A warning Detroit emergency manager Kevyn Orr issued in March could
serve as an effective starting point for negotiations Friday with city
bondholders and creditors, who will be asked to accept far less than what is
owed to them.
"Don't make me go to the bankruptcy court," Orr said at his introductory news conference, adding a moment later: "I'm very comfortable in bankruptcy court."
Interviews with several bankruptcy attorneys and legal research suggest creditors, unions and bondholders should be worried.
Under a Chapter 9 bankruptcy, Orr becomes even more powerful. The 10th Amendment of the U.S. Constitution says the federal government can't interfere with states' rights -- so a federal bankruptcy judge might have to defer to Orr's recommendations on some issues. Judges in Chapter 11 bankruptcy -- the kind that helped revive General Motors and Chrysler -- have much more power.
"People say, 'Oh, well, I don't want to do what Kevyn Orr says, I'll take a risk with the bankruptcy judge,' " said Laura Beth Bartell, Wayne State University law professor. "The bankruptcy judge isn't making the decisions. It's either Kevyn Orr making the decisions out of bankruptcy, or Kevyn Orr making the decisions in bankruptcy."
Here are some answers to questions about how a Chapter 9 bankruptcy could unfold:
QUESTION: Can Orr -- who is set to offer fewer than 10 cents on the dollar to city creditors -- avert bankruptcy?
ANSWER: Experts said it's likely he's pursuing agreements from as many creditors as possible so that he can enter bankruptcy with concrete deals to hasten the process.
University of Michigan bankruptcy law professor John Pottow said the city's debt-to-revenue ratio of approximately 15-to-1 is "absurd," yet creditors may ignore intense pressure to cave outside bankruptcy.
"People are not going to be willing to give up 90 cents on the dollar outside of bankruptcy," he said.
What needs to happen before the city files for bankruptcy?
To file a Chapter 9 petition, the city must convince a judge that it's eligible to file by getting the state's approval, showing it's not paying its bills and proving it negotiated "in good faith" with its creditors.
"Creditors usually can find room to argue that the city has not done enough to avoid bankruptcy," said Patrick Darby, an attorney who is advising Jefferson County, Ala., in its Chapter 9 bankruptcy.
How long could the process take?
Douglas Bernstein, a bankruptcy attorney with Plunkett Cooney, said it could last years.
But Pottow said it may take "months, rather than years," if creditors agree to concessions ahead of time and the bankruptcy judge decides to expedite the case.
Who decides whether the city negotiated "in good faith" with its creditors?
Bankruptcy attorneys suggested that Orr's current talks with creditors reflect an attempt to prove to the bankruptcy court that the restructuring talks were fair. But disgruntled creditors can challenge the city's assertion that it negotiated in good faith, spawning a protracted legal fight. "That bogs the process down," Bartell said.
How does the bankruptcy judge get appointed, and where would the case be filed?
Alice Batchelder, the chief judge of the U.S. 6th Circuit Court of Appeals, would have the power to appoint a bankruptcy judge to handle Detroit's case.
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