City of Detroit’s Bankruptcy Enters Courtroom

more+
less-

In the last two weeks, the Honorable Steven W. Rhodes of the Bankruptcy Court for the Eastern District of Michigan held two important in hearings in the City of Detroit’s chapter 9 case, the largest in history.

On July 24, Judge Rhodes heard arguments on two specific motions to confirm and extend the protections of the automatic stays under sections 362 and 922 of the Bankruptcy Code. The Court approved both motions over numerous objections. These objections were based primarily on the argument that the City’s bankruptcy case was not properly before the bankruptcy court because the Governor’s authorization to file for bankruptcy under PA 436 was not consistent with the Michigan Constitution and other state laws.

The Court declined to address the merits of those arguments, and stated that the Court would address state authorization issues as a component of a future hearing on Detroit’s eligibility to file for chapter 9. Judge Rhodes also found that there was no need for a state court to weigh in on these issues because (i) the statute does not require it and (ii) a bankruptcy court has determined the eligibility issues surrounding municipal debtors in every recent chapter 9 case.

The Court then granted the stay confirmation motion, concluding that the Emergency Manager is an officer subject to the protections of the automatic stay under section 922 of the Bankruptcy Code. The Court also granted the stay extension motion and found that section 105 of the Bankruptcy Code empowers the Court to extend the automatic stay because: (i) the City’s interests are intertwined with the interests of the entities to whom the stay would extend; (ii) the creditors opposing the extension will not be harmed if the extension is granted; (iii) the City could suffer irreparable harm if the extension is not granted, as evidenced by the numerous state court lawsuits and the costs attendant thereto; and (iv) the extension motion serves the public interest by increasing the likelihood that the debtor can reorganize, reducing transaction costs and eliminating the risk of inconsistent judgments.

On August 2, Judge Rhodes then heard arguments on the Court’s proposed dates and deadlines regarding eligibility and the filing of a chapter 9 plan of debt adjustment. Although the Court took the scheduling issues under advisement, the Court suggested October 23, 2013 as the date on which a trial on eligibility could be held. The Court also suggested that it would set March 1, 2014 as the deadline by which the City must file its plan. In response, the City stated that it hoped to file a plan before December 31, 2013. Finally, the Court approved the creation of a committee of retirees and scheduled a hearing regarding the assumption of the City’s swap settlement agreement for August 28, 2013. These time frames demonstrate that the Court and the City intend to resolve the City’s chapter 9 case relatively rapidly.