Since Detroit’s Chapter 9 filing in late July, it has slipped off the front-pages to some extent. The Chapter 9 process is underway and Barclays provides a deep-dive look at the various liabilities involved in the bankruptcy. From the pension obligation certificates (POC), which they believe could be subject to the most volatility over the course of the bankruptcy process and will likely recover no more than 30 cents on the dollar, Barclays' muni team expands on the various aspects of the eligibility process, historical precedents (such as Stockton, CA), and the tough decisions that investors face in deciding between short-term goal of certainty of payment or a long-term goal of maximizing returns. The judge has set a mid-March 2014 deadline for the city to file its plan of adjustment.
Via Barclays,
Overview
The first court hearing on the Detroit bankruptcy was held on July 24, 2013. Two specific topics were covered: the status of conflicting state court objections to the bankruptcy filing and the extension of immunity to related parties such as the emergency manager (EM) and the governor of Michigan. In both cases, US Bankruptcy Judge Rhodes provided preliminary victories for the city, granting an injunction against any related suits being heard in state courts and extending the immunity from suits as requested.
This decision means that the city parties (the city itself, the EM and the governor) will not be distracted by the several suits filed or to be filed in State Court opposing the action. Judge Rhodes ruled that municipal unions and others seeking to litigate grievances against the proposed fiscal restructuring of the city must bring said grievances and litigation to the US bankruptcy court. This decision is consistent with general bankruptcy theory, which holds that the idea of bankruptcy is to provide a single forum to manage the many issues involved in a financial restructuring. Current and potential litigants will have at least two main opportunities to litigate their case: through the eligibility process and at plan confirmation.
Initially, there will be some administrative or procedural hearings, with the first real issue to be determined being eligibility. The EM has requested that Judge Rhodes require objections to the filing (eligibility issues) to be filed within 30 days, which he has granted. This is fairly short period from what has occurred in other Chapter 9 bankruptcies. For example, the eligibility process took over nine months in the case of Stockton, California, and was fairly long and contentious in the Vallejo, California case. In Stockton, objections were filed several months after the commencement of bankruptcy.
At an early August hearing, Judge Rhodes began to solicit comments regarding his proposed timetable, which has Detroit moving through bankruptcy court fairly quickly. Specifically, he has proposed that the trial over Detroit’s eligibility be set for late October; this is ahead of the EM’s proposal for a November deadline with regard to filing pre-trial briefs. Although Judge Rhodes is attempting to move the case along quickly, expectations of many issues of first impression are likely to result in several lengthy appeals and could prevent a speedy bankruptcy (with a September 2014 emergence date, as proposed by the EM). The judge has set a mid-March 2014 deadline for the city to file its plan of adjustment.
Overall, we expect a vigorous fight over eligibility. There are eligibility hearings in most contested Chapter 9 cases, as this is one of the few opportunities for creditors to force a trial and judicial ruling. Unions will likely bring state court arguments to be heard in US bankruptcy court, which may state that these arguments are issues to be determined at confirmation, rather than at an eligibility hearing. Bondholders, unions and other constituencies might object to eligibility on a good faith basis. As in the Stockton bankruptcy, creditors may argue that the EM basically held forums for stating the case for his restructuring proposal and that there were little real negotiations (let alone good faith) in the conduct of the forums. The EM has claimed that his efforts to negotiate in good faith were interrupted by creditors filing for court injunctions against his plan. In recent cases such as Stockton and Vallejo, the distressed fiscal condition of the city trumped creditors’ arguments against eligibility.
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