U.S. Bankruptcy Judge Steven Rhodes

CHICAGO - U.S. Bankruptcy Judge Steven Rhodes approved Detroit's bankruptcy plan of adjustment Friday.

In a ruling widely expected to inform future municipal bankruptcies, Rhodes praised the city's debt adjustment plan as reasonable, fair and equitable, key benchmarks under federal bankruptcy law.

Detroit's decision to treat its pensioners more favorably than other creditors was fair and justified in part because of state constitutional protections of the retirement obligation, Rhodes ruled.

The judge lauded the so-called "grand bargain" at the center of the confirmation plan as a "miraculous" infusion of cash for pensions in exchange for privatizing the art collection. He called settlements with bond insurers "an ideal model for future municipal debt restructurings."

Rhodes summarized his ruling from the bench for nearly 90 minutes. At the end, he said it was "time to restore democracy to the people of the city of Detroit."

The ruling brings the end in sight for the 16-month, often-tumultuous bankruptcy, the largest municipal filing in U.S. history. The result was a confirmation plan that sheds $7 billion of debt and reinvests roughly $1.5 billion back into city services.

Bruce Bennett, the city's lead attorney with Jones Day, said he was "thrilled" with Rhodes' opinion.

"His opinion not only proves and endorses the plan of adjustment, it also approves and endorses the city's approach to the Chapter 9 case," said Bennett in an interview after the ruling. "The eligibility opinion and the opinion of the judgment are going to stand as important precedents in municipal bankruptcy law for a really long time."

The case did not set legal precedent because the city reached settlements with all of its major creditors. But for muni bond investors, key lessons will be the city's successful move - supported by the state of Michigan and driven largely by political considerations - to elevate pension debt over bond debt.

In doing so, Rhodes said the confirmation plan does discriminate against creditor classes but not unfairly. The city's "discrimination in favor of the pension claims in the plan is necessary to its mission," Rhodes said, adding "fairness and unfairness are a matter of conscience."

He added that Detroit is also justified in treating its pensioners better than other unsecured creditors in part because the Michigan Constitution singles out pensions for protection.

In approving each separate creditor settlement, Rhodes said that litigation with any of the creditors would have meant costly and complex litigation that could threaten the city's recovery.

The success of a court battle by the city to defend its planned treatment of unlimited-tax general obligation bondholders as unsecured was a "coin toss," so its settlement allowing a 74% recovery for the ULTGO holders is reasonable, though perhaps at the "upper end" of the range of reasonableness, the judge said.

Rhodes estimated the city had a 75% change of legal success in declaring its limited-tax GO holders unsecured, so a 34% recovery for those creditors was reasonable.

The final deals and the judge's endorsement of them should be taken seriously by muni investors, Bennett said.

"The bond market has to look carefully at the settlements that were reached and the judge's remarks concerning the probability for success for certain arguments by the bondholders," said Bennett.

The decision to treat pensioners more favorably than bondholders - a move also made by bankrupt Stockton, Calif. and other cities - reflects a reality that investors now need to take into account, the attorney added.

"It's clearly an important credit factor when looking at making investments," he said.

Bennett also defended Detroit's decision to seek bankruptcy protection, saying the city would not have been able to shed so much debt so quickly outside of a federal court. The number of creditors, the complexity of the city's financial affairs, and the state's constitutional protection of pensions all would have blocked progress, according to Bennett. Rhodes agreed that the Chapter 9 process was crucial to the city's recovery.

"In Chapter 9 of the United States Bankruptcy Code, the federal government provides help" to cities, Rhodes said during the first few minutes of his ruling. "Today this federal bankruptcy court grants that help … the court confirms the plan."

After the ruling, politicians and officials across the state issued statements and held press conferences praising Rhodes and hailing the ruling as a new beginning for the long-struggling city.

"What you saw today was a tour de force of legal acumen, skill and opinion," emergency manager Kevyn Orr said at a press conference with Mayor Mike Duggan and Michigan Gov. Rick Snyder. "I've never heard anything like it and I've been doing this for 34 years."

The corporate bankruptcy attorney, who emptied out his City Hall office earlier Friday, said he looked forward to giving Detroit back to its citizens and "let it rise from the ashes again."

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