds that the city was generally not paying its debts as they became due. ... The court finds that the city of Detroit was and is insolvent." Did the city negotiate in good faith? Allowing only a month to negotiate was not enough, Rhodes said. "This calendar was very tight and did not request counter proposals," he said. "The creditors cannot be faulted for failing to offer counter proposals when they did not have enough information to evaluate the city's initial vague proposal." He ruled that the city did not negotiate in good faith but filed the petition for bankruptcy in good faith. Was it impractical to negotiate in good faith? Rhodes found that negotiating in good faith was impractical. And "accordingly, the court finds that pre-filing negotiations were impracticable."

Live coverage from the federal courthouse in Detroit

See the details as they happened in this Twitter blog by Free Press reporters Nathan Bomey and Brent Snavely.