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Detroit files for bankruptcy protection

10:35 PM, Jul 18, 2013   |    comments
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Detroit Emergency Manager Kevyn Orr announced that the city has reached key settlements with creditors as the city tries to relieve itself of billions in debt.(Photo: Carlos Osorio AP)

DETROIT, Mich. -- The city of Detroit has filed for bankruptcy protection, becoming the largest city in U.S. history to do so.

State-appointed Emergency Manager Kevyn Orr on Thursday asked a federal judge permission to place the city into Chapter 9 bankruptcy protection.

The filing would begin a 30- to 90-day period that will determine whether the city is eligible for Chapter 9 protection and define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating $18.5 billion in debt and other liabilities.

Detroit Emergency Manager Kevyn Orr, who in June released a plan to restructure the city's debt and obligations that would leave many creditors with much less than they are owed, has warned consistently that if negotiations hit an impasse, he would move quickly to seek bankruptcy protection.

Michigan Gov. Rick Snyder would have to sign off on the filing. A spokeswoman did not immediately return telephone calls Thursday.

Orr's spokesman Bill Nowling would not confirm Thursday that the filing is imminent. However, he said, "Pension boards, insurers, it's clear that if you're suing us, your response is 'no.' We still have other creditors we continue to have meetings with, other stakeholders who are trying to find a solution here, because they recognize that, at the end of the day, we have to have a city that can provide basic services to its 700,000 residents."

This week, the city's two pension funds (which have claims to $9.2 billion in unfunded pension and retiree health care liabilities) filed suit in state court to prevent Orr from slashing retiree benefits as part of a bankruptcy restructuring.

Ambac Assurance Guaranty, which insures some of the city's general obligation bonds, has also objected to Orr's plan to treat those bonds as "unsecured," meaning they're not tied directly to a revenue stream and would receive pennies on the dollar of their value. Ambac, and other creditors, have threatened to file suit.

Sources agree that Orr's deal with creditors, widely reported to be Bank of America Corp. and UBS AG, to pay a $344-million swap with a $255-million debtor-in-possession loan, is instrumental in the timing of the potential bankruptcy filing.

The deal gives the city access to $11 million a month in casino tax revenues that Orr has said is key to maintaining city services while negotiations, in or out of bankruptcy court, take their course with other creditors and unions.

Plunkett Cooney bankruptcy lawyer Doug Bernstein, who is not involved in the bankruptcy and is not representing any parties related to it, said Thursday he had no direct information about whether or when the city would file, but said he understands the strategy if the city were to do so Friday or perhaps over the weekend.

The employee groups, and separately the city's two pension funds in another lawsuit, argue that the governor - who under Michigan law must authorize any bankruptcy filing - cannot do so if the filings include plans to reduce pension benefits, because the state's constitution explicitly protects public pensions.

Bernstein said preventing the court hearing Monday is probably a key part of the strategy behind a Chapter 9 petition by the city, because a ruling in favor of the employees could put a halt, at least temporarily, to any moves by Orr and Snyder to proceed with a bankruptcy petition. A bankruptcy filing immediately stays all such court proceedings.

"The stay kicks in as soon as the filing, whether it's Friday or Monday," Bernstein said. "The key is taking advantage of the automatic stay. Because of the lawsuit filed by the pension funds and the hearings coming up Monday, it became a factor, so to the extent that (Orr) wanted to continue negotiations with creditors, now the city is forced to" file a Chapter 9 petition.

The 30- to 90-day eligibility fight could be prolonged beyond that time frame if creditors mount a significant challenge to Detroit's eligibility for bankruptcy. In other communities that have filed for Chapter 9 protection, such fights have extended the process a year or more, including Jefferson County, Ala., and Stockton, Calif., two of the largest municipal bankruptcy filings so far in the United States.

Detroit's would be by far the largest municipal bankruptcy in U.S. history, in terms of the city's population of about 700,000 and the amount of its debts and liabilities, which Orr has said could be as high as $20 billion. Because of the stakes involved, and the impact on residents statewide, as well as 30,000 current and retired city workers and Detroit's ability to stay in business, the case could be precedent setting in the federal judiciary. It could also set an important trajectory for the way troubled cities nationwide settle their financial difficulties.

Bernstein noted that Orr has said repeatedly his office would "negotiate with creditors until and unless we find that the negotiations won't bear fruit, with the understanding that the city has a limited amount of time" for those talks.

USA TODAY

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