San Francisco Chronicle | - |
(Updates
with Orr's comment in 16th paragraph.) Dec. 3 (Bloomberg) -- Detroit
can remain under bankruptcy court protection, where it's shielded from
lawsuits or other actions that might interfere with its attempts to
reduce debt and cut employee benefits.
Detroit to Stay Under Bankruptcy Protection, Judge Says
Published 10:43 am, Tuesday, December 3, 2013
(Updates with Orr’s comment in 16th paragraph.)
--With assistance from Brian Chappatta in New York and Steven Raphael in Detroit. Editors: Andrew Dunn, Stephen Farr
To contact the reporter on this story: Steven Church in U.S. Bankruptcy Court in Detroit at schurch3@bloomberg.net
To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net
Dec.
3 (Bloomberg) -- Detroit can remain under bankruptcy court protection,
where it’s shielded from lawsuits or other actions that might interfere
with its attempts to reduce debt and cut employee benefits.
U.S. Bankruptcy Judge Steven Rhodes
announced his decision today in Detroit after holding a two-week trial
to determine the city’s eligibility to continue enjoying the protections
of Chapter 9 of the U.S. Bankruptcy Code.
Detroit
filed the biggest U.S. municipal bankruptcy on July 18, listing about
$18 billion in debt and saying it didn’t have the money to pay
bondholders, retirees and employees everything it owes them while still
providing basic city services. In ruling, Rhodes said it would be lawful
to cut city pension obligations as part of a debt-reduction plan.
“We
have here a judicial finding that this once proud and prosperous city
cannot pay its debts,” Rhodes said today. Detroit “has the opportunity
for a fresh start,” he said in a decision that was almost immediately
challenged by a city union.
With Rhodes’s ruling,
the city can now focus on writing a plan to cut the debt. That will mean
spending time in court fighting with creditors and time in confidential
mediation talking to them, said Dale Ginter, a bankruptcy lawyer who is not involved in the case.
“None
of the constituents will regard such a plan as fair or equitable, but
that’s not the standard,” said Ginter, who represented retired city
workers in the bankruptcy of Vallejo, California. He made the comments
in an interview before Rhodes issued his ruling.
Similar Creditors
For
the plan to be approved, it must treat similar creditors equally, which
means if unsecured bondholders take losses, retirees should lose by the
same percentage, Ginter said.
Before the bankruptcy, Detroit’s emergency manager, Kevyn Orr,
proposed canceling $3.5 billion in future obligations to the pension
system and $1.4 billion in unsecured bonds the city issued in 2005 and
2006 to fill a hole in its retirement system.
Orr
offered to replace those debts with a $2 billion note paying 1.5 percent
interest, which would give bondholders, the pension system and other
unsecured creditors pennies on the dollar.
In a
ruling with implications for other cities coping with obligations to
retired workers, Rhodes today said federal bankruptcy law allows Detroit
to try to cut pensions, rejecting arguments that the reductions are
barred by the U.S. and Michigan constitutions.
Union Appeal
Within
moments of the judge’s decision, the American Federation of State,
County and Municipal Employees, which represents city workers, filed a
notice of appeal.
Rhodes cautioned lawyers on both
sides today not to assume his statement on pension cuts means he would
approve such a proposal. Any plan would have to meet bankruptcy code
standards, and he would take into consideration how cuts would affect
creditors, including retirees, the judge said.
“We are very concerned about how this ruling may affect retired city employees,” Sharon L. Levine, an attorney for the union, said before today’s hearing.
The judge said that under the bankruptcy code the case can’t be halted while creditors appeal.
After
the case was filed in July, Rhodes ordered the city and its creditors
into confidential mediation sessions overseen by the chief judge of the
U.S. District Court in Detroit, Gerald Rosen.
Specified Cuts
Mediation
may yield a proposal to cut debt by the end of the year. That proposal,
called a plan of adjustment, would specify cuts to be imposed on
creditors, including retired city workers who have had their health-care
benefits threatened and municipal pension funds that have been told
Detroit can’t afford to pay the $3.5 billion needed to cover future
retirement benefits.
“We look forward to working
with all our creditors -- pension funds, unions and lenders -- to
achieve a consensual agreement on a restructuring plan that balances
their financial recoveries with the very real needs of the 700,000
citizens of Detroit,” Orr said today in a statement.
Orr
has said he must move quickly to get the plan approved before his term
in office can be ended by the city council in September.
“We
plan to submit a plan of adjustment in the coming weeks, file a
disclosure statement early next year and work to exit Chapter 9
protection by the end of September,” Orr said.
Should talks fail, the city would need to persuade Rhodes to approve the plan of adjustment over creditor objections.
The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
--With assistance from Brian Chappatta in New York and Steven Raphael in Detroit. Editors: Andrew Dunn, Stephen Farr
To contact the reporter on this story: Steven Church in U.S. Bankruptcy Court in Detroit at schurch3@bloomberg.net
To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net
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-
end quote from:
Detroit to Stay Under Bankruptcy Protection, Judge Says
Here is a repeat quote from above:"Detroit filed the biggest U.S. municipal bankruptcy on July 18, listing about $18 billion in debt and saying it didn’t have the money to pay bondholders, retirees and employees everything it owes them while still providing basic city services."
If they are referring to Muni Bonds in this quote then if Detroit is allowed to stay in Bankruptcy it might rock the Muni Bond Market here in the U.S.
One of the ways I believe in hedging this potential problem of Muni Bonds is to only buy bonds that are insured with Treasuries or other types of insurance. In this way if you are a bond buyer or have a bond ladder you are protected from any loss of your investments.
If Detroit is allowed to go bankrupt like it looks now it will be very important to only buy munis that are insured in some way from now on nationwide. Because Detroit will be the biggest city allowed to go bankrupt in the U.S. so Far. The Biggest before this I believe was Stockton in California.
Here is another quote I found interesting above: "Orr offered to replace those debts with a $2 billion note paying 1.5 percent interest, which would give bondholders, the pension system and other unsecured creditors pennies on the dollar." end quote.
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