Academic journal article Fordham Urban Law Journal

The Detroit Bankruptcy, Pre-Eligibility

Academic journal article Fordham Urban Law Journal

The Detroit Bankruptcy, Pre-Eligibility

Article excerpt

Introduction   I. The First Main Event: Eligibility   II. Before the Main Event: Detroit's Bankruptcy, Pre     Eligibility         A. Dispute Resolution           1. The Automatic Stay and an Additional Injunction           2. Establishing a Retiree Committee           3. Access to Casino Revenues           4. Discovery Generally           5. Pre-Trial Eligibility Matters        B. Other Elements           1. Litigation Avoidance           2. Team-Building           3. Keep Things Moving           4. Interactivity           5. Procedural Justice Conclusion 

INTRODUCTION

On July 18, 2013, the City of Detroit, Michigan filed the largest municipal bankruptcy in history. (1) The filing fueled a national conversation about ailing governmental units and the gap between pension promises and financial realities. Eyes were trained primarily on one major court decision: after a trial, the judge would determine whether Detroit met the statutory eligibility requirements for Chapter 9 bankruptcy. If the City jumped that hurdle, then parties would resume negotiations over a plan of adjustment, which would require court review and approval to be effective.

Fast-forward several months, and the script already diverged from expectations. As predicted, the City of Detroit has been deemed eligible for bankruptcy. (2) Not as predicted, the court's lengthy eligibility decision tackled, head-on, the issue of pension obligations. The court held that the Michigan Constitution made pension entitlements contractual obligations that could be modified and impaired in a Chapter 9 plan of adjustment. (3) Whether a proposed plan could and would satisfy the legal requirements remained to be seen.

As the rest of the world looks ahead, however, this brief commentary looks back. Specifically, it examines Detroit's bankruptcy from its commencement through the eve of the eligibility trial. I draw significantly on a review of primary source documents on the court's docket and digital audio recordings of every court hearing through that time. This analysis sets a foundation to examine the interaction between federal courts, a major metropolitan city in serious financial distress, and its creditors and stakeholders.

Part I lays the groundwork by briefly discussing eligibility, the front-end flashpoint in Chapter 9 bankruptcies. Part II examines activity in Detroit's bankruptcy in the pre-eligibility-trial period that history otherwise might omit. Representative and relevant judicial acts of this period are divided into two groups. Part II.A reviews the court's dispute resolution activity. The willingness to rule quickly and either from the bench or quickly thereafter has been essential to the progress of the case. Part II.B identifies other elements to watch in this case beyond traditional dispute resolution.

I. THE FIRST MAIN EVENT: ELIGIBILITY

The Chapter 9 eligibility requirement for municipalities is not merely a pro forma hurdle. (4) A debtor municipality bears the burden of proof on each element of the Chapter 9 eligibility test by a preponderance of the evidence. (5) This routine expectation of front-end judicial gatekeeping has no analogue in voluntary Chapter 11 cases. (6) Creditors sometimes allege that a Chapter 11 case should be dismissed because the debtor lacks good faith. (7) But judges rarely preside over trials about the entitlement of businesses to file bankruptcy.

In a voluntary Chapter 11, the entry of an order for relief occurs simultaneously with the filing of the petition. (8) In a Chapter 9, the court does not enter the order for relief until it makes the eligibility finding. (9) The order for relief rather than the petition date is the trigger for some Bankruptcy Code provisions. (10) The cloud of potential ineligibility can stall negotiations with creditors and make it impossible to complete some transactions." After all, a finding of ineligibility will generate case dismissal--back to the world of state law and races to the courthouse. …

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