Leiden Law Blog

City of Detroit is Emerging from Bankruptcy

Posted on by Bob Wessels in Private Law
City of Detroit is Emerging from Bankruptcy

On July 18, 2013, the city of Detroit (USA) filed for its bankruptcy under Chapter 9 of the U.S. Bankruptcy Code. A Chapter 9 bankruptcy is not a liquidation, but the controlled development of a rescue plan. See my blog. Sixteen months later U.S. Bankruptcy Judge Hon. Steven Rhodes approved on November 7, 2014, such a plan intended to help Detroit escape years of financial ruin and begin the hard work of becoming viable again. Judge Rhodes approved a plan for the city to rid itself of $18 billion in debt and to invest about $1.7 billion into long-neglected city services. The decision has been made in a remarkably short time, given all the different stakeholders involved (around 170,000 creditors), and ends a period with an accumulated debt of an enormous amount, while the city had been wrestling with annual budget deficits, miserable city services and an uninterrupted exodus of residents (in 60 years 60 percent of the population left) and investment dollars. In the US’ largest municipal bankruptcy, the plan will set aside $1.7 billion over a decade to remove blighted buildings (around 80,000!), to upgrade its emergency services (buying fire engines, police cars and ambulances), and to modernise its antiquated computer systems. The plan requires strict oversight of the city’s finances in the years ahead by a commission that includes representatives of the state of Michigan. Judge Rhodes said in his ruling, approving the city’s restructuring plan: ‘Detroit’s inability to provide adequate municipal services runs deep and has for years. It is inhumane and intolerable, and it must be fixed.’ The handling of the different types of debt involved can be regarded as a roadmap how in future Chapter 9 cases could treat creditors and bondholders of all kinds.

In European eyes, Detroit’s ‘grand bargain’ settlement, included in the decision, is written in a very clear and direct language. In terms of legal concepts the decision serves as an interesting illustration in construing the requirements of proposing a plan for debt adjustment ‘in good faith’, that a plan should be ‘in the best interest of the creditors’ and the ‘feasibility’ of a plan. 

Judges Rhodes supports the City’s decision not to sell the art of the Detroit Institute of Arts, as the Institute ‘… stands at the center of the City as an invaluable beacon of culture, education for both children and adults, personal journey, creative outlet, family experience, worldwide visitor attraction, civic pride and energy, neighborhood and community cohesion, regional cooperation, social service, and economic development. Every great City in the world actively pursues these values. They are the values that Detroit must pursue to uplift, inspire and enrich its residents and its visitors. They are also the values that Detroit must pursue to compete in the national and global economy to attract new residents, visitors and business.’ Long-term future revenues have been balanced against short-term liquidity. Legal fees top around $140 million in October 2014 and they will continue to climb in coming weeks. Judge Rhodes wants mediators to determine whether the legal fees charged (by Jones Day and a team of consultants that worked on Detroit’s bankruptcy) are reasonable.
At the end of the decision gratitude was bestowed on 30 odd persons  (‘This comes with thanks to many people’; follow 4 pages of thanks), which indeed makes clear that the decision would not have been possible without the hard work, compromise and sacrifice of many people and organizations that put aside their considerable differences and came together for the benefit of Detroit's future, Kevin Orr, emergency manager for the city of Detroit, said. The Judge is also a semi-reverend, asking still angry creditors to turn the page: ‘And so I ask you, for the good of the City’s fresh start, to move past your anger. Move past it and join in the work that is necessary to fix this City. Help your City leaders do that. It is your City. It is now time to restore democracy to the people of the City of Detroit. I urge you to participate in it. And I hope that you will soon realize its full potential.’ Judge Rodes also turns a page, as he will retire in December.

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