Overview of the City of Detroit Bankruptcy
- On July 18, 2013, the City of Detroit, Michigan (the “City” or the “Debtor”) filed a voluntary petition for relief under Chapter 9 of the United States Bankruptcy Code (the “Bankruptcy Code”). Detroit is the largest city in the history of the United States to file for Chapter 9 Bankruptcy protection.
- The Bankruptcy case was assigned Case No. 13-53846 and is pending before the Honorable Steven W. Rhodes in the United States Bankruptcy Court, Eastern District of Michigan.
- Pursuant to the Bankruptcy Code, specifically including, but not limited to, 11 U.S.C. §§ 362 and 922(a), a debtor is afforded certain protection against its creditors. For example, the Bankruptcy Code prohibits creditors from taking certain actions related to debts that may have been owed prior to the commencement of the Bankruptcy Case.
- If you believe that you might be a creditor of the City based upon debts arising prior to July 18, 2013 and you are considering taking action based upon your status as a creditor, you should seek legal advice.
What is a Chapter 9 Bankruptcy?
- Chapter 9, Title 11 of the United States Code is a chapter of the United States Bankruptcy Code, available exclusively to municipalities to assist them in the restructuring of municipal debts, for example Detroit.
- A “municipality” is defined by the Bankruptcy Code as a political subdivision or public agency or instrumentality of a State, so a municipality includes many types of governmental units besides cities. Sometimes a Chapter 9 Bankruptcy is called a municipal bankruptcy for this reason.
The Bankruptcy Court’s Limited Power
- The Bankruptcy Code severely limits the power of the Court over operations of the municipal debtor.
- The Bankruptcy Court may not “interfere with – (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor’s use or enjoyment of any income-producing property” unless the debtor consents or the plan so provides.
- The Bankruptcy Court may not control or veto the debtor’s day-to-day activities. They are not subject to Court approval.
- The debtor may borrow money without Court authority.
- The Bankruptcy Court may not interfere with the operations of the debtor or with the debtor’s use of its property and revenues.
- The Chapter 9 debtor may employ professionals without Court approval. The Court may only review the reasonableness of the fees at confirmation.
- Strict limits on the Court’s authority is necessary to ensure the constitutionality of Chapter 9 and to avoid the possibility that the Court might substitute its control over the political or governmental affairs or property of the debtor for that of the state and the elected officials of the municipality.
How can I access the Court documents filed in Detroit’s Chapter 9 case?
- The Bankruptcy Court has set up websites for the City of Detroit Bankruptcy:
- General Information: http://www.mieb.uscourts.gov/news/city-detroit-bankruptcy-filing
- Pleadings Website: This website allows anyone to obtain free access to the petition and schedules filed by the City of Detroit, all motions, responses, objections and claims that have been filed. These documents are available free of charge. Access this website at the following link: http://www.mieb.uscourts.gov/cityofdetroit.
What happens when a City like Detroit files Bankruptcy?
- Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan. Although similar to other Chapters in some respects, Chapter 9 is significantly different in that there is no provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors.
- The Bankruptcy Court generally is not as active in managing a municipal Bankruptcy case as it is in corporate reorganizations under Chapter 11. The functions of the Bankruptcy Court in Chapter 9 cases are generally limited to a determination of the debtor’s eligibility to file a Chapter 9 case, approving the petition, confirming a plan of debt adjustment, and ensuring implementation of the plan.
What is a Chapter 9 Proof of Claim?
- A “claim” is any right to payment, whether or not such right has been ordered by a court or is disputed or it may be a right to an equitable remedy for breach of contract. The term “claim” is very broad. If you have a good faith belief that a debtor in Bankruptcy owes you something, whether that is money, or performance of some task, you may have a valid claim. If you believe that you might have a claim or might be a creditor of the City based upon debts arising prior to July 18, 2013 and you are considering taking action based upon your status as a creditor, you may wish to seek legal advice.
- In order to be paid on your claim, you must have an allowed claim. Generally, in order to have an allowed claim, a claim-holder must file a proof of claim form with the Court.
- In a Chapter 9 case, the Court will set a deadline for you to file your proof of claim. Your proof of claim must state the amount of your claim, the type of claim, and have the necessary supporting documents attached that prove your claim is valid. In order to be considered, it must be filed before the deadline to file claims expires.
- Many creditors may not be required to file a proof of claim in a Chapter 9 case. For example, a proof of claim is deemed filed if it appears on the list of creditors filed by the debtor, unless the debt is listed as disputed, contingent, or unliquidated. 11 U.S.C. § 925. Also, if you have a claim and you are not one of the listed creditors, you will need to file a proof of claim.
- To assist creditors and claimholders, the attorneys representing the City of Detroit have established a Claims and Noticing Agent website. This website provides useful information regarding the Bankruptcy case and the filing of claims. You may access this website at the following link: http://www.kccllc.net/Detroit
- Proof of claim forms are available on both the Bankruptcy Court’s website and the Detroit Claims and Noticing Agent’s website.
Chapter 9 Bankruptcy and Employee Unions and Associations
- According to the City of Detroit, there are a total of approximately 47 distinct bargaining units, of 28 separate unions who represent certain employees and/or retirees of the City. The City has recognized at least 4 retiree associations.
- Prior to the petition date, the City sent letters to each of the Unions to determine who will represent their retirees in this Bankruptcy. As of the petition date, only eight Unions (representing 10 of the 47 bargaining units) offered to represent their retirees.
- The City also sent letters to each of the Associations to determine whether they were willing to represent Union retirees in connection with the City’s restructuring. Only 2 of 4 Associations offered to represent retirees.
- The Bankruptcy Court has approved the creation of a Committee of Retirees to negotiate on behalf of all retirees in connection with the City’s Bankruptcy plan. The United States Trustee will appoint committee members. That process is ongoing.
Chapter 9 Bankruptcy and Pensions
- The Pension Liabilities: The City’s retirement systems consist of the General Retirement System (the “GRS”) and the Police and Fire Retirement System (the “PFRS”), collectively referred to as the “Retirement Systems”.
- As of June 30, 2012, membership of the Retirement Systems consisted of over 23,500 retirees (including more than 2,400 former employees not yet receiving pension benefits), and more than 9,700 active employees with an expectation of receiving benefits when they retire.
- Each Retirement System is administered and managed by a Board of Trustees. The Boards generally are responsible for managing the assets of the Retirement Systems. The Boards have no authority to amend the terms of the Retirement Systems and pension plans. That authority lies with the City.
- According to the City, the Retirement Systems were under funded by $977 million as of the end of 2012. Kevyn Orr, Detroit’s Emergency Manager, believes that the pensions, as of June 30, 2013 are actually under funded by approximately $3.5 billion.
What to do if my pension is being affected by Detroit’s Chapter 9 Bankruptcy Filing
- The City has proposed to cut benefits to the pensions of retired city employees, and there has been much discussion as to whether or not the City may legally cut pensions at all. The Pension Plans will not sit by quietly, and they have made it clear that they will challenge the City at every turn. The Pensions have announced that they will file motions in the Bankruptcy Court to dismiss the Bankruptcy case. They will also challenge the right of the City to reduce pensions at all.
- Retirees do have people who are looking out for their interests. The Bankruptcy Court has ordered that a committee be created to represent City retirees in the Bankruptcy case. Their job will be to fight for the rights of retirees and will negotiate with the City. The members of that committee are being selected at this time.
- There is little that individual retirees can do on their own. Retirees should monitor the progress of the case in the news, with your union, and you may contact one of the Associations of Retired employees for more information:
- Detroit Retired City Employees Association: http://www.drcea.org/
- Retired Detroit Police & Fire Fighters Association: http://rdpffa.org/
Important notices that creditors will receive in a Chapter 9 bankruptcy filing
- Notification of Chapter 9 Bankruptcy Filing – Notice of the filing of a Chapter 9 case is published at least once a week for three consecutive weeks in at least one newspaper of general circulation in the district where the case is filed, and in a newspaper that is commonly read by financial institutions, bondholders and bond dealers selected by the Court.
- List of Creditors – Each municipal debtor is required to file a list of its creditors. The list is called the matrix. If the bankrupt municipality listed you on the matrix, you will receive notice of the filing of the Bankruptcy. You should also receive copies of future documents and pleadings filed in the case.
- Preferential Transfer Notifications– A preferential transfer occurs when a debtor makes a payment, or transfers something of value, to a “preferred” creditor before the debtor files the Bankruptcy. These transfers or payments may be voluntary, as in the case of a payment to pay a favorite or critical vendor, or involuntary, as in the case of a creditor’s garnishment of the debtor’s accounts, or the foreclosure, repossession or attachment of the debtor’s accounts, etc. If you are a creditor, or vendor of the city and you receive payments on account from the city, you may receive a notice from the city demanding that you return all payments that you received on account from the city for up to one year prior to the date of the filing of the case. These demands are common and should be taken seriously.
- Preferential transfers are looked upon with disfavor. Such payments are often made to powerful creditors, or to favorite creditors, or to a creditor whose cooperation will be needed in future cases, or to someone with whom the debtor has a close personal or familial relationship. These transfers are often intended to give a greater benefit to the “preferred” creditor who receives the payment instead of other creditors. The payment may allow the preferred creditor to receive more than they would have received through the Bankruptcy case, instead of the creditor having to request payment through the Bankruptcy case and be on equal footing with all other creditors.
- Not all payments made to a creditor are required to be returned, some transfers are not paid to preferred creditors, are not preferential, or do not allow that creditor an unfair advantage over other creditors. You may have defenses to the debtor’s demand for repayment. Please consult with a Bankruptcy attorney for a more detailed review of your case, and advice regarding what might be a preferential transfer.
Who is Kevyn Orr?
- Kevyn Duane Orr is the emergency manager of the city of Detroit, Michigan. He was appointed by Governor Rick Snyder on March 14, 2013.
- Orr holds B.A. and J.D. degrees from the University of Michigan. Orr practiced law in Washington, D.C., specializing in complex Bankruptcy reorganization cases. Mr. Orr represented Chrysler in connection with its 2009 Bankruptcy and restructuring. According to Bankruptcy Court records, Orr billed $700 an hour during the Bankruptcy. The Detroit News described Orr as “the lead attorney on convincing the court to allow Chrysler to abruptly close a quarter of its U.S. dealerships.” The Chrysler Bankruptcy proceeding was widely regarded as successful.
- Before his appointment as emergency manager of Detroit, Orr was employed with the Executive Office of the United States Trustee, a division of the United States Department of Justice that monitors the nation’s Bankruptcy system. He also worked at the Federal Deposit Insurance Corporation.
Is Kevyn Orr’s position legal?
- Yes. For now. The law presumes that he has authority to act; at least until a court declares that his position is illegal. There have been several challenges to the legality of the appointment of Kevyn Orr as the emergency manager of the City of Detroit and to the legality of his decision to put the City of Detroit into Bankruptcy. These challenges were started in the state courts of Michigan, but those challenges were placed on hold when the Bankruptcy case was filed. The automatic stay prevents any of the state court lawsuits from proceeding. However, these legal challenges will probably be continued in the Bankruptcy Court, where Judge Rhodes will be called upon to decide these issues.
- Detroit’s Public Pensions announced that they will file formal objections to the Detroit City Bankruptcy. They will likely object to the constitutionality of the Emergency Manager statute, and the constitutionality of the decision to file the Bankruptcy.
I am a contractor with the City of Detroit. What should I be doing now? How should I be fulfilling my contract? Should I retain an attorney?
- Vendors and contractors are strongly recommended to contact a Bankruptcy attorney before making any decisions regarding their performance under their contracts with a municipality that has filed a Chapter 9 case.
- Chapter 9 proceedings are designed so that there is as little as possible interruption in the everyday ongoing obligations of the City. In a Chapter 9 case, the City is not required to seek the Bankruptcy Court’s approval to conduct its business, to borrow money, or to enter into contracts with vendors.
- In Chapter 9 cases, like Chapter 11 cases, the debtor will often file motions with the Court called “First Day Motions”. These motions often address issues that affect vendors and contractors that are critical to the operations of the City. Current vendors and contractors should consult with their own attorney to determine whether or not there have been any First Day Motions filed and whether any such motions affect them.
- If you provide critical supplies or services to the City, and those supplies or services are necessary to its continuing operations, there is a good likelihood that that contract will continue to be honored and you should continue to receive payments. Critical vendors should consider contacting the city departmental officer responsible for their contract to discuss how that department intends to deal with the contract and to determine specifically how future transactions, obligations, and payments are to be handled.
Chapter 9 Bankruptcy automatic stay
- The automatic stay is one of the most important protections that the Bankruptcy Code gives to a debtor. The automatic stay is found in section 362 of the Bankruptcy Code. The stay is effective immediately at the moment that the Bankruptcy case is filed, and it operates to stop all collection actions against the debtor and its property upon the filing of the petition.
- Additional automatic stay provisions are applicable in Chapter 9 that prohibit actions against officers and inhabitants of the debtor if the action seeks to enforce a claim against the debtor. Thus, the stay prohibits a creditor from bringing a legal action against an officer of a municipality to force that officer to perform any actions that related to a pre-petition debt. It also prohibits a creditor from bringing an action against an inhabitant of the debtor to enforce a lien on or arising out of taxes or assessments owed to the debtor.
- If you are a city resident, and you are engaged in an appeal of your property taxes or the assessed value of your property, the automatic stay may prevent you from continuing with those actions. Our law firm has successfully obtained permission from the Bankruptcy Court to continue with property tax appeals for our clients. Also, the City of Detroit has filed motions in the Bankruptcy Court to allow tax appeals to proceed normally. Please contact us if you have any questions regarding your city property taxes.
- The filing of a Chapter 9 petition does not stop the payment of pledged special revenues for payment of indebtedness secured by such revenues. Thus, an indenture trustee or other paying agent may apply pledged funds to payments coming due, or distribute the pledged funds to bondholders without violating the automatic stay.
Chapter 9 Bankruptcy Cram Down
- Plans filed in Chapter 9 cases are similar to plans filed in Chapter 11 cases. Plans of reorganization are generally proposed after negotiations with creditors. The debtor in Bankruptcy will seek to obtain the willing consent of creditors. A plan places creditors of similar type, i.e. secured creditors, unsecured creditors, bondholders, etc., into groups. The debtor’s plan will make a proposal on how the claims in each group are to be treated. Some claims may be paid in full or not paid at all.
- Once the plan is filed, the creditors will have the right to vote on the plan, and whether or not to accept the plan’s proposed treatment of that creditor’s claim. In order to get the plan approved, the debtor must obtain a “yes” vote from a majority of the creditors in each of the classes.
- If the debtor is unable to obtain the willing agreement of a majority of creditors, the debtor may propose a plan that “crams down” the creditors’ claims. A cram down in Chapter 9 cases means that the debtor requests the Court to approve its proposed plan over the objections of creditors.
- Negotiated plans, approved by a majority of creditors, are the most common way that a Bankruptcy plan is confirmed, but cram down plans are allowed.
- Due to the general public opposition to the appointment of an emergency manager, to the filing of Bankruptcy, and to the City’s proposed plan to make drastic cuts to the pensions of public employees and retirees, it will be very difficult for the City of Detroit to obtain a majority “yes” vote on its plan.
Chapter 9 Confirmation of the Plan
- One of the powers that a Bankruptcy Judge has over a municipality is the power to approve or reject a municipal debtor’s proposed plan of reorganization. The standards for plan confirmation in Chapter 9 cases are a combination of the rules of Chapter 9, and the rules of Chapter 11 that have been adopted for use in the Chapter 9 case.
- There are seven general conditions required for confirmation of a plan. If the plan meets these requirements, the Court must confirm the plan whether or not a creditor objects; they are:
- The plan complies with the Bankruptcy Rules established by Congress for Chapter 9 cases;
- The plan complies with the provisions of Chapter 11 that are made applicable to Chapter 9 cases;
- The legal fees of the debtor’s attorneys, professional fees paid to any professionals, such as accountants, appraisers, and other experts, and any costs incurred in the filing and prosecution of the case have been fully disclosed to the Court and creditors, and the fees and costs are reasonable;
- The debtor is not prohibited by law from taking any action necessary to carry out the plan ( this will be a key objection to the Detroit plan as creditors and Pension funds will challenge the right of the City to reduce the funds to be paid to retirees in their pensions since they believe that the Michigan State Constitution prohibits the City from reducing pension benefits);
- Unless the creditor has agreed to a different treatment of their claim, the plan provides that on the date of confirmation, all creditors with claims identified in section 507(a)(1) will receive full payment of their claim;
- If the debtor requires the approval of any regulatory agency, or if approval of any legislature is necessary to carry out any provision of the plan, that approval has been obtained; and
- The plan is in the best interests of creditors and is feasible.
Chapter 9 Bankruptcy Discharge
- A municipal debtor receives a discharge in a Chapter 9 case when the plan is confirmed. If the plan provides for the payment of any money, the issuance of any bonds or securities, then after the funds, bonds or securities are given to the agent appointed by the Court to make the payments or deliver the securities, and if the municipality will be issuing bonds or securities, the discharge will not enter until the Court determines that the bonds or securities are legal and the method of disbursement is valid.
- There are two exceptions to the discharge in Chapter 9 cases. The first is for any debt excepted from discharge by the plan or order confirming the plan. The second is for a debt owed to an entity that, before confirmation of the plan, had neither notice nor actual knowledge of the case.