CHICAGO — Detroit's federal bankruptcy judge urged the appellate court to reject an appeal of his recent rulings on the city's eligibility for Chapter 9 and declined to recommend an expedited appeal process.
Early last week, U.S. Bankruptcy Court Judge Steven Rhodes said he would certify a direct appeal by creditors to the U.S. Court of Appeals for the Sixth Circuit on his Dec. 3 eligibility ruling and finding that pensions are not automatically protected in bankruptcy. That allows objectors to bypass the district court level. At the time, he did not rule on their request to recommend an expedited appeal process.
Late Friday, Rhodes issued a lengthy three-part memorandum in which he affirms his decision to allow for the direct appeal.
In the first part of the memorandum, Rhodes certified that the appeal meets the legal criteria because it "involves a matter of public importance." But Rhodes goes on in the second part to recommend that "even though these appeals do involve a matter of public importance, authorization for direct appeals be denied."
Rhodes calls the "single controversy" in the case being whether the city of Detroit can adjust its debts in bankruptcy and notes that the question has yet to be decided with the eligibility ruling simply open the door to those discussions.
"It is time now to begin that discussion, unfettered by piecemeal appellate litigation. The results of that discussion, whether a confirmed plan of adjustment or an order of dismissal, may then be effectively reviewed and corrected as necessary," Rhodes writes. "For these reasons, the court recommends that the Court of Appeals decline to authorize these appeals."
In the third part of the memorandum, Rhodes rejects the request of objecting creditors to recommend an expedited appeal process.
"Rather, should the Court of Appeals authorize the direct appeals, the court recommends that it consult with the mediator in the case, Chief District Judge Gerald Rosen, on whether expediting this interlocutory appeal is in the best interest of the City, its creditors and its residents," he writes. "The management of the pace of this unique case must be guided by what best facilitates the mediation process."
Detroit's attorneys had argued that the appeal being pursued by creditors including the city's pension systems, unions, and retirees but no bondholders or insurers, should be delayed until after the city files its plan of adjustment. Pension fund lawyers countered that the case stands to impact municipal bankruptcies elsewhere. The case ultimately could land before the U.S. Supreme Court.
If accepted by the appellate court, Rhodes suggests that whether the appeals are expedited should turn on whether it is in the best interest of the city, its residents and its creditors.
"Ordinarily, the bankruptcy judge presiding over a reorganization case is in a good position to assess that question and to determine the appropriate procedural pace based on the best interests of the parties," he writes. "In the present case, one fact overshadows everything, including these appeals. The city is insolvent on a cash flow basis. It has no money to pay claims. The city cannot successfully adjust its debt and revitalize itself without help."