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Q & A on C of D

posted by Melissa Jacoby

Yesterday's Is. It. Legal. provoked some comments and questions. Some quick replies above the line, so to speak.

Q: Is it clear that this is going to be a cramdown plan?

    Multiple groups of creditors have not settled with the City (e.g., those with financial interests in certificates of participation, water and sewer bonds, LTGO, a few police and fire groups). Non-settling claimants are actively challenging plan confirmation from top to bottom, including whether Detroit's current plan passes muster under the standards applicable to nonconsensual plans. Those who hold or insure COPs are most relevant to yesterday's comments on unfair discrimination.  In addition to offering little payment, the City has challenged the COPs' validity altogether. Will all of that get settled?  Stranger things have happened in the history of bankruptcy and municipal finance law. But I would guess that result would necessitate some sharing in the Grand Bargain premium.

Q: If it is not a cramdown, then all of the unfair discrimination and absolute priority issues are moot.

    I disagree. The strength of the cramdown-related arguments contribute to the leverage of the parties to compromise and settle.

Q: Isn't Detroit's Grand Bargain is pretty readily distinguishable from previous gifting situations?   Detroit involves a truly donative contribution from a non-creditor third party that is essentially adding assets to the estate conditioned on a particular distribution.

   Putting aside whether any of the components to the Grand Bargain are purely donative, the components cannot be uniformly characterized. The State of Michigan contribution, for example, is not purely donative. It is more akin to mass tort settlements in which insurers and third parties fund part of the plan in exchange for a broad release and channeling injunction. In addition, creditors challenge whether some foundation gifts, principally motivated by a desire to save the art, were actually conditioned on a distribution that excludes financial creditors. Will be hard to prove, of course, but goes to the asserted premise that this was the only way to get the deal done.

    Someone may be able to distinguish Detroit's plan from the gifting plans that did not pass muster with the Second and Third Circuits - which are not binding on the Detroit court in any event. It is the City's reply brief that leaned on WorldCom, triggering my reaction. If this plan is found to be acceptable, it need not, and should not, depend on a broad holding that third-party contributions are categorically irrelevant to unfair discrimination analysis.  

    Pension claimants' health care losses can come into the analysis;  the structure of the argument depends on the test for unfair discrimination that is applied (raised in an earlier post in May).  I read the City's brief as doing something different: suggesting that the difference between the distribution to COPs and pension claimants is smaller than it seems because pension claimants face cuts in another class. COPs holders could have holdings in other classes too.


Melissa, it seems a lot comes down to the classification. Even if there are lots of objectors, if they're in classes that overwhelm their votes, then none of the cramdown triggered arguments (unfair discrimination/absolute priority) will come into play. But I have no idea if the classification is likely to produce accepting majorities in every impaired class.

To the extent third-party contributions matter, I would think they would be an absolute priority, rather than an unfair discrimination issue.

I misunderstood the City's point about the pension claimants' health care losses. I didn't understand that the City was arguing the need to look at holdings across classes. While it makes sense from a real world point of view, bankruptcy law usually cares about claims, not creditors.

The argument I _thought_ Detroit was making was that one had to look at the total treatment of creditors irrespective of when concessions were made. I'm not sure if there are any pre-bankruptcy concessions here, but there certainly were for Chrysler and GM. The UAW gave up a huge amount before the bankruptcy filing, but no one mentions that when comparing how the UAW did relative to the Indiana Pensioner Funds. It strikes me as a problem that bankruptcy law doesn't have any mechanism for accounting for pre-bankruptcy concessions; failing to do so discourages pre-bankruptcy workouts. This creates a double whammy with preferences and fraudulent transfers-you get dinged for getting security, etc. before bankruptcy, but no credit for being nice.

One quick response - this isn't a situation in which the debtor has classified claims to dilute objectors. The (many, many) classes in Detroit's plan are narrowly drawn. There is also a dispute about whether the insurers or the claimants get to vote, and the insurers of claims I mentioned (COPs, LTGO, DWSD) are among the big objectors. Absent a settlement with the big objectors, I don't foresee the 1126 voting rules and classification resolving all of this.

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