Detroit files for bankruptcy, setting off battles with creditors, pensions, unions

Detroit on Thursday became the largest American city to file for bankruptcy, a historic move sure to ignite complex battles in coming months with creditors, pensioners and unions who stand to lose significantly as the state tries to rescue a city whose failure Gov. Rick Snyder said was 60 years in the making.
Bankruptcy and restructuring experts said the filing will initiate a new round of battles in federal court, potentially setting national precedents on matters ranging from whether bondholders get repaid when cities run out of money to whether public pensions, previously thought to be sacrosanct under the Michigan Constitution, are protected in municipal bankruptcies.
Financially troubled cities around the nation will be watching what happens in the Motor City for lessons that could apply to them.
In the end, state-appointed emergency manager Kevyn Orr’s attempt to reach out-of-court settlements could not overcome opposition from unions, retirees and a long list of lenders to whom the city owes as much as $20 billion.“There’s some real benchmark laws that could be set here,” said Jim McTevia, a leading turnaround management expert in Bingham Farms. “There are going to be a number of issues that a normal bankruptcy doesn’t cover.”
Orr filed a Chapter 9 bankruptcy petition Thursday in U.S. Bankruptcy Court for the Eastern District of Michigan that is the largest of its kind in terms of population and the size of the debts and liabilities involved. Bankruptcy experts said the outcome is sure to have sweeping impact on how other troubled cities around the country resolve financial difficulties. But Snyder said the size of debt involved mattered less to him than the city’s inability to provide services to its 700,000 residents.
Snyder, who approved the filing, called the move “a last resort to return this great city to financial and civil health for its residents and taxpayers.”
“I know many will see this as a low point in the city’s history,” Snyder said in his order authorizing the filing. “If so, I think it will also be the foundation of the city’s future — a statement I cannot make in confidence absent giving the city a chance for a fresh start, without burdens of debt it cannot hope to fully pay.
“This was a difficult decision,” Snyder said, “but it’s clearly the right decision because there are no other viable options.”

Bing: 'Difficult for all'

Mayor Dave Bing, who called it a difficult day, said Orr called him in the afternoon to tell him about the filing.
“One of the things that I want to say to our citizens is that as tough as this is, I really didn’t want to go in this direction,” Bing said. “But now that we are here, we have to make the best of it. I think Kevyn and the team that he brought together has a lot of history of succeeding. This is very difficult for all of us, but if it’s going to make services better off, then this is a new start for us.”
Orr, who appeared with Bing at an evening news conference, said he hopes to get through the bankruptcy process by late summer or fall of next year. He did not answer questions about what impact he expects bankruptcy to have on thousands of city retirees or creditors of the city, saying those talks are ongoing. Orr said he believes the city has been negotiating in good faith.
“We don’t have time for more delaying tactics, more litigation, business as usual,” he said. “We’ve been saying that again and again and again. Everybody knows I have an 18-month term, and I have 15 months left in it. So, we’re going to start. And we’re going to give the level of services that the city needs.”
The filing begins what could be a lengthy fight over whether the city is eligible for Chapter 9 protection and to define how many claimants might compete for the limited settlement resources that Detroit has to offer. The bankruptcy petition would seek protection from creditors and unions who are renegotiating debts and liabilities.

Race to courthouse

A sign of just how contentious the matter likely will remain came as pensioners and their pension funds made a last-ditch effort Thursday afternoon to stop the bankruptcy filing but were beaten to the courthouse by minutes.
An attorney for the pension funds who was seeking a temporary restraining order in Ingham County to block the historic bankruptcy filing said he felt blindsided because he agreed to delay an emergency hearing by five minutes at the request of attorneys for Snyder.
During those five minutes, he said, attorneys filed the bankruptcy petition in Detroit, which generally results in a stay in all other pending lawsuits involving the city. Ingham County Judge Rosemarie Aquilina later issued a temporary restraining order preventing further actions to cut pension benefits, but said she would have issued one to stop the bankruptcy filing altogether, if given the chance.
The judge said the bankruptcy filing was made at 4:06 p.m., five minutes before her emergency hearing began.
A furious Ronald King, a lawyer representing Detroit’s General Retirement System and the Detroit Police and Fire Retirement System, said he agreed to the five-minute delay that he now believes was not requested in good faith.
“There’s no denying this was a race to the courthouse this afternoon and yet another example of usurping the will of the people,” King said.
Snyder, in a telephone conference with reporters, declined to comment on King’s accusations, citing ongoing litigation. He conceded that recent lawsuits may have affected the timing of the bankruptcy filing by “a day or so,” but said the filing was imminent regardless.

Union sees hurdles

In an additional court filing late Thursday, the city said it is insolvent, which is one criteria that must be met before a court can approve a petition for bankruptcy.
Still, a top official at the city’s largest union, the American Federation of State, County and Municipal Employees Council 25, predicted a tough challenge for Orr to prove the city’s eligibility for bankruptcy, required for the case to proceed.
“I still think they have some hurdles to cross because I think they filed prematurely,” said Ed McNeil, special assistant to the president of AFSCME Council 25. “I don’t think they’ve proved insolvency. They have a list of people they can’t pay, but there’s an even bigger list of people they are still paying, and they have a bunch of friends and consultants getting paid. They haven’t been doing this process in good faith, and we’ve been saying that all along.”
Orr, who in June released a plan to restructure the city’s debt and obligations that would leave many creditors with much less than they are owed, had warned consistently that if negotiations hit an impasse, he would move quickly to seek bankruptcy protection.
■ PDF: Read the bankruptcy filing
Snyder signed off on the filing in a letter attached to court documents.
“It is clear that the financial emergency in Detroit cannot be successfully addressed outside of such a filing, and it is the only reasonable alternative that is available,” Snyder said in the letter. “In other words, the city’s financial emergency cannot be satisfactorily rectified in a reasonable period of time absent this filing.”
Orr spokesman Bill Nowling said: “Pension boards, insurers, it’s clear that if you’re suing us, your response is ‘no.’ We still have other creditors we continue to have meetings with, other stakeholders who are trying to find a solution here, because they recognize that, at the end of the day, we have to have a city that can provide basic services to its 700,000 residents.”