17 December 2013


Story first appeared in the Detroit Free Press.

U.S. Bankruptcy Judge Steven Rhodes on Monday allowed appeals of two of his critical rulings -- finding Detroit eligible for bankruptcy and its pension systems subject to cuts to retirees -- to proceed to the U.S. 6th Circuit Court of Appeals.

Rhodes certified his eligibility ruling, which allows creditors including labor unions and the official group representing retirees to appeal his decision to permit Detroit to enter into the largest municipal bankruptcy in U.S. history.

Rhodes did not act on requests from lawyers for unions and retirees that he support their bid to fast-track appeals. Rhodes said only that he certified his Dec. 3 ruling and would decide "in the next day or two" whether to support expedited appeals in the 6th Circuit.

Court proceedings resume today as Rhodes begins hearing evidence in what could be a three-day trial on the city's request for $350 million in new financing from Barclays, a London-based banking company. The financing is controversial because it would pay off about $230 million in debt owed to two banks before the city figures out how it will repay other creditors.

The city said it needs the additional financing now to free up about $180 million in annual casino revenue. The city also would gain access to $120 million that it could use to fund its revitalization and improve city services.

Orr has said that the city urgently needs to improve city services such as police and fire response times and that the additional financing is essential to those improvements.

During questioning on the appeals Monday, Sharon Levine, a lawyer for the city's largest union, the American Federation of State, County and Municipal Employees, said the union sees the issue of pension rights in Detroit as one of national importance because cities and other governments across the nation pay attention to how such benefits are decided.

AFSCME and other creditors are fighting Rhodes' decision to declare Detroit eligible to proceed with Chapter 9 bankruptcy and not to treat pensions as protected from cuts.

While the city's two pension plans are fighting the eligibility ruling, they are committed to negotiating with the city, said Lisa Fenning, a lawyer for the pension systems. "We are not trying to slow down the process," she said.

Lawyers for the city had argued that appeals should wait until after Detroit files its detailed plan of adjustment, the legal term for the strategy it will finalize to emerge from bankruptcy, including what cuts it plans for creditors and how Detroit would operate post-bankruptcy.

Emergency manager Kevyn Orr's restructuring team hopes to file the plan of adjustment by early to mid-January with agreement from a number of creditors. He led the city's filing for Chapter 9 protection in July, saying Detroit had about $18.5 billion in debt and liabilities it couldn't afford to pay in full, including $3.5 billion in unfunded pension liabilities. Unions and the city's two pension plans dispute that figure.

The retiree groups and other creditors argue that Michigan's constitution protects pensioners from cuts, but Rhodes' Dec. 3 ruling found that the federal bankruptcy code trumps state law.

The city's bankruptcy lawyers want to move as rapidly as possible and had hoped appeals would be stayed until the city presents the plan of adjustment.

But Corinne Ball, a lawyer for the Jones Day firm that represents the city, said in court Monday that Detroit would support moving the appeals out of U.S. District Court in Detroit to the U.S. 6th Circuit Court of Appeals in Cincinnati on an expedited basis to speed up resolution of the appeals.

Fenning told Rhodes that quick hearings on the appeals could help prevent complications later. She said the appeals court could affirm Rhodes' ruling, reverse it or provide a middle ground where Detroit is found to be eligible to proceed with bankruptcy but without the ability to cut pension benefits.

Fenning said that her firm has been retained to fight the matter to the Supreme Court, if necessary.

Historically, challenges to eligibility have been resolved prior to appeals court arguments, said Douglas Bernstein, who leads the banking, bankruptcy and creditors' rights practice at the Plunkett Cooney law firm in Bloomfield Hills.

"The 6th Circuit still has to agree to hear the immediate appeal," Bernstein said.

Complicating the Detroit issue is that there's so little precedent for many of the questions raised by Detroit's bankruptcy, Bernstein said.

Rhodes "recognizes that we don't have any binding precedent, and it involves a matter of public importance," he said. "Whether or not we ever see a decision on the appeals remains to be seen, as the parties very well may settle prior to disposition."

The proposed financing agreement is one of the most complex and important elements in the city's bankruptcy proceedings. If approved, the financing would be used to settle a claim from UBS and Bank of America Merrill Lynch, which hold city debt from a soured Wall Street bet that was backed by the city's casino tax revenues.

The interest rate swaps are investments that tried to lock in steady interest rates on a $1.44-billion loan in 2005.

The city told Rhodes on Friday that it plans to call five witnesses -- including Orr -- and creditors said they would call several financial consultants.

However, Rhodes told attorneys from both sides he does not plan to rule on how the city can spend the loan or if the loan is necessary because bankruptcy code gives a city the right to obtain additional financing in a bankruptcy case. Instead, Rhodes said, he will base his decision on whether "it is fair and equitable and whether it is in the best interest of the estate."

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