Judge Rules Detroit Can Enter Bankruptcy Protection

By Chuck Sudo in News on Dec 4, 2013 3:00PM

A federal judge ruled Tuesday the city of Detroit may formally enter into bankruptcy protection, paving the way for cuts to the pension and retirement benefits plans of thousands of city workers and potential catastrophic losses to the city’s creditors.

U.S. Bankruptcy Judge Steven Rhodes agreed with Detroit Emergency Manager Kevyn Orr’s claim that the city’s pension obligations are undistinguishable from its other debts, ruling against an argument that Michigan’s constitution protects retiree pensions. Rhodes said that even though Detroit didn’t negotiate in good faith with its creditors—in some cases Orr tried to get the city’s creditors to accept debt settlements for pennies on the dollar—the city did make its bankruptcy filing in good faith and agreed with its claim that some creditors were obstinate in their negotiations.

Rhodes’ ruling paves the way for Orr and his administrators to settle debts with creditors for as low as 10 cents on the dollar but all eyes are on how the city will handle the pension debt. The city could cut retiree pensions to as low as 16 cents on the dollar but Rhodes said he would not approve any bankruptcy plan unless it was fair and equitable and noted the city had an obligation to its retirees.

"It is indeed a momentous day," Rhodes said as he read aloud for more than an hour from a written statement in a packed courtroom. "We have here a judicial finding that this once-proud and prosperous city cannot pay its debts. It's insolvent. It's eligible for bankruptcy. At the same time it has an opportunity for a fresh start."

Detroit filed for bankruptcy protection in July claiming $18 billion in long-term debt; $11 billion of that is unsecured, including pension and retiree health care plans for over 30,000 city employees—the largest municipal bankruptcy filing in history. Orr’s proposal laid out prior to the filing offered unsecured creditors shares in a $2 billion note in exchange for $11 billion in unsecured debt. Orr told media assembled at a news conference after the ruling he expects to file plans to bring Detroit back to solvency by early January and that negotiations with organized labor and other creditors were ongoing in an attempt to close out this chapter in the city’s history and move forward.

Rhodes’ decision trumps a previous ruling by a Michigan judge declaring the bankruptcy unconstitutional. Ingham County Circuit Judge Rosemarie Aquilina said the Michigan Constitution prohibits actions that will lessen the pension benefits of public employees and that Orr and Michigan Gov. Rick Snyder violated the state Constitution by filing for bankruptcy, knowing full well of the consequences to pension benefits.