The Groundwork Is Being Laid for a Management Bankruptcy of Detroit

4798Even as the state Treasury prepares to begin another financial review of Detroit's books, a plan is being solidified in the governor's office that would guide Michigan's largest city through what is being called a managed bankruptcy. 
The working concept, still evolving, assumes that the state's financial review would find severe financial distress in Detroit, that Mayor Dave Bing and City Council would be unable to push through overdue restructuring, and that the process would culminate in appointment of an emergency financial manager under Public Act 72.

The case would be filed under Chapter 9 of the federal bankruptcy code, according to two ranking sources familiar with the situation, following efforts to reach prenegotiated settlements with as many key creditors -- unions, vendors and pension funds among them -- as possible before any filing.

"Clearly, we will always try to do that," one source familiar with the situation said in an interview Thursday. "You can move on a much more expedited basis if you can demonstrate that your cash is running out" -- as Detroit clearly is with each passing week.

The evolving bankruptcy scenario is a clear signal that Gov. Rick Snyder and Treasurer Andy Dillon have lost confidence in the ability of the mayor, his management team and council to honor their commitments under the eight-month-old consent agreement with the state, or to make any meaningful progress on restructuring.

Contingency planning in Lansing for a possible Chapter 9 bankruptcy filing is not likely to be popular inside council chambers or the Mayor's Office. But it's the responsible and necessary thing to do, whatever the protests from the elected officials whose denial and self-delusion are hastening the arrival of a reckoning they can no longer avoid.

The goal of a managed bankruptcy is to streamline the protracted process by minimizing the chaos, uncertainty, delay and steep costs associated with Chapter 9. It would be the largest municipal bankruptcy in the nation's history, an unambiguous symbol of the city's epic failure and a chance for a fresh start.

"That's exactly the strategy you should do," said Douglas Bernstein, managing partner of Plunkett Cooney's banking, bankruptcy and creditor rights group. "You're never going to be able to get all the unions -- and all you need -- to agree in advance, not a chance. You try to do it outside of bankruptcy or you drop it in. It's prudent, too. It's very prudent."

In bankruptcy, pre-packaged deals arrange settlements with all creditors in advance of a filing that is usually followed quickly with a plan of reorganization (called "plan of adjustment" in Chapter 9). A pre-negotiated deal akin to the one being explored in the Governor's Office would reach settlements with some creditors and leave others to be litigated in court.

A Chapter 9 filing for Detroit may be increasingly likely given the dysfunction and infantile posturing atop City Hall. But bankruptcy is not yet certain, provided three obstacles can be removed or settled outside of court: pending litigation designed to slow the process; pension debt of $1.4 billion and $440 million in outstanding swap contracts; and liabilities for retiree health care.


Source: Detroit News | Daniel Howes
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