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Detroit's Plan Submission -- Now What?

posted by John Pottow

Much excitement in our nerdly circles is arising about Detroit's plan of adjustment, just filed yesterday.  This has gotten me thinking about what's next (other than the obvious ongoing cajolling/negotiations).  Three ruminations thereon:

1. The future: the media are focused on the haircuts the major creditors are being asked to take, which is fine, but what's more interesting to me is the capital expenditures the city proposes investing -- about a billion and a hallf.  This is important, because...

2. Feasibility.  Even if the parties don't raise it, Judge Rhodes has an obligation to gauge feasibility.  He is not going to want a chapter 18.  (Cf. Valejo.)  This means that there has to be an ongoing plan of investment, services, etc. that will attract/retain a vibrant base of taxpayers (plus such banal matters as financial transparency and accountability).  This is as important if not more important than the creditor haircuts.  But let's not forget...

3. Pension impairnment constitutionality appeal.  CA6 just accepted the certification (but declined expedition).  Will that reignite the pension fight and distract from signing on, or did CA6's coincidental timing of its order upon plan release mean the pension funds are on board?  This is a development I can't yet gauge well.  Given CA6 earlier stalled on issuing the order (pending a mediation update), I tentatively think the non-expedited route is a plan to slow-boat this issue in the hopes a consensual plan is done and everyone can do the equitable mootness dance. 


Professor Pottow,

You suggest so I will ask - What is the definition of “just compensation” satisfying the 5th Amendment in a cramdown forced by the debtor and court in a municipal bankruptcy; ie absent agreement on a plan or consent by the creditors?

For individuals in chapters 7 & 13 satisfaction of just compensation for unsecured creditors comes from the debtor’s non-exempt property and above mean income.

In a corporate 11 plan just compensation is satisfied by adequate protection or consent to a plan.

In a non-plan 363 sale liens must be satisfied but unsecured claims are often extinguished/enjoined - unconstitutionally it would seem.

Robert White

The morning paper noted that one provision is to require a way to compel withholding of resident income taxes from the pay of city residents who work outside the city. This would probably require state legislation. It is estimated that the city lost $150,000,000 in such unpaid taxes either in 2009, or since 2009.

Robert, the cramdown requirements differ for secured vs. unsecured creditors. Unsecured creditors lack property rights that would trigger the Just Compensation Clause of the Constitution. Nor is the Contracts Clause implicated in light of the Bankruptcy Clause. The harder question -- which is maybe what your'e getting at -- is what does the "fair and equitable" requirement (aka "absolute priority rule") require in a chapter 9.

Professor Pottow,

Thanks for answering, and in a way I expected regarding constitutional protection of unsecured claims.

So far so good - no secured interest, no priority under the plan.

However, doesn’t the unsecured creditor have a constitutionally protected property interest in their own contract and claim that can not be extinguished without adequate protection, consent, or a confirmed plan ?

And by extinguish I mean for the court to enjoin the creditors’ right to sue to collect on their claim outside bankruptcy.

That is - a plan (or 363 sale order) can provide for less than owed to an unsecured creditor but the plan can not extinguish those rights without consent, adequate protection, or an equitable cramdown by the judge.

Robert White

PS: I’m raising similar questions in my petition for a writ to the us supreme court early in April.

By the way Professor Pottow,
thanks for coming out on this new appellate issue on the eve of Executive Benefits.

It shows courage.

Your first position in Executive Benefits that “to determine” includes the lesser function of issuing findings and conclusions for ultimate referral to the District Court is closest to where the Supreme Court will land, on this issue, but still not a total win.

Actually, “to determine” means to sort into core and non-core categories.

28 USC 157 (b)(3) makes the meaning of “to determine” clear.

It means to assign core or non-core status to proceedings - not to decide the issue as opposing counsel argues.

So you win this point - thank you very much.

But the issue of consent is more problematic.

If it is held (as I believe it will be by the Supremes) that explicit consent is required for the bankruptcy court to adjudicate an unconstitutionally core proceeding then who is gaming who when consent is not put at issue?

Robert White

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