If Kevyn Orr gets his way, Detroit's bankruptcy will move faster than
many outsiders expect.
Orr, whom Gov. Rick Snyder appointed as Detroit's emergency manager in March with an 18-month tenure, expects to steer Detroit out of Chapter 9 bankruptcy by September 2014.
Many bankruptcy experts said that is an ambitious time frame. Orange County, Calif., spent 18 months in Chapter 11 bankruptcy in the 1990s, and Jefferson County, Ala., has been in bankruptcy since November 2011.
But Orr doesn't have that long.
"Time is slipping away," he told the Free Press on Friday. "I only have 15 months."
Although Chapter 9 is different from Chapter 11, the rare nature of Chapter 9 introduces uncertainty about how the basic procedural elements of the case will unfold. There are early indications that Orr will follow a path similar to the one his former law firm and now adviser, Jones Day, charted with Chrysler.
In 2009, General Motors and Chrysler slipped through bankruptcy in a matter of weeks by using novel legal arguments and identifying loopholes to reduce or eliminate some of the laborious requirements typically associated with bankruptcy. Of course, GM and Chrysler got federal money that helped to speed up the process -- an advantage that Detroit will not have. But some of the legal tactics may be similar.
Asked whether he is looking for similar shortcuts within the law to tighten the city's time line, Orr said, "Exactly."
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During Chrysler's bankruptcy, for example, Orr's Jones Day team slashed months off the process by eliminating a requirement to seek and vet buyers for the automaker. Orr is following a similar script with Detroit by suggesting that it's a well-documented fact that the city has been in decline for decades so it doesn't have to go through the lengthy process of proving it. "This didn't happen overnight," he said.
Speed is crucial in bankruptcy court because every month that passes costs the city millions of dollars for legal work and consultants.
As the city enters uncharted territory, lawyers, bondholders and labor officials are training their attention on the Motor City's Chapter 9 case for clues about how Orr plans to navigate the process smoothly.
What happens next
The first thing the city has to do after filing for bankruptcy is defend its right to file at all. To beat the challenges, Orr's team offered a two-pronged approach: Attorneys said in a court filing that it's no longer practical for the city to negotiate with creditors outside of court, and they said that the city negotiated in good faith before it sought bankruptcy protection.
Detroit's pension boards complained that Orr didn't conduct extensive negotiations to reach a resolution over the city's unfunded pension liabilities, which Orr has pegged at $3.5 billion. If a judge agrees, the case could be dismissed and the city would have to return to the bargaining table.
To qualify for Chapter 9, Orr must prove that Detroit is insolvent. "We know there (is) going to be opposition to eligibility and there there are going to be discussions regarding whether or not we engaged in good faith" negotiations, Orr said Friday."I don't think anybody (is) debating whether or not Detroit is insolvent."
Orr has asked U.S. Bankruptcy Judge Steven Rhodes to force creditors to file objections within a month of the city's filing.
"It's probably unlikely (the judge) is going to rule that they're not eligible," said Keith Mason, co-chairman of the McKenna Long Aldridge Municipal Reform & Innovation practice and senior counsel for the City of Harrisburg, Pa., which attempted to file for Chapter 9 in 2011 but was ruled ineligible.
Still, these issues have caused major delays -- even up to a year -- in other Chapter 9 cases.
But University of Michigan bankruptcy law professor John Pottow said he believes Orr will prevail quickly on the eligibility issue.
"It's very clear this guy has been negotiating for months," Pottow said in a phone interview from Vienna, Austria. "It's very clear the city is financially distressed. I can't think of any strong ground on which they could block the Chapter 9 filing."
Orr also has a high-powered weapon on his team: Bruce Bennett. Bennett, a partner at Jones Day, was the lead attorney in the 1990s for the Orange County, Calif., bankruptcy case. Jones Day, a global law firm, won the contract to be Detroit's lead legal counsel largely because of Bennett's expertise with municipal bankruptcy.
The big questions
Among the most significant legal questions is whether pensions will suffer cuts, which Orr plans to pursue next year.
The unions have said that the Michigan Constitution, which protects public pensions as a contractual obligation that cannot be impaired, will prevent the bankruptcy court from making cuts.
"Welcome to war," George Orzech, chairman of the Police and Fire Retirement System, said Thursday.
But some bankruptcy experts said federal bankruptcy law, which allows contracts to be severed, will pre-empt the state constitution and trigger reductions to pension payments.
"They're going to have to be adjusted," Mason said.
Separately, Orr wants the city's general obligation bondholders to be treated as unsecured creditors, meaning they could receive pennies on the dollar for their investments. This dispute could prolong Detroit's case.
The bondholders are furious, arguing that they have historically received better treatment and that the city pledged to use its "full faith and credit" to pay the bonds.
But Ken Buckfire, who is co-president of Miller Buckfire and the city's top financial consultant, said the bondholders, who largely consist of sophisticated financial institutions, have known about the risk facing Detroit for years.
"They are all worried about the impact on their global business," Buckfire told the Free Press. "I've told them ... Detroit is so unique. I just don't see anybody heading down this path. I really don't."
Art and taxes
Orr argues that the city has already raised taxes to the highest amount allowed by the state and still can't pay. Therefore, he said, those bonds are unsecured.
"If you look at the financial press, their initial take is that there is little precedent for treating these obligations as general unsecured debt," said Christine Chung, co-director of the Albany Law School-University at Albany Institute for Financial Market Regulation and a former enforcement division branch chief of the U.S. Securities and Exchange Commission.
Orr said Detroit is an exception because it simply doesn't have the money to pay up. But creditors said the city has money in the form of assets such as artwork and artifacts at the Detroit Institute of Arts. Rhodes cannot force the city to sell assets under Chapter 9 law. However, the city may decide that selling assets is necessary to reach a settlement with its creditors and exit bankruptcy.
The fact that the Michigan Legislature failed to pass a law protecting the art before the bankruptcy filing is problematic, Pottow said.
"I think they're in trouble," Pottow said of the DIA.
Arguing about Detroit's assets could delay the proceedings further. The DIA's lawyer, Judy B. Calton of Honigman Miller Schwartz and Cohn, has already filed paperwork with the U.S. Bankruptcy Court for the Eastern District of Michigan to represent the museum as the case unfolds.
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