A judge has decided that insolvent Detroit is eligible for bankruptcy
By N.L. | CHICAGO
FOR A city as indebted as Detroit it may seem surprising that a judge would have to decide whether it is eligible for bankruptcy. Nonetheless this is what Judge Stephen Rhodes has been obliged to consider since the city filed for Chapter 9 protection in July. On December 3rd he decided that Detroit was insolvent and could move ahead with its bankruptcy filing. That is good news for the city, but bad news for its over 100,000 creditors, among whom are pensioners, bondholders and even those awaiting payouts in lawsuits against the city.
In his ruling, Mr Rhodes turned away arguments that the bankruptcy violated the federal constitution. The use of federal mechanisms for resolving municipal debts does not violate the tenth amendment, he said, citing the Supreme Court case of US v Bekins. Then he turned to the state constitution, which protects the pensions of public workers, except in the case of bankruptcy. Mr Rhodes ruled that those constitutional protections "do not apply to the federal bankruptcy court" and that pensions ought to be treated like the city's other debts.
Creditors also tried to argue that the city did not negotiate in good faith, which it must do in order to be approved for bankruptcy. On this point the judge's ruling was particularly interesting. He deemed that the city did not satisfy the good-faith requirements with its proposal to creditors in June. Moreover, he said that creditors could not be faulted for failing to counter the city's restructuring deal, as it was vague and creditors were given little time to consider the offer. But these concerns were trumped by his ruling that it was impracticable for the city to negotiate with so many creditors.
One of the criticisms leveled at Detroit's emergency manager, Kevynn Orr, and Michigan's governor, Rick Snyder, is that the bankruptcy was a foregone conclusion even before negotiations. Of course it was, said Mr Rhodes. They should have filed years earlier.
The unions are appealing the decision. Meanwhile, the bankruptcy hearings will continue—the next step is for the city to file its restructuring plan. Ultimately Detroit hopes to emerge from bankruptcy towards the end of 2014.
