Detroit bankruptcy: Deadline looms for creditors to file objections

Detroit may have filed for bankruptcy, but that doesn’t mean a judge will agree that the city lacks the money to pay its creditors and allow it to restructure its debt under Chapter 9.

Indeed, unions – among the city’s biggest creditors – say that Detroit did not negotiate in good faith with them before filing for bankruptcy. Retirees argue that the bankruptcy violates the state’s constitution because pensions are protected by state law. And some creditors say that the city gave special preference to other creditors, creating an unfair situation.

The deadline for filing objections to the city’s bankruptcy, which is the largest municipal bankruptcy case in the United States, is 11:59 p.m. Monday.

It’s one of only two chances in municipal bankruptcies for creditors to voice their objections, said Mark Kaufman, chair of the McKenna Long & Aldridge Municipal Recovery & Restructuring practice. Creditors can file objections by the deadline Monday or and they can wait and file objections after the city releases its restructuring plan.

That means creditors who may someday be fighting each other for repayment are now joining to object to the bankruptcy.

“Though the bond insurers, unions and pension beneficiaries are likely at some point down the road to be opposing one another, they are for now strange bedfellows united in opposition to the city’s eligibility to be in Chapter 9,” Kaufman said.

It could take months before the judge decides whether Detroit is actually eligible for bankruptcy. Judge Steve Rhodes will first have to examine all of the objections arguing that Detroit should not have filed for bankruptcy in the first place. He’ll eventually rule on whether Detroit tried to negotiate in good faith with its creditors and whether it followed all appropriate laws in filing for bankruptcy. If he finds the city can proceed under Chapter 9, he will then begin the process of deciding how to restructure the city’s finances.

Some observers believe that because of the numerous lawsuits and objections filed, Rhodes will not rule on whether Detroit is eligible for bankruptcy protection until 2014.

Lawyers are also wondering whether anyone will file objections to the actual state law, signed by Gov. Rick Snyder in late 2012, that allowed Michigan to push Detroit to seek bankruptcy protection. Public Act 436 allowed for an emergency manager to step in and run financially struggling Detroit. A similar referendum, Public Act 4, was repealed by voters in November.

The role of the state in Detroit’s bankruptcy is controversial. Though Snyder has defended Public Act 436 as a way to help the city out of its financial mess, some observers have called on the state to do more to assist Detroit financially, which the state has seemed loathe to do. At the same time, the Michigan legislature approved a new Detroit Red Wings stadium last month, financed by state development funds.

Rob Johnson, president of the Institute for New Economic Thinking, has argued that the state or federal government should consider stepping in and assisting Detroit. After all, many people live in the suburbs of Detroit and don’t pay taxes there, but use the city’s cultural and sports institutions, he said.

“Many people are demoralized because they see we don’t help our cities but we do help our auto companies,” he said in a call with reporters last month.

How a judge deals with these objections could reverberate across the country.

“Detroit is being closely watched because we don’t have a national policy on how we deal with state and city finances,” Johnson said.

[For the Record, 11:00 a.m. PDT Aug. 21: An earlier version of this post identified the president of the Institute for New Economic Thinking as Ron Johnson. His name is Rob Johnson.]

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