Detroit Bankruptcy Update: Sixth Circuit Throws Wrench into Restructuring Timetable

Earlier this month the Sixth Circuit Court of Appeals ruled that the appeal of Syncora Guarantee Inc. must be heard by the lower federal district court before the bankruptcy court may conduct its trial on the city’s proposed Chapter 9 restructuring plan, which is scheduled to begin on August 14th. Syncora, a municipal bond insurer and one of Detroit’s many creditors, petitioned the Sixth Circuit to order the federal district court to reconsider its appeal to stop Detroit from using tax revenue from casinos rather than preserving the revenue so as not to deplete the bankruptcy estate. Bankruptcy Judge Steven Rhodes ruled in August that casino revenue is city property and therefore subject to the automatic stay.

At $15 million a month, casino taxes are the city’s single best stream of revenue.

Although the appeal was filed eight months ago, the federal district court judge balked and failed to make a ruling. Instead, the district court judge issued an order in April freezing the casino-tax appeal until the Sixth Circuit ruled on a separate appeal regarding Detroit’s eligibility for municipal bankruptcy. Syncora then filed a petition for mandamus, essentially asking the appellate court to order the lower district court to issue a ruling.

The Court of Appeals granted the mandamus petition by holding that without a final decision on the question whether Detroit could use casino tax revenue for continuing city expenses, “the city will not know what amount its coffers will contribute to the bankruptcy estate, the creditors cannot know the size of the pie they are being asked to share, and the bankruptcy court cannot be confident that it is considering a legally and financially viable plan.”

Whether the bankruptcy court pushes back its August 14th trial commencement is not yet known. What is clear, however, is that the district court’s decision will be pivotal to the city’s restructuring plan.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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