Judge Steven W. Rhodes of the United States Bankruptcy Court issued a historic ruling Tuesday morning that Detroit has met the criteria of insolvency and is therefore eligible for bankruptcy, becoming the largest municipality in U.S. history to enter Chapter 9 protection.
“The court finds that the city of Detroit was and is insolvent,” Judge Rhodes said from a prepared text that read like a treatise on bankruptcy law. “The court finds that this case was filed in good faith and should not be dismissed.”
He said the court has found that the city was generally not paying its debts as they were due, something that emergency manager Kevyn Orr and proponents of bankruptcy have long argued.
Sale of city assets, including the much written about and discussed Detroit Institute of Arts, seemed to have been spared in this ruling, because Rhodes said the city itself has established that selling assets would not address the long-term fiscal issues of the city.
But the city’s deplorable public safety conditions, begging for swift reform, was a key component of Rhodes’ ruling, especially after Detroit Police Chief James Craig testified about the capacity and conditions of the Detroit Police Department.
“The testimony of Chief Craig established that the city is in a state of service delivery insolvency,” Rhodes said in the ruling.
The sweeping ruling, which was watched across the nation, will have wide impact on financially troubled municipalities and is significant because Detroit became the first city in the nation to seek chapter 9 protection on July 18 when Orr filed.
The judge also ruled that pensions of retirees can now be slashed because, “If the 10th Amendment prohibits cuts of pension benefits in this case, then it would also” prevent cuts to other debts. However, he quickly noted that until there is a plan of adjustment that is determined to be fair and equitable, he will not approve any dire cuts to pensions.
Labor lawyers and representatives of retirees have been arguing that pensions are protected under the state constitution.
But Rhodes countered that argument in his ruling when he explained that, “It has long been understood that bankruptcy law entails the impairment of contracts.”
At the heart of the legal challenge to Detroit’s filing for bankruptcy was if Orr, the emergency manager, had negotiated in good faith.
Rhodes said the city did not negotiate in good faith but that the timing of the entire process did not allow for that and it was, as he put it, “impracticable,” referring to pre-filing negotiations.
In a rather interesting choice of words, Judge Rhodes said even though the city did not negotiate in good faith with the parties involved, “the totality of the circumstances” the city was facing showed that Orr filed for bankruptcy in good faith.
The Detroit Branch NAACP, labor and other groups objected to the bankruptcy filing, claiming it was a fixed plan from the beginning, especially after some of the revelations that came out in the depositions.
Rhodes addressed that as well, saying that many people in Detroit hold on to that narrative.
“In some particulars, the record does support the objectors’ view,” Rhodes said, but warned that was not enough to convince him otherwise.
“Certainly the court must conclude that the bankruptcy filing was a foregone conclusion, at least in 2013,” Rhodes said.
On the controversial EM law, which has been the basis for opposing Orr’s appointment, Judge Rhodes said, “The popularity of a decision to appoint an emergency manager is not a matter of eligibility under federal bankruptcy laws. The City of Detroit is a municipality,” while calling the protest and testimonies in court on Sept. 19 against bankruptcy “moving, compassionate, compelling and well-articulated arguments.”
Judge Rhodes’ decision now sets the stage for what will go and stay in Detroit as far as satisfying billions owed to creditors as well as the fate of pensioners.
Detroit Mayor-elect Mike Duggan was one of the first leaders in the city to respond to the historic ruling.
“This is a day in Detroit’s history that none of us wanted to see. Now that Judge Rhodes has ruled the city eligible for bankruptcy, we are about to move into the Plan of Adjustment phase that is likely to define our city government for years to come,” Duggan said.
“I’m going to do everything I can to advocate on behalf of Detroit’s future in this process. We need to make sure the retirees are treated fairly on the pensions they earned and we need to make certain we come out of bankruptcy in a way we can afford to provide the quality of city services the people of Detroit deserve.”
Emergency manager Orr, who now holds the cards moving forward, hailed the federal court decision.
“We are pleased with Judge Rhodes’ decision today, and we will continue to press ahead with the ongoing revitalization of Detroit. We look forward to working with all our creditors — pension funds, unions and lenders — to achieve a consensual agreement on a restructuring plan that balances their financial recoveries with the very real needs of the 700,000 citizens of Detroit,” Orr said.
“We are making good progress. In addition to today’s important decision, Detroit has transferred its electric operations and customers to DTE Energy and begun a program to improve city lighting. It has announced plans to privatize trash collection that will save $6 million a year while improving services and adding curbside recycling. It has invested in sorely needed equipment for its police, fire and other first responders.
“The city also has arranged, pending a court hearing later this month, $350 million of post-petition financing to improve its financial condition, lessen some of its debt obligations and make much-needed investments.”
Orr said the city is also committed to the federal mediation already under way aimed at resolving disputes with its creditors and “we fully support U.S. District Court Chief Judge Gerald Rosen’s efforts to find additive solutions, particularly from the philanthropic community, to the city’s financial issues.”
He said time is of the essence and that he and his team will move forward as quickly as possible.
“We plan to submit a Plan of Adjustment in the coming weeks, file a Disclosure Statement early next year and work to exit Chapter 9 protection by the end of September,” Orr said. “We hope all parties will work together to help us develop a realistic restructuring plan that improves the financial condition of Detroit and the lives of its 700,000 citizens.”
Mark Schauer, the presumptive Democratic nominee for governor of Michigan in 2014, also responded to the ruling in Detroit, the state’s largest Democratic constituency.
“It’s time to rebuild the great city of Detroit. How we got here isn’t as important as how we build a better future for Detroit’s families, businesses, and neighborhoods,” Schauer said. “As the bankruptcy restructuring plan advances, Gov. Snyder and Kevyn Orr have a responsibility to uphold Michigan’s constitution by protecting hard-earned retiree pensions over Wall Street creditors.”
The gubernatorial candidate said he “strongly urges Gov. Snyder to empower Mayor-elect Duggan to lead the city’s day-to-day turnaround efforts. It’s time for Detroiters to lead Detroit.”
The DIA responded that it will continue to support the city’s efforts to address the financial crisis while maintaining that, “the DIA art collection is a cultural resource of the people of Detroit, the tri-county area and the entire state of Michigan. The museum’s collection is the result of more than a century of public and private charitable contributions for the benefit of the public.
“Protected by a charitable and public trust, the collection has survived several mu
nicipal fiscal crises and financial downturns, including the Great Depression, free from threats to its existence.”