Detroit Ruling Set for Nov. 7
CHICAGO — The historic trial to decide if Detroit's bankruptcy confirmation plan will be approved closed Monday, with attorneys for the city defending its debt-adjustment plan as fair to creditors and capable of setting the long-struggling city on a path to revitalization.
Lead Detroit attorney Bruce Bennett of Jones Day told U.S. Bankruptcy Judge Steven Rhodes the plan to shed $7 billion of debt and invest $1.4 billion back into the city was fair and feasible during his nearly four-hour closing defense of the plan.
The plan's fairness to creditors and the city's ability to implement it are key federal benchmarks the city needs to pass for Rhodes to approve the plan and allow Detroit to exit Chapter 9.
Rhodes will rule on the plan of confirmation at 2 p.m. ET on Nov. 7. The judge also said he would hold a hearing on the confirmation order — if the plan is affirmed — and a hearing on how the plan would be implemented.
Attorneys for the city said Monday they hope Detroit will be out before Thanksgiving.
"The plan is very broadly consensual at this point and the city has settled with all the objectors and all the major economic players in the city of Detroit," Bennett said. "Of course the case did not start out that way. It's hard to think of any major constituency that was not involved in major litigation concerning some aspects of its rights with the city."
An attorney representing Michigan also urged Rhodes to support the plan.
"Although the filing of Chapter 9 has not been popular, there's no question it was the right thing to do," said attorney Steven Howell, of Dickinson Wright. "We cannot allow the city to fall back and continue its downward spiral."
Rhodes asked the most questions of Bennett, a long time bankruptcy attorney who represented Orange County, Calif. during its municipal bankruptcy.
The judge in particular focused on the city's decision to give its pensioners higher recoveries than its other creditors.
"To me the pension claims are a debt just like any other," Rhodes said, according to local reports from the courtroom. He noted that Detroit's own projections show the pension recoveries could rise to 100% over time. "Tell me why [the settlement with pensioners] isn't a 100% recovery," he said.
"The math gets a little tricky here," Bennett responded, saying that factors like cost-of-living adjustments and other measures complicate recovery calculations.
Bennett said it was difficult to assess a pension debt the same way that one would a bond debt. After several minutes of a back and forth, Rhodes told Bennett to move on.
Under the city's confirmation plan, the city's police and fire pensioners see no cuts in their monthly checks and their cost-of-living adjustments cut to 1% from 2.25%. Pensioners in the general employee system see 4.5% cuts in their monthly checks and the elimination of COLA increases. Both will see 90% cuts in their health care benefits.
It's the highest recovery by far among the city's creditors. Unlimited-tax general obligation bondholders agreed to 74% recovery and limited-tax GO holders to a 34% recovery. Bond insurers Financial Guaranty Insurance Co. and Syncora Guarantee Inc., which both wrap $1.5 billion of certificates of participation, will see just under 14% cash recovery on their claims but each also won potentially lucrative development deals and asset leases as part of their settlements.
In an earlier discussion, Bennett told Rhodes that the city also benefits from the pension settlements because the two retirement systems — like all creditors — have agreed to drop any appeals of the case in the future.
Rhodes also asked Bennett to identify the top risks in the feasibility of the plan, another key benchmark to approval.
Bennett responded that top risks include city officials not sticking to the plan or misspending the $1.4 billion set aside for reinvestment into services and operations.
"I would say the risks that are controllable are sticking with the plan and using the money," the attorney said. "To the extent that they're deployed or adjusted in any way, it's got to stay for that: critical purposes in critical areas that may evolve over time to a degree, but what we don't need is the use of that money for other purposes that someone might decide is more politically expedient."
The attorney said that the plan has already passed three feasibility tests: from Detroit's restructuring consultants, Conway MacKenzie; from Mayor Mike Duggan; and from Rhodes' own expert witness, Martha Kopacz, who testified last week during the trial that the plan was feasible.
Bennett also spent part of his argument defending the so-called grand bargain at the center of the city's bankruptcy exit plan, a public-private plan valued at a stated $816 million that saves the city's art collection in exchange for lower pension cuts.
Bennett noted that all creditors support the grand bargain, and said the Detroit Institute of Arts museum could play a crucial role in the city's recovery.
"It contributes to the image of the city," Bennett said.
"It contributes to the city's rehabilitation. It might even contribute to bringing residents back," he said. "It is most assuredly a reasonable decision for Detroit to make to keep a world-class art museum."
Rhodes asked Bennett to defend the argument that selling the art may have raised more money for creditors.
"What do we say to the pension claimant whose pension is impaired as a result of that decision?" Rhodes asked.
"We say to pension claimants in this what we say to other creditors," Bennett said. "There's no law that says a pension creditor has to be paid by causing a city to sell its assets."
Referring to the speed of the historic case and the $7 billion of debt shed, Bennett said the bankruptcy should be considered a "great case, in terms of how much is accomplished."
Last week, ahead of closing arguments, Rhodes told Bennett to discuss the professional fees that the Chapter 9 case has cost Detroit taxpayers. The fees from the 15-month case have reached nearly $140 million. Of that, $52 million goes to Jones Day, according to bankruptcy filings.
Bennett said such fees are to be expected in such a complicated, high-profile case.
"Are the city's professional fees going to be high in a case like this? Of course they are," Bennett said. "Because they are high does that mean they are unreasonable? Of course they are not."
Earlier Monday, before closing arguments, the owners of $1.1 billion of the city's pension certificates insured by FGIC said they had reached a deal with the insurer that meant they would support the city's confirmation plan.
FGIC's deal with Detroit gives a roughly 13% recovery on its $1.1 billion claim as well as the chance to develop a site adjacent to the city's convention center into a 300-room hotel with condos and retail space. The settlement with the COPs holders — which include five hedge funds — means that FGIC will allow the hedge funds to participate in the development and give the holders a share of $141 million of cash for their claims.