Puerto Rico Seeks Help From the Supreme Court

Puerto Rico is asking the U.S. Supreme Court to review the First Circuit decision that Puerto Rico's Recovery Act is preempted and thus unconstitutional. Here's the petition. In addition to parsing the legal issues, the petition is framed around Puerto Rico's financial emergency, the need for the Supreme Court to step in notwithstanding the lack of circuit split (or even a dissent to the First Circuit ruling). It makes sense that Puerto Rico would challenge a ruling making it harder for the Commonwealth, in a nebulous legal zone, to write laws to solve its problems. The difficulty with the financial crisis framing is that even if (1) the Supreme Court agreed to hear the matter, (2) heard the matter quickly, (3) decided the matter quickly, and (4) actually reversed the First Circuit - a chain of tough "even ifs"  - public corporations in Puerto Rico will not be able to start using the law because another formidable constitutional challenge is still alive: whether the Recovery Act can survive scrutiny under the Contracts Clause. That hotly contested fight would be fact intensive in a way that the preemption dispute was not. A fix from the federal government must come from one of the other two branches. Speaking of which, the persuasive argument against H.R. 870/S.1774 continue to be underwhelming. For example, the fact that chapter 9 would not be a complete solution for, say, PREPA, is really beside the point.

If the Supreme Court agreed to review the First Circuit's decision, then fellow Slipster Stephen Lubben's work on Puerto Rico and the Bankruptcy Clause would become even more important than it is already. While I am not on board with Stephen's conclusions regarding preemption, his research and arguments are central to this debate. So check out his article if you haven't already.

Picking a Judge to Preside over a Municipal Bankruptcy

Last week I introduced to Credit Slips readers my draft article on federal court oversight of Detroit's bankruptcy. An easily overlooked element of what I called The Detroit Blueprint is non-random judge selection, required by Congress for municipal bankruptcy cases.

Departing from the random assignment norm in the federal judiciary, section 921(b) of the Bankruptcy Code requires the chief judge of the applicable circuit court of appeals to select the judge who will preside over a municipal bankruptcy. In 1997, the National Bankruptcy Review Commission unanimously recommended eliminating section 921(b).  That Commission's Final Report observed that the fear prompting the provision - random draw of a judge unable to handle the case - was no longer salient. Congress did not take up this recommendation. What difference did section 921(b) make in Detroit?

Chapter 9 and Federal Courts: The Detroit Blueprint

Among its other effects, the Puerto Rico debt crisis has dramatically increased the number of public figures and politicians whose verbal repertoire includes the term "chapter 9." Bondholders' resistance to chapter 9 access for Puerto Rico municipalities is fueled in part by an earlier public debt crisis: Detroit. As suggested in my Credit Slips posts, Detroit made some new law but its major lasting legacy is procedural. I just posted a draft article, based on original empirical research, documenting that procedural blueprint, Federalism Form and Function in the Detroit Bankruptcy. It shows the paths by which the federal court became a major institutional actor throughout Detroit's restructuring.

After reading scholarship and case law on chapter 9, one might envision that, because of the Tenth Amendment to the U.S. Constitution and federalism principles, presiding judges are essentially locked in a closet for much of the duration, released only when the parties affirmatively seek an adjudicator. That's never entirely accurate, but to say it is inaccurate regarding Detroit is the understatement of the year.

Although The Detroit Blueprint will have broader ripple effects, I am dubious that its most significant elements could or would be implemented in, say, a PREPA bankruptcy. Detroit should not be an impediment to changing the Bankruptcy Code to cure the wrongful omission of Puerto Rico municipalities. More on that, and additional perspectives from the article, in future posts.  
 

Image courtesy of Shutterstock

Chapter 9 and Puerto Rico

As Melissa has noted, the First Circuit has found that the Commonwealth's attempt to solve its own problem runs afoul of Congress' "intent" to leave Puerto Rico without a municipal bankruptcy system.

Professor Eichengreen, in an interesting essay on Greece and Puerto Rico, suggests that Congress will fix the problem with the Bankruptcy Code. Word from Washington is somewhat less optimistic.

Puerto Rico Preemption Redux: Back to You, Congress

On February 6, 2015, a district court held Puerto Rico's Recovery Act to be expressly preempted by section 903 of the Bankruptcy Code.

On July 6, 2015, the U.S. Court of Appeals upheld the finding: The Recovery Act is preempted, on both express preemption and conflict preemption grounds. 

Judge Torruella wrote a separate concurrence starting on page 50 of the decision. One of his points bearing special mention here is that he finds unconstitutional the 1984 Bankruptcy Code amendment that stripped Puerto Rico's right to authorize chapter 9 for its municipalities, due to the lack of a rational basis. Had he secured another vote for that view...

Credit Slips contributors surely will weigh in more, in this space or elsewhere, on the decision and  next steps. For now, Congress needs to move on H.R. 870, which now has support in the Senate. H.R. 870 simply reinstates Puerto Rico's ability to authorize its municipalities to use chapter 9, akin to states. Others advocate for bankruptcy relief for the Commonwealth of Puerto Rico itself; that proposal is separate from, and considerably more controversial than, H.R. 870.

 

Catching Up

So I've been off the grid for a few weeks, and of course after months of little to talk about, the world gave us a bounty of stories about financial distress, and related topics, each of which would merit its own post. But I'm going to hit them quickly to get caught up again this holiday weekend:

• I've always enjoyed reading Hamilton's Report on Public Credit, which has something of a reorganization plan about it, as well as a good discussion of distressed debt trading. Thus, I'm largely in agreement with those that say that Jackson and not Hamilton should go to free up space on one of our bills. But what about having two types of bill in each denomination? Harriet Tubman on some dollar bills, with Washington on the others, seems about right. 
• I joined an amicus brief for the loosing side in in Baker Botts, L.L.P. v. ASARCO, L.L.C., the most important case of the term.  (Or maybe not.)  Thus, it will be no surprise that I think the dissent has the better argument. The majority seems to be totally out of touch with the reality of bankruptcy practice, and its opinion seems to be an open invitation for bomb throwers who stop just short of Rule 11.
• Greece in undoubtedly between a rock and a hard place. Its economy is likely to be devastated if it leaves the Euro, at least in the short term, and it certainly will be further devastated by more austerity. Does it really matter which way they vote? The larger EU has to think about precisely what it is trying to achieve here. Yes the current Greek government is a bit buffoonish, but who helped to elect them?
• Puerto Rico is obviously in quite a similar situation. The most realistic outcome seems to me to be (a) an exchange offer of the Commonwealth debt tied to realistic (non-punitive) reforms and (b) chapter 9 for the utilities. Part "a" of course risks holdout problems – can exit consents do the trick?

That might generate some comments this weekend.

No Evading Illinois Pension Woes

The Illinois Supreme Court issued its unanimous opinion this past Friday putting a stake through the heart of the legislature's latest attempt to evade its responsibility for woefully underfunding four of the state's five public pensions. Adam (among others) has discussed the pension issue in the Detroit bankruptcy case and the Michigan constitutional provision protecting pension benefits from impairment. The Illinois Constitution of 1970 has an identical provision (art. XIII, s. 5), which will have much more bite in the case of the state of Illinois--an entity that, unlike Detroit, is not eligible for bankruptcy protection. Long story short: the Supreme Court all but scoffed at the state's arguments that contracts can sometimes be impaired (and the state has a really, really good reason here) and that prohibiting the legislature from reducing vested pension benefits is an impermissible abdication of sovereign authority. The Court pointed out that it wasn't the legislature, but the people of Illinois, who imposed the pension protection restriction ... and it seems now the people will likely have to revisit the idea of vastly increased state income taxes and the like, as "[a]dherence to constitutional requirements often requires significant sacrifice, but our survival as a society depends on it."

I had long wondered why we still see defined-benefit pensions, in either the public or the private sector. It seemed obvious to me that defined-benefit plans are not sustainable and that every retirement protection system needed to switch to defined-contribution plans (like 403(b) and 401(k) retirement savings plans). It turns out that even this "obvious" switch won't necessarily fix the problem prospectively, as this paper reports.

Where's bankruptcy (or some other kind of restructuring) protection when you need it!?

Puerto Rico's Municipalities

As previously predicted, and in light of recent events, legislation has been reintroduced to allow Puerto Rico's municipalities into chapter 9. Two Slipsters are quoted in the accompanying press release.

Meanwhile, the Commonwealth has appealed to the 1st Circuit. I would note that once the district court found the Recovery Act preempted by the Bankruptcy Code, and thus enjoined the Recovery Act, the point of the remainder of the opinion becomes something of a mystery to me. In short, there probably is no problem appealing from the district court's order at this point.

Puerto Rico – Recovery Delayed?

As Melissa has noted, the district court has ruled that Puerto Rico's Recovery Act is preempted by the Bankruptcy Code, among other things. I want to amplify one point that she made in her post.

The court's preemption analysis is exceedingly week. In particular, the court never grapples with the 10th Amendment implications of its decision, despite holding that no state can address municipal insolvency, even those jurisdictions that do not allow their municipalities to file under chapter 9. Treating the 10th Amendment as a dead letter seems like something that is about two Chief Justices too late.

In a recent article, I argued that this Constitutional problem, and some statutory conflicts (like the definition of "creditor" in section 101) can be avoided by reading section 903 to only apply to municipalities that are eligible under chapter 9 (because their state governments permit filing, and the Code does not otherwise prohibit entry into chapter 9 – cf. §101(52)).  The district court gives that argument the back of the hand in footnote 19.

The obvious solution is to fix section 101(52) and allow Puerto Rican municipalities into chapter 9. But absent Congressional action, the First Circuit awaits.

Puerto Rico Preemption

Last summer, PREPA bondholders filed actions challenging the constitutionality of Puerto Rico's recently enacted, but as yet unused, Public Corporation Debt Enforcement and Recovery Act. Last night, the district court filed a seventy-five page opinion. It did not dispose of the actions in full (e.g., the contract clause challenges remain alive but not decided), but did hold the Recovery Act is preempted. Given that the judge's order permanently enjoins Puerto Rico from enforcing the Recovery Act, I believe it is immediately appealable under 28 USC 1292(a)(1).

Detroit's Bankruptcy: The Conversation

Readers who have not otherwise received notice in the twittersphere may be interested in this commentary at The Conversation.

Detroit's Bankruptcy: End(s) and Means

On Friday November 7, 2014, Judge Rhodes confirmed the City of Detroit's plan of adjustment. As previously noted, this judicial act permits the release of debt and clears the way for the City to forge ahead, but the future of Detroit is in the hands of many others. Although a fuller written decision is expected, the court's oral ruling already hints strongly at new bankruptcy doctrine. Two examples: unfair discrimination and professional fees.

Settling Detroit: Remembering General Unsecured Creditors

The 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. 

Detroit: "Now Is Not the Time for Defiant Swagger..."

Plan confirmation time. Doesn't everyone relish a big trial? Headlines in national newspapers breathlessly proclaim that the fate of Detroit's future is in the hands of one single judge!

Well, no.

Let's get literal about the judicial role at this juncture. There's no way over the finish line without a determination by the bankruptcy court that the City has met its burden of showing its plan satisfies all legal requirements by a preponderance of the evidence.

This standard includes the City showing that the plan is not likely to fail. Back in January 2014, as the parties negotiated the plan's initial version, Judge Rhodes called for restraint in creditor demands, modesty in City promises:

Now is not the time for defiant swagger or for dismissive pound-the-table, take-it-or-leave-it proposals that are nothing but a one-way ticket to Chapter 18 ... . If the plan ... promises  more to creditors than the city can reasonably be expected to pay, it will fail, and history will judge each and everyone of us accordingly.

    --Jan 22, 2014, afternoon session

Detroit's plan includes revitalization investments, and does so not merely to show how it will service its debt. That scope takes the court into a farther-reaching review.  And the judge appointed his own feasibility expert, and is planning to conduct the direct examination of the expert himself. Such factors further fuel the image of a judge as gatekeeper of Detroit's future.

Yet, no bankruptcy judge should be saddled with the full weight of longstanding socio-economic and geographic challenges. Historian Thomas Sugrue teaches us that the roots of Detroit's crisis run quite deep. Deeper than the recent past of corruption in the Kilpatrick administration, or dependence on casino revenues, interest rate swaps on certificates of participation, or questions about thirteenth checks. Even before the height of worries about auto industry competition abroad, or the enactment of Michigan constitution language on pensions. By Sugrue's account, Detroit's economic decline started in the 1940s and 1950s with hemorrhaging (his word) of good jobs and capital. For the spiral downward from there, the book is here, the speech, 19 minutes into the video, there.  Repair depends on collaborative work: many tools, many hands. How to engage all communities in the effort to conquer longstanding racial tensions and segregation, achieve regional cooperation, expand jobs that offer more security and opportunity than downtown coffee shops and sports stadiums? ("Downtown does not trickle down," said Sugrue at a Wayne State conference earlier this year; explanation here). Again, many tools, many hands.

Although these challenges illustrate how the judge's plan confirmation role operates within a much broader framework of actors, judges also can shape a municipality's restructuring and future throughout the bankruptcy process, in more informal ways. In Detroit's case, Judge Rhodes planted the seeds of oversight and influence in the earliest days of the bankruptcy. He drew on tools and techniques used decades earlier in other kinds of complex litigation, including prison reform and school desegregation cases. See here, here, here, and here.

Among the most consequential moves was delegating to Chief District Judge Rosen the authority to mediate nearly every substantive issue in the case. Detroit heads into the confirmation hearing with many settlements in its pocket - with financial creditors as well as workers and retirees. Most discussed is the pension/art settlement (a.k.a. Grand Bargain) that looks the least like a conventional mediated settlement. Chief Judge Rosen has suggested the deal could be a model for other distressed cities. On harnessing the power of the non-profit sector, maybe so. On a sitting life-tenured judge being the designer, broker, and closer of this type of deal, not so much. However socially desirable the content of the Grand Bargain may be (and that debate will rage on), the costs and risks of this procedural model are simply too great. 

So, as the last phase of the historic Detroit bankruptcy commences, the question of judicial responsibility and influence must be put in context. The role of federal judges in shaping Detroit's future has been overstated in some ways, understated in others. Trials matter. But if they capture too much of our attention, we will miss other important things.

Puzzle picture courtesy of Shutterstock

 

Puerto Rico To Get Chapter 9?

Long overdue, in my opinion, HR 5305 has been introduced by Resident Commissioner Pedro Pierluisi.  The one-sentence law would allow the territory of Puerto Rico to join the definition of "State" and hence provide access to chapter 9 for its municipal and other entities.  (And no, the territory itself can't file chapter 9, so don't get your hopes up for that solution to its finances.)

It seems archaic and patronizing not to let the people of Puerto Rico authorize (or forbid) their public entities from using chapter 9.  In terms of the policy decisions involved -- some states refuse their entities to access chapter 9 -- it strikes me at least as eminently more sensible to let the government of that territory make that call rather than Congress.  Here's hoping to swift passage on what should be a non-contentious error correction to the Code.

Detroit: My Complication Had A Little Complication

Until a few days ago, it looked like Detroit's chapter 9 plan confirmation would come and go untouched by appellate process. In February 2014, the U.S. Court of Appeals for the Sixth Circuit granted seven petitions for direct appeal of the bankruptcy court's eligibility decision, which included the finding that public pension claims could be impaired in chapter 9 bankruptcy. But the Sixth Circuit did not act on the request for expedited consideration. Somewhat remarkably, it agreed to do what the bankruptcy court had requested in its certification memo: consult with the bankruptcy court's lead mediator to consider the impact of the appeal's timing on negotiations. According to the bankruptcy court, "the interests of the City, its residents and its creditors are better served by adjusting the pace of the legal process, including the appeals, to meet the needs of the mediation process." (p. 14)  Don't know for sure, but it seems plausible that the lead mediator preferred deferral of the appeal until after plan confirmation; doing otherwise might throw a wrench in implementation of plan settlements he oversaw - especially the Grand Bargain, for which he has pressed for many months. Because the eligibility decision included the finding that public pensions could be impaired in bankruptcy, the Sixth Circuit docket has swelled in the meantime to include many amici appearances and briefs, including from CalPERS, the Illinois Public Pension Fund Association, the American Federation of Teachers, and AARP.

A host of appeals from other bankruptcy court orders in Detroit's bankruptcy also are pending in the U.S. District Court for the Eastern District of Michigan. In at least several - and possibly all, as I haven't yet checked each and every one - the district judge sua sponte stayed the matter until the Sixth Circuit decided the eligibility appeal. 

This week, the Sixth Circuit shattered the blockade on appeals from Detroit's bankruptcy.  

The Puerto Rico Public Corporation Debt Enforcement and Recovery Act

6/30 UPDATE: here's the  amended complaint.

The fast-moving legislation's title does not include the word bankruptcy. Materials distributed by the Puerto Rico government explain, though, that the bill is meant to provide chapter 9-like relief to Puerto Rico public corporations through one of two paths - one more prepack-like than the other. Calling the effort "dazzling," Cate Long notes, "[s]eldom have financial markets seen such an elegantly choreographed approach to haircutting sovereign debt."

However elegant, investors say the bill violates multiple provisions of the U.S. Constitution. Quiz yourself, or directly check out the action just filed in the U.S. District Court for the District of Puerto Rico seeking a declaratory judgment.  H/T Cate Long.

Puerto Rico flag courtesy of Shutterstock

"You Can't Eat Principles" - Detroit's Grand Bargain Moves Another Step Forward

A little like the ship that Fitzcarraldo (and Werner Herzog) pushed, hoisted, and willed up up up and over a mountain, Detroit's Grand Bargain continues to defy expectations and make forward progress. A significant step today: A big press conference as Governor Snyder signed the necessary bills. Watch here.

The Detroit Retired City Employees Association produced the button in the picture (photo courtesy of Matt Helms of the Detroit Free Press). Shirley Lightsey, President of the association, produced the slogans: You Can't Eat Principles, and Uncertainty Doesn't Pay the Bills. Of the speakers at the press conference today who advocated for the Grand Bargain, Ms Lightsey was the most persuasive.

And practical too. Some retirees are skeptical, but it is hard to imagine retirees will do financially better by voting no or abstaining and hoping for an appellate court victory on the Michigan Constitution questions.

Voting is not, though, the last hurdle for the Grand Bargain - a point lost in the shuffle of the bill-signing press conference.

A Three-Hour Tour and Other Distractions

The City of Detroit has proposed a three-hour bus tour of the City to start its chapter 9 plan confirmation hearing. Some creditors object. The City's motion says "[i]f any case ever warranted a Site Visit, this one does." I don't agree, for reasons explored below, but in any event, the eligibility trial would have been a more logical place for it. And even Gilligan and the Skipper too couldn't cover 139 square miles in three hours. So what is going on here?

A step back. In the earliest days of my bankruptcy court clerkship, the United States Trustee sought to dismiss or convert the chapter 11 of a small nonprofit on the south side of Chicago. The debtor and the U.S. Trustee parties presented starkly contrasting depictions of this debtor - I remember the dueling photographs - with neither more obviously credible than the other. The case, like most in the bankruptcy court, had a starkly human element: the debtor was a rehabilitation center of sorts. The U.S. Trustee essentially was alleging that the residents lived in deplorable conditions, and the debtor strongly disagreed. To resolve the discrete factual dispute between two parties about the property's condition, Judge Ginsberg decided to schedule a time to leave the modernist skysraping box that was the Dirksen Federal Courthouse and visit the premises, in a van, with law clerk, court reporter, and others in tow. No easy way to verify -  the name of the case is lost to me now - but my strong recollection is that the site visit idea prompted no objections. The case cratered for an unrelated reason, mooting the trip. No other case during my clerkship prompted Judge Ginsberg to make a similar proposal.

Over the years, I have learned of other judges' experiences with site visits, revealing similar characteristics: cases with limited parties in interest, specific factual disagreement, the resolution of which could be accomplished efficiently by visiting circumscribed sites. 

Q & A on C of D

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.

Is.It.Legal.

In a week bustling with municipal finance activity (e.g., conclusion of the Stockton confirmation hearing), the Michigan Senate rather easily passed legislation to contribute money to Detroit's restructuring, earmarked for pension claims and permanent insulation of the City-owned art museum against the City's creditors. The bankruptcy is not fully resolved yet, of course. For one thing, creditor voting is not complete, and some pension claimants must be resolicited because of errors in ballots. Assuming that the requisite votes materialize, the City has the burden to prove that its plan of adjustment meets all requirements of the Bankruptcy Code by a preponderance of the evidence. Due to a series of document production delays on the City side, the trial will likely be postponed by at least a few weeks.

Since I last wrote about Detroit, the City filed an omnibus reply to plan objections (doc #5034). Exceeding 250 pages, brief it is not. But the City had much ground to cover, and the end pages are a very useful chart breaking down who made which objections. Several assertions I found troubling relate to whether the plan unfairly discriminates in favor of pension claimants who benefit from the Grand Bargain premium and against dissenting classes of creditors who do not.

Detroit: So Many Questions

...but first, a new (and short!) article: Please download here a just-published piece on the first months of Detroit's bankruptcy, resulting from a fall 2013 Fordham symposium. It reflects efforts to follow public parts of Detroit's chapter 9 through recordings of court hearings and monitoring the docket. And although largely descriptive, the piece sets the stage for unpacking the institutional and functional roles played by the federal court in municipal bankruptcies and beyond. The court's early management and oversight choices (discussed on Credit Slips here & here & here & here) can be tied quite directly to this bankruptcy's development  - most notably through the appointment of Chief District Judge Rosen as lead mediator. Without Chief Judge Rosen, would the  Grand Bargain exist?

It's Populist, Got Mass Appeal

 

Some thoughts on the anticipated bondholder objection to Detroit's "art deal," up now over at Dealb%k.

Detroit's Plan Submission -- Now What?

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. 

Detroit and the Swaps

So in declining to approve Detroit's proposed payoff of its interest rate swaps – all out of the money, naturally – Judge Rhodes has reminded us that the case is not pending in Wilmington or Manhattan.

But now what? The swaps and their supporting collateral (a particular tax revenue stream) are the beneficiaries of the safe harbors, which means the counterparties are not subject to the automatic stay, among other things. Thus, while there has been some suggestion that Detroit might challenge the validity of the swaps, in the interim how does Detroit regain control of the revenue, which they say they need?

The parties stipulated that the terimination amount due was $247 million at the end of 2013. Presumably the counterparties get to hold onto the tax revenue until they are paid that amount. In that light, paying $160 million to end the swaps does not look so bad.

Maybe Detroit asks the judge to enjoin the counterparties while they challange the validity, but then there is our friend section 560, which says that termination of a swap shall "not be stayed, avoided, or otherwise limited ... by order of a court."  

Sure Detroit will get the money back from the counterparties if it turns out the swaps are not unenforceable, but in the interim there might be a lot of chaos.

Detroit: Eligibility and Pensions

Two big rulings in Detroit's Chapter 9 bankruptcy today:  first that Detroit is eligible for Chapter 9 and second that it may impair its pension obligations in bankruptcy.  Both rulings were delivered orally from the bench and transcripts aren't yet available, so it's hard to really parse them other than through selected quotations in the media. With that major caveat, here are my initial thoughts on each issue in turn:

Detroit's Managerial Milestones

A city in bankruptcy operates with considerably more freedom from judicial oversight than its private chapter 11 counterparts. People often say judges have just two principal points of involvement in a chapter 9: presiding over trials on eligibility and confirmation of the plan of adjustment. My earlier posts about Detroit have told a story that puts judges in a more active ongoing role, emblematic of the evolution of the federal judiciary over the second half of the Twentieth Century. Serious managerial judging (plus a team) empowers them to shape the speed and direction of municipal restructuring notwithstanding doctrinal and constitutional limits on their formal legal authority. Yesterday's evidentiary hearing in Detroit's bankruptcy is illustrative.

One Hundred Forty Characters (Of Detroit)

Short bursts on Detroit's Chapter 9 bankruptcy will be offered at @bankrprof. While I'm here, though, a report that the retiree committee has filed a motion to withdraw the reference from the bankruptcy court of its objections to Detroit's chapter 9 eligibility. 

Note paper image courtesy of Shutterstock

Detroit: More People, Moving Faster (and, in an instance, Slower)

My Detroit posts so far (here and here) focus on the role of the judge and court. The first considered managerial judging, and there's significant news on that front this week. Having read one hundred and nine timely objections to eligibility, Judge Rhodes interpreted many objections to raise only legal issues and expedited the hearing on those issues to September 18, from October 23 (see p.3 of order). On September 19, the court will hear from individuals who filed eligibility objections, three minutes each. October 23 remains the date for objections that require the resolution of material fact. But the court is deferring objections based on treatment of pension rights in a plan because they are not eligibility issues (see section VI of the order, p. 6). This is the technically "slower" instance, per this post's title. Parties troubled by this new order have until September 6 to file objections or comments (see section XI. p.7).

Detroit's Finest

Some thoughts on the Detroit situation, addressing many of the points Adam raised last night, but from a slightly different perspective, up over at Dealb%k.

Detroit Institute of Art Collection--Available to Creditors?

I have a piece on Salon about whether creditors should be able to force the liquidation of the Detroit Institute of Arts collection.  The DIA collection is apparently municipal property, although the DIA is an independent non-profit entity that basically operates the collection. Some of the highlights of the collection, such as Diego Rivera's amazing murals inspired by the Ford River Rouge plant are physically part of the DIA building (I'm not sure who owns the building). 

The legal issue about the DIA collection is sort of the twin of the pension issue:  both are about the ability of the states to order the bankruptcy process. The pension issue about about states' ability to specify the treatment of liabilities in bankruptcy, while the DIA collection is about states' ability to specify the treatment of assets in bankruptcy.  

It Takes A Village: Detroit, Chapter 9, and Litigotiation

First, the most recent news: the fee examiner job in Detroit's chapter 9 has just been awarded. And the Detroit Free Press has just awarded itself a not-so-subtly snarky news headline. 

Similar to the bankruptcy court's order appointing a mediator, the fee examiner order authorizes the examiner to call in reinforcements - other lawyers at his law firm, as well as an accountant and the accountant's firm. Judicial Team Chapter 9 Detroit grows. 

A cadre of federal judges once fought hard - repeatedly and successfully - to exclude bankruptcy judges from the Article III judiciary. In so doing, they conceptualized bankruptcy judges as the helpers, not the ones building teams. When a district judge was asked at a Congressional hearing in the 1970s whether bankruptcy judges would need law clerks, the district judge's NO could be heard from miles around. That issue has long been resolved - of course, they need law clerks. The Federal Rules of Bankruptcy Procedure prohibit special masters in bankruptcy cases. But bankruptcy courts commonly appoint fee examiners or fee committees in bigger cases, which seem little different from a special master. And the judges fighting against Article III status never imagined a bankruptcy judge appointing his own chief district judge as the omnibus mediator, with the potential for a raft of additional judicial and non-judicial mediators in tow. But now it has happened. And that delegation of responsibility from bankruptcy judge to district judge is already underway, per the first mediation order dated August 16.  

And yet, the building of this team should feel familiar to those Article III judges from the 1970s and 1980s. When they needed to bring order to complex cases involving unconstitutional conditions in prisons and schools, and bargaining over the remedial scheme, district judges brought in more people. Masters. Special masters. Hearing officers. Monitors. Various kinds of committees. Ombudsmen. Barring the appointment of lions, tigers, or bears, the City of Detroit case yet again illustrates commonalities between the non-adversarial aspects of bankruptcy cases and non-bankruptcy litigotiation.

Human spokes image courtesy of Shutterstock

Legal Solutions to Non-Legal Problems

Again, this is me posting on Adam Levitin's behalf because he is away from Internet access as he owns an Apple computer (often a redundant statement). Adam writes:

The Peculiar Vulnerability of Municipal Pensions in Chapter 9

This may be my byline, but I am posting for Adam Levitin. He is not in his office, and his Apple device is not being cooperative with our blog hosting service. He asked me to post for him, apparently unaware that meant that I would also get to take cheap shots like asking whether he would like to replace his Apple faux-device with a real computer. 

Anyway, Adam writes:

I've written a piece about the peculiar vulnerability of municipal employees' pensions in bankruptcy. It's up on Salon. The key problem is that there is no PBGC insurance for muni pensions, so workers would be SOL if their pensions can be cut in Chapter 9. Many don't even have Social Security. This gap makes me think that pensions ate not really supposed to be fair game in Chapter 9, but that's a somewhat different point than the need to provide PBGC coverage for muni employees and extend ERISA generally to muni retirement plans.

The piece makes some important points and is well worth a read (but don't tell Adam I said that).

Detroit's Chapter 9 and the Vanishing Umpires

When the Chief Judge of the Sixth Circuit selected Judge Rhodes to preside over the City of Detroit's chapter 9 case, she attached a letter from the Chief Judge of the Eastern District of Michigan. Among other things, it lauded Judge Rhodes' case management skills, and asserted the need for those skills in a case of this nature. To many, the phrase “case management” may evoke procedural judicial tasks of little normative content. But the sandwich of the two words should invite deeper questions about the role of courts, judges, judicial adjuncts, and trials, and the impact of the presence or absence of disputes playing out in public view.

Vallejo's Chapter 9 plan

The City of Vallejo has filed its Disclosure Statement and plan in its Chapter 9 bankruptcy case.  The plan proposes paying general unsecured creditors, mostly employees and retirees, about 5 cents on the dollar from a $6 million fund, an amount roughly equivalent to the legal fees paid in the case through December 2010.  Vallejo apparently did not finance capital projects with unsecured general obligation bonds typical of many state and local governments.  Instead it had complex financing using sale and leaseback arrangements with certificates of participation, with certain city revenues earmarked as collateral for the financing, in a kind of factoring or receivables financing deal.  The resulting $50 million or so in non-employee debt was therefore secured, and because of a prepetition default, was held by the bank that insured the deals.  The plan proposes to pay these claims in deferred payments, at a reduced interest rate, represented as a 40% reduction in their present value, i.e. 60 cents on the dollar.  It is hard to say what precedent this will set for other local governments considering a bankruptcy.

What the disclosure statement does not quantify is the savings/cuts in employee wages, health care and pensions resulting from the rejection of the prepetition union contracts and their replacement with new contracts.   Depending on which commentator you read, Vallejo has either impoverished its workers to repay the bank, or missed an opportunity to tackle the greedy unions.  Because the cuts in worker pay and benefits were negotiated as part of an executory contract rejection, the disclosure statement doesn't really spell out in clear terms how losses were allocated among taxpayers, banks and workers.  Of course, the disclosure statement has not been approved yet.