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Detroit Bankruptcy Hearing Will Decide Speed Of Municipal Eligibility Trial

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Photo via AP.
Photo via AP.

Detroit is bankrupt according to the national media and its emergency manager, Kevyn Orr -- but technically, it isn't bankrupt yet.

Under Chapter 9 bankruptcy law, filing for bankruptcy is only the first of many steps for Detroit, which claims to have $18 billion in long-term debt. The code has rigorous qualifications that the city must meet in order to show that bankruptcy is the only available option.

Attorneys representing Detroit's emergency manager will be seeking to convince a bankruptcy judge that Detroit is eligible to go through the process. Labor unions, pension fund representatives and bondholders -- all creditors who stand to lose hundreds of millions, if not billions, of dollars in obligations -- could fight to prove that Detroit should settle its debts without a judge.

What is likely to be a fierce court battle begins Friday, when U.S. Bankruptcy Judge Steven Rhodes hears arguments over his schedule for Detroit's eligibility to file for bankruptcy. Even that timetable is proving controversial.

Rhodes presented a schedule that would give opponents until Aug. 19 (less than three weeks) to file any objections they have to Detroit's bankruptcy. He also is expected to appoint another judge who will serve as a mediator between Orr and creditors during the process. Rhodes' proposal sets the eligibility trial for Oct. 23 -- meaning that challengers to the city's bankruptcy will have less than three months to submit all evidence that the city isn't bankrupt. Orr has said that he wants the city to exit bankruptcy proceedings by next fall, when his term as emergency manager is expected to come to an end.

"It is an aggressive timeline," Orr's spokesman, Bill Nowling, told The Huffington Post. "But I think it's one that everyone can meet, and the judge thinks it's one everyone can meet."

That timeline could prove difficult to enforce. San Bernadino, Calif., filed for bankruptcy in July of last year. A judge will finally decide whether the city is eligible to go through bankruptcy at an Aug. 28 hearing -- almost 14 months since eligibility hearings began. It took a judge nine months to decide that Stockton, Calif., another city that is currently in bankruptcy court, was eligible to file.

"These people have much more at stake in Detroit than they did in San Bernadino," Michael Sweet, a municipal restructuring expert and attorney with Fox Rothschild, told The Huffington Post. "I think it's a big stretch. It's possible, but given what's happening and given the fact that there are so many things to decide, I think it's pretty optimistic to think it's going to happen on a fast track."

But Rhodes is known in legal circles for running a tight ship in his courtroom. "I could certainly see him pushing the sword," said Peter Henning, a law professor at Detroit's Wayne State University. "If a lot of evidence has to be presented, it could be months" to get a ruling on whether Detroit's problems can be solved in bankruptcy court.

Nowling said that critics of the schedule were just voicing "standard objections" to Detroit's decision to file for bankruptcy.

"People who really don't have any good ideas on how to fix anything attack the process," he said. "The process won't work, or the process is too short, or the process left somebody out ... instead of getting to the substance of the matter."

Once Rhodes issues a decision on the schedule, attorneys on both sides will spend the next 90 days compiling evidence and preparing for a trial that will, ultimately, decide whether the city is eligible to go through bankruptcy proceedings.

Creditors could argue that Detroit isn't technically insolvent, that it doesn't intend to make a long-term plan for exiting bankruptcy court, or that it didn't negotiate in good faith with labor unions and other parties.

"I don't think there will be any question over whether Detroit is insolvent," Sweet said. "The other two factors, though, could definitely get play."

Nowling said Orr and his restructuring team held more than 100 meetings with stakeholders and creditors before filing for bankruptcy, which happened just minutes before a state court judge was supposed to hold an emergency hearing from pension plans and unions requesting to block the bankruptcy.

"It's hard to say that we won't negotiate in good faith when we put a proposal on the table and instead of coming back with a counterproposal, you sue us," Nowling said. "The emergency manager has been sued three times in this process by the unions. That's a pretty clear indication that any type of discussions or negotiations in good faith are over -- when people start suing you."

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