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Settling Detroit: Remembering General Unsecured Creditors

posted by Melissa Jacoby

ChessThe trial on the City of Detroit's restructuring takes a hiatus while insurer Syncora and others try to finalize a settlement. The deal seems to be a hybrid of enhanced treatment for Syncora's class of claims in Detroit's plan (class 9) and other value for Syncora alone, such as rights in Detroit property, and possibly a release from insurance obligations on interest rate swaps. The deal does not resolve class 9 objections as a whole. Indeed, it may give others in the class, e.g., insurer FGIC, more to grumble about. Signals are flashing that the judges (intentionally plural) overseeing Detroit's bankruptcy want a full class 9 settlement and want it now. At the end of Wednesday's bankruptcy court hearing, Judge Rhodes requested an off-the-record conference with representatives from FGIC and the City. Yesterday, the lead facilitative mediator entered a bring-your-toothbrush order; it requires mediation participation "continuing day-to-day thereafter as deemed necessary, until released by the mediators." (document 7419)

But what about plaintiffs alleging civil rights violations/constitutional torts who had section 1983 actions pending before the bankruptcy? Or plaintiffs holding state law tort claims, or rejected contract claims? In a municipal bankruptcy pitched as a battle between workers, Wall Street, and residents, it can be easy to overlook other kinds of unsecured creditors. 

The general unsecured creditors rejected the plan (in class 14, many of the "yes" votes were held and cast by the State of Michigan). In its most recent iteration, the plan promises class 14 a pro rata share of 30-year notes, plus a small slice of a disputed claims reserve relating to the COPs litigation (which now might disappear). If anyone has seen evidence that this treatment is worth more than 10-13 cents on the dollar, please speak up, as I don't want to misreport. Members of class 15, a "convenience class" in Bankruptcy Code parlance, also rejected the plan. But at least they are getting 25% in cash. 

Class 14 has little bargaining leverage, but it didn't have to be this way. Early in the bankruptcy, Judge Rhodes suggested Detroit should have a tort claimant committee, but no such committee was formed. Although Judge Rhodes found a creative method to prompt the City to develop its own plan for tort suits, the selected method (ADR protocol) did not give plaintiffs negotiating leverage for plan distribution. The U.S. Trustee appointed an unsecured creditors' committee, but the court vacated the appointment and disbanded the committee. Only one of the creditors selected for that committee would go on to become a class 14 member in any event (Jessie Payne, profiled here). Section 1983 plaintiffs sought their own committee, but the Court denied the motion, concluding that the mediation process adequately protected their interests. The plaintiffs also argued that section 1983 claims are not dischargeable in bankruptcy at all. The court held oral argument on this issue in July, and that's why no one needs to talk about it at the trial.

A year ago, I predicted the legacy of Detroit's bankruptcy would be in procedural mechanisms used by the court to oversee and shape the restructuring, rather than in the production of appellate-level precedent as others expected. We'll find out soon if that prediction will continue to hold. In the meantime, there's unfinished business. In addition to the elements of plan confirmation that the City must prove even if class 9 settles, including plan feasibility, at least one holder of a class 14 claim has argued the plan unfairly discriminates, triggering the City's burden to prove it does not. If the City ends up relieved of significant appeals as well as the COPs validity litigation, won't that free up some cash for the general unsecured creditors? 

Chess photo courtesy of Shutterstock

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