SAN DIEGO - The meaning and strength of a full faith and credit pledge remains murky after Detroit's treatment of general obligation bonds in Chapter 9 bankruptcy did nothing but raise more questions, according to a bankruptcy partner from Schiff Hardin LLP.
"One thing that we can take away from Detroit is that we're still in the abyss when it comes to knowing what exactly a GO is and what the implications of it are in a bankruptcy case," Rick Frimmer said Thursday at The Bond Buyer's California Public Finance Conference.
Frimmer, a partner in Schiff Hardin's Chicago office, specializes in defaulted municipal and corporate debt and has represented creditors in Chapter 9 proceedings.
"We only know that in a large case when we think the train has left the station, it's easier to settle and figure out how to get something, than it is to spend millions of dollars trying to find a result," he said.
GO pledges vary from state to state.
Detroit alone had multiple pledges, including limited-tax GOs and unlimited-tax GOs, but because creditors settled with Detroit, the judge did not make any ruling on how a GO pledge is treated in bankruptcy.
"One would like to have thought that with a case like Detroit, we would have some legal interpretation or some precedent to use in other cases, but unfortunately we haven't," Frimmer said.
He added that he wishes one or more of the classes in Detroit had not settled so there could have been some guidance to which other municipal bankruptcy cases could refer.
While no precedents have come out of the Detroit case, the questions that resulted about what a GO pledge really means could lead to more disclosure regarding GO bonds in the market, Frimmer said.
One way to do this would be to create a "check-the-box-system" for all municipalities issuing debt.
"Box one might be for the real full faith and credit box, where you check the box and put in your disclosure that we will never seek to disavow this debt," he said. "Then you might have a 'limited' check box, where you say we'll limit it to future tax increases, to the extent that we can actually increase taxes."
A third box could be for GO pledges that "make no promises," he said.
