Bankruptcy ruling to come first week of November

Christine Ferretti
The Detroit News

Detroit could be out of bankruptcy — decades in the making, and 16 months in court — in three weeks.

Bankruptcy Judge Steven Rhodes on Monday promised he would issue his ruling on the city's historic Chapter 9 case, filed in July 2013, late in the week of Nov. 3.

Bankruptcy watchers said the timetable that Rhodes set for himself — a decision less than two weeks after closing arguments — is another example of his determination to keep the case moving, and to prevent it from languishing. The judge delayed his retirement by a year to hear the case.

"It seems to be a bookend on an incredibly tight schedule and overseen trial," said John Pottow, a bankruptcy law professor for the University of Michigan. "He's not going to let it hang over for months. He's going to make a decision and move on."

If Rhodes rules that the city's debt-cutting plan is fair and feasible, Detroit will be able to dump $7 billion in debt and invest $1.7 billion into city services during the next decade.

Recent settlements negotiated between the city and its major holdout creditors — especially bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co. — facilitated the case's expected resolution.

"There's never been a Chapter 9 as successfully resolved by mediation as this one," said Laura Bartell, a bankruptcy professor at Wayne State University's Law School. "... to successfully resolve so many of the open issues is unprecedented. That's why it's speeding up at this stage."

The city has cut deals with most of its opponents, including retirees, unions, pension funds, banks and bondholders. A pillar of the so-called plan of adjustment is the equivalent of a $816 million pledge over 20 years of money from the state and charitable foundations to soften retiree pension cuts and shield Detroit Institute of Arts works from being auctioned by creditors.

Rhodes undoubtedly has been working on his opinion for weeks, Bartell said. She previously predicted Rhodes would rule before Thanksgiving, but not this quickly.

"If he's ready, he's ready," Bartell said. "There was never any question that he was going to rule in favor of confirmation. It was just a matter of how hard it was going to be for him to do that."

But Pottow isn't sold that Rhodes has made up his mind.

"He'll listen, be thoughtful, make a decision and crank it out and move on," he said.

Remaining testimony will be delivered Tuesday and Wednesday in what's been the largest municipal bankruptcy case in U.S. history. Closing statements are slated to begin Monday.

If there are no delays, Rhodes' ruling would come after the November election. Although the timing may be interesting, San Francisco bankruptcy attorney Michael Sweet says it's unlikely to be politically motivated.

"Federal judges stay away from doing things that are politically driven," Sweet said. "I would not expect there's any connection with the Election Day (Nov. 4) and the ruling except coincidence."

Sweet, who has been monitoring developments in the case, added he expected Rhodes to act fast. "It's a ruling that everyone is eager to get and he made it clear from the beginning of the case that he wanted it to move quickly," he said, adding the process will be cleaner in light of the settlements with Detroit's significant objectors — and it's "highly unlikely" he will deny confirmation. "He's not going to wait around."

A key remaining issue is whether Detroit's debt-cutting plan is feasible, which was assessed in a 226-page report written by Rhodes' court-appointed expert witness, Martha Kopacz.

Kopacz is scheduled to testify Wednesday as the bankruptcy trial draws to a close.

In her July report, Kopacz, of Philadelphia-based Phoenix Management Services, concluded the city's bankruptcy plan is feasible. But she cautioned the city needs more municipal workers and commitment from its elected leaders to carry out the massive restructuring.

"I believe the success, or failure, of Detroit's revitalization will hinge on the people employed by the city and the officials elected by the residents in the coming years," Kopacz wrote in the report, noting that based on Detroit's "lack of even modest technology," the average skill level of city workers is "low and outdated."

The detailed review also identified areas where improvements could be made.

Bartell said Rhodes' upcoming decision will likely have "strong cautionary words" about the reasonableness of the plan.

"Everybody is worried about feasibility," she said. "But, it's something you can never be sure about."

Pottow says Rhodes doesn't want anything to slip through the cracks and will take great care in detailing his decision on the complex issues.

"The single most important thing is, he does not want to get a reversal. He really sees himself as a player in this whole reorganization," Pottow said, adding Rhodes would want to avoid the prospect of a future refiling.