Plan of Adjustment in Detroit Bankruptcy facing difficult hurdles

When the City of Detroit proposed a plan of adjustment in its Chapter 9 bankruptcy action, there appeared to be some hope that the case could be wrapped up before the end of September. Currently, the City’s interests in the bankruptcy case have been handled by its emergency manager, Kevyn Orr, who was appointed months before the City filed Chapter 9, for the purpose of addressing the City’s long-term debt problems. But now the chance of serious objections from some creditors, including bondholders, as well as a question regarding whether the Michigan Legislature will agree to appropriate $350 million to the City, put that timetable in serious jeopardy.

Whether the Legislature will be tardy in considering that appropriation is unknown at this point but the federal bankruptcy judge presiding over the case, Steven Rhodes, claimed at a recent hearing that he had heard the Legislature may not take it up until after the City and the creditors reach an agreement on all of its claims. This is tricky because two bondholders, Syncora and the Financial Guaranty Insurance Company, argue that the Plan of Adjustment improperly considers that its $1.4 billion of certificates issued in 2005 and 2006 to raise money for Detroit’s pension system are not valid and do not require repayment. This unresolved legal issue, if tried over the summer, could unravel the entire plan which, some financial institutions suggest, overly protects the interests of the City’s pensioners at the expense of legitimate claims by creditors. Spokesmen for these banks argue that   they should not be treated disproportionately to other similarly-situated secured creditors. The two aforementioned bondholders themselves contend their interest-rate debt swaps constituted transactions which cannot be impaired in bankruptcy.

Attempts to resolve this Chapter 9 municipality bankruptcy possess a particular complication which Chapter 11 corporate bankruptcies do not: the Legislature must act to secure sufficient funds to make the plan work. Many creditors may be reluctant to settle their claims prior to trial if the Legislature fails to pony up the $350 million the City needs to balance the necessary revenues with outgoing payments to creditors. The uncertainties concerning that outlay, as well as the disposition of the bondholders’ claims  which the City is willing to negotiate despite its insistence they lack legal enforceability, leaves many observers skeptical that the case’s ultimate resolution will occur before Mr. Orr’s tenure as Emergency Manager terminates.

In Albuquerque, Giddens & Gatton Law, P.C. has attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases as well as receiverships and other remedies available to creditors. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, P.C. at (505) 633-6298 to set up an appointment or visit the firm’s website at Giddens & Gatton Law, P.C. is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.