February 21, 2014 at 12:24 pm

Where does Detroit's Chapter 9 go from here?

Grand Circus Park in Detroit. (Brandy Baker / The Detroit News)

Detroit — The city’s plan of adjustment represents seven months of behind-the-scenes planning and negotiating with creditors that could result in contentious courtroom battles.

As the legal tool for paring down some of Detroit’s $18.5 billion in municipal debts, the city still faces an uncertain pathway out of bankruptcy court, experts say.

Q. What is the plan of adjustment?

A. The plan of adjustment is a bankruptcy term for the city’s prescription for reducing its debts, canceling or rewriting contracts and balancing its budgets.

It contains long-term financial projections that will be used to pay off creditors for the next 40 years and dictate the terms of retirement benefits for current and former employees.

The complex legal document includes a disclosure statement to creditors that explains how individual classes of creditors will fare in Detroit’s historic reorganization.

Q. What’s next?

A. U.S. Bankruptcy Judge Steven Rhodes will set a hearing on the adequacy of the disclosure statement and whether the average creditor, such as a retiree, can understand how he or she will be affected by the plan, said Laura Bartell, a bankruptcy law professor at Wayne State University.

Once the judge approves the disclosure statement, it will be sent to about 100,000 individual creditors who may be eligible to vote on whether to accept Emergency Manager Kevyn Orr’s proposed cuts in city debt.

The exact impact to a retiree’s monthly pension check may not be immediately known because changes to the retirement benefits are still the subject of mediation negotiations between the city and its two pension funds, labor unions and retiree groups, said Bill Nowling, Orr’s spokesman.

“This could take quite a long time depending on how really final that plan is,” Bartell said. “You can’t go out for votes until you have your numbers buttoned up.”

Q. How does voting work?

A. Ballots will be sent to unsecured creditors. Rhodes has previously said he wants to make sure Detroit’s 23,500 retirees are able to vote on whether to accept the plan.

Under federal bankruptcy law, the plan of adjustment would be considered consensual if it is approved by impaired creditors who carry at least two-thirds of the unsecured debt and make up half of the allowed claims.

But to confirm a plan, the city only needs one class of creditors to accept less than they’re owed. That’s a process known as a “cram down” where a municipality uses one creditor’s acceptance of the plan to force it on everyone else.

Q. Can creditors object to the plan?

A. Rhodes also will set a deadline for creditors to file objections to the plan.

One of the areas that could be the subject of time-consuming delays is the city’s placement of creditors into different classes and their treatment under the plan.

“It could be disputed and no doubt will be disputed,” said Michael Leib, a Southfield bankruptcy attorney closely following the case. “You may see objections from everybody.”

After the objections are filed, Rhodes will schedule a hearing on whether to confirm the plan, which could turn into a mini-trial, depending on disputed legal issues and facts related to the value of the city’s pension plans.

Q. Can pensioners be treated better than banks and other unsecured creditors?

A. Bondholders and companies that insured Detroit debt have already signaled they will object to getting a lower percentage recovery of money they’re owed than pensioners.

Retirees are getting treated better because of $815 million pool of money assembled by Chief U.S. District Judge Gerald Rosen from private foundations, donors of the Detroit Institute of Arts and a pledge of state aid by Gov. Rick Snyder. All three groups have pledged the money for pensioners in exchange for shielding city-owned art at the DIA from being sold to repay creditors.

“There is some law out there that would support treating the pension folks differently,” Leib said.

Ultimately, the bankruptcy code says the plan must be in the “best interest of creditors,” with the alternative being dismissal of the case.

Q. What about the appeals?

A. The 6th Circuit Court of Appeals on Friday granted Detroit’s two pension funds, retiree groups and largest labor union permission to directly appeal Rhodes’ December ruling that the city is eligible for bankruptcy. The creditors contend the city did not negotiate with them in good faith before filing for bankruptcy in July.

Michigan Attorney General Bill Schuette has urged the appellate court to quickly consider whether pensions can be reduced contrary to the state’s constitutional protection of earned pension benefits. However, the Court of Appeals did not expedite the case.

The appeals will proceed while the plan of adjustment courtroom maneuvering continues, Leib said.

“If the retirees agree to the treatment under the plan, then the appeals go away,” he said.

Q. Can creditors or the judge propose different plans?

A. In a word, no.

Unlike a corporate bankruptcy where creditors can present counter proposals or a judge can order a debtor to take certain actions, only the municipal debtor in Chapter 9 can present a plan of adjustment.

In Chapter 9, the judge can either confirm the plan or reject it. But the judge can use his power to reject a plan as a way to leverage changes to the plan.

In Detroit’s case, Rhodes has already displayed that power when he twice rejected an early settlement with UBS AG and Bank of America over a pension-related debt. Rhodes said the city’s proposed payout of $230 million to the banks and then a second offer of $165 million was too generous, which emboldened the city’s legal team to threaten to sue the banks if they don’t accept an even lower settlement.

“The stance the city is taking now is really a direct result of the judge’s rulings,” Leib said.

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