CHICAGO — The Detroit City Council is expected to vote Friday or Monday on a $350 million debtor-in-possession financing the city wants to use to pay off its interest-rate swaps.
The council has 10 days from when Detroit emergency manager Kevyn Orr signed the DIP financing order, to vote on it. Monday is the deadline.
If it rejects the financing plan, which is the first of its kind for a Chapter 9 debtor, the council is required to propose an alternative under the state's emergency management law.
The federal bankruptcy court and other bodies also need to approve the loan. It also relies on the proposed settlement between the city and the counterparties on its interest-rate swaps.
Orr said he plans to file a motion with the court in late October for a hearing in November on the loan.
Meanwhile, U.S. Bankruptcy Judge Steven Rhodes will hear final arguments Monday from creditors objecting on legal grounds to Detroit's eligibility for Chapter 9 protection.
Rhodes agreed to give creditors a few extra days to prepare their final arguments after a two-day hearing Tuesday and Wednesday. Oral arguments were set to end Wednesday afternoon, but creditors said they needed extra time to address unexpected issues raised by the city.
No bondholders or insurers objected to the city's eligibility. Rhodes is not expected to rule until after a second set of hearings scheduled to begin Wednesday. Those hearings will address factual challenges, such as whether the city negotiated in good faith or is truly insolvent.
Rhodes will also hear from various witnesses during the trial, and Orr is expected to testify.
On Tuesday and Wednesday, attorneys for the city's unions and retirees presented a handful of arguments aimed at blocking the city's historic bankruptcy filing. Chief among them is the argument that Detroit plans to cut pensions, a move that would violate the state constitution and render the bankruptcy illegal.
Creditors also argued that Chapter 9 itself is unconstitutional because it trumps states' rights, and that the state's emergency management law, which authorizes bankruptcy filings, is a violation of voter rights.
Rhodes questioned attorneys on both sides over the course of the hearings. He pressed pension system attorneys about the iron-clad nature of the provision barring impairment of the retirement benefits.
"Is there any other constitutional right, state or federal, that is that absolute?" he asked. "Even freedom of the press isn't that absolute, is it?"
Rhodes also questioned a state attorney on the Legislature's move to re-write an emergency management law just two months after voters overturned the existing one in November 2012.
"Where is the substance of that right of referendum that the Constitution gives the people if the Legislature has the authority to thumb its nose like that?" he asked an assistant attorney general, who replied that the new law is different from the old one.
More than 140 parties objected to Detroit's eligibility, including dozens of retirees, the city's unions, and its two pension funds.
It's expected that bondholders and bond insurers who face steep losses under the city's plan to exit bankruptcy are saving their court battles to fight Orr's plan to treat $2 billion of bond debt as unsecured.
