The city of Detroit on Tuesday officially became the largest municipality in U.S. history to enter Chapter 9 bankruptcy after U.S. Bankruptcy Judge Steven Rhodes declared it met the specific legal criteria required to receive protection from its creditors.
The landmark ruling ends more than four months of uncertainty over the fate of the case and sets the stage for a fierce clash over how to slash an estimated $18 billion in debt and long-term liabilities that have hampered Detroit from attacking pervasive blight and violent crime.
“It is indeed a momentous day,” Rhodes said at the end of a 90-minute summary of his ruling. “We have here a judicial finding that this once proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start. I hope that everybody associated with the city will recognize that opportunity.”
Rhodes — in a surprise decision Tuesday morning — also said he’ll allow pension cuts in Detroit’s bankruptcy. Rhodes emphasized that he won’t necessarily agree to pension cuts in the city’s final reorganization plan unless the entire plan is fair and equitable.
Rhodes’ verbal ruling Tuesday — which will be followed by a 140-page written opinion — gave Detroit the green light to enter Chapter 9 bankruptcy.
“The court finds that Detroit was and is insolvent,” he said. “The court finds that the city was generally not paying its debts as they became due.”
Rhodes said he will not issue a stay on the bankruptcy, meaning the case will proceed.
University of Michigan bankruptcy law professor John Pottow said Rhodes was clearly urging the city to reach a consensual resolution with its creditors.
“Bottom line: he’s pushing negotiation,” Pottow said in an email.
Still, Rhodes also scolded the city for rushing through negotiations with its creditors, noting they only had 30 days to offer a counter. Saying that amount of time is “simply far too short,” Rhodes ruled the city did not satisfy good faith requirements to try to negotiate with creditors outside of bankruptcy court.
Despite that, Rhodes said moments later that negotiating in good faith was “impracticable.”
The city will now proceed with its plan to introduce a proposal to restructure its debt and reshape government operations.
In a statement after the ruling, Detroit Emergency Manager Kevyn Orr said his team plans 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.
“Time is of the essence, and we will continue to move forward as quickly and efficiently as possible,” his statement said. “We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens.”
The plan is expected to include controversial cuts to unsecured creditors and asset sales, including a potential spinoff of the water and sewer department and the possible sale of Detroit Institute of Arts property.
In a press conference after the ruling, Orr’s message to pensioners was: “We’re trying to be very thoughtful, measured and humane,” but cuts are necessary.
Mayor Dave Bing said Tuesday’s ruling will be beneficial in the long run.
“There’s going to be a lot of pain for a lot of different people,” he said. “But in the long run, the future will be bright.”
The ruling comes after an exhaustive nine-day bankruptcy eligibility trial that concluded Nov. 8.
During that trial, Rhodes gave unions and retiree groups an opportunity make their argument that the city’s bankruptcy case should be rejected.
Major creditors objecting to the bankruptcy included AFSCME, the UAW, Detroit’s two pension funds, the city’s public safety unions, retiree associations and a committee created to officially represent retirees during the bankruptcy.
Unions and retirees argued that Orr conducted no substantive negotiations with creditors and argued the city fell short of its duty to conduct “good faith” negotiations before filing for bankruptcy.
No financial creditors objected to the filing.
By July 18, the day Detroit filed for bankruptcy, the city was being bombarded by lawsuits, facing dwindling cash flow and failing to deliver vital services —adding credence to Jones Day bankruptcy attorney Bruce Bennett’s argument that reaching a deal with more than 100,000 creditors would have taken too long.
“It was clear to Judge Rhodes that negotiations were not going to go anywhere,” Laura Beth Bartell, a Wayne State University law professor, said in a recent interview.
Rhodes ruled the city is legally insolvent and obtained the necessary legal authorization from Michigan Gov. Rick Snyder to enter Chapter 9.
Creditors are expected to appeal the ruling, although experts say that appeals courts are hesitant to overturn bankruptcy rulings based on the facts.
Sharon Levine, an attorney for Michigan Council 25 of AFSCME, the city’s largest employee union, recently called the process a “terrifying use of Chapter 9” during the trial.