Detroit bankruptcy: investors to file objections

Judge calls for submissions from those who oppose bankruptcy as he prepares to rule on whether city has proved it is insolvent

Pension funds and investors prepared to file objections to Detroit's historic bankruptcy proceedings on Monday before a crucial court hearing.

Judge Steven Rhodes, who is overseeing the proceedings, set a deadline of 11.59pm ET Monday for public employee pension funds, retirees, bondholders and others to oppose the city's plans to file for the largest ever municipal bankruptcy.

So far, only a few former city workers have filed official objections with the court despite widespread objections and legal manoeuvres to block the proceedings.

Rhodes has called for the submissions as he prepares to rule on whether the city has proven it is insolvent and negotiated in good faith with its creditors before granting the Chapter 9 bankruptcy. The filings come ahead of a trial to consider Detroit's eligibility for bankruptcy that is scheduled for October 23.

Kevyn Orr, Detroit's state-appointed emergency manager, made the decision to file for bankruptcy last month, saying the city could no longer cope with its $18bn debts. Orr stopped payment on $2.5bn in debt in June.

The decision came after negotiations between the city's pension funds, bond holders and Orr collapsed. In a court filing, Orr claimed "further negotiations with all of the city's various stakeholders is impracticable."

Orr must prove that the city negotiated in good faith with its creditors and did everything possible to reach a resolution. Bondholders dispute this. The Chapter 9 proceeding must also overcome objections from pension funds that Orr's plan violates Michigan's constitution which protects pension benefits.

If Rhodes declines to allow the bankruptcy to proceed, creditors will be allowed to sue the city for defaulting on payments. If the chapter 9 goes ahead, pensioners and city workers face deep cuts in their benefits and bondholders will see the value of their investments slashed. Some investors could receive as little as 10¢ on the dollar.

Orr, a former corporate lawyer who helped Chrysler through its bankruptcy, has said he would like city to emerge from bankruptcy by September 2014. A lengthy court battle could extend that time frame.

Since 1954 there have been just 63 Chapter 9 filings dealing with cities, towns, villages or counties across the country, and none as large as what Orr is proposing. Of those cases 29 were dismissed for reasons that included ineligibility.

James Spiotto, bankruptcy specialist at the law firm of Chapman and Cutler, said Detroit's case appeared far stronger than many of the rejected cases. In some cases alternative solutions had been found that avoided the necessity of a Chapter 9 filing. "Those options don't seem to exist here," he said.

Detroit's list of creditors filled 3,504 pages of court documents. The city's two largest unsecured creditors are its pension funds, the general retirement system and Detroit police and fire retirement system. Orr calculates that the two schemes are underfunded by $3.5bn, a figure the funds dispute.

The city's next largest creditors are its bondholders. Fears that they will have the value of their investments slashed are already impacting the ability of other Michigan cities. Three local governments postponed plans to raise money although some investors have recently started investing in Michigan-based bonds again. Investors bought $18.7m of bonds earlier this month to fund school districts in Ypsilanti, 30 miles west of Detroit.


Dominic Rushe in New York

The GuardianTramp

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