Is.It.Legal.

In a week bustling with municipal finance activity (e.g., conclusion of the Stockton confirmation hearing), the Michigan Senate rather easily passed legislation to contribute money to Detroit's restructuring, earmarked for pension claims and permanent insulation of the City-owned art museum against the City's creditors. The bankruptcy is not fully resolved yet, of course. For one thing, creditor voting is not complete, and some pension claimants must be resolicited because of errors in ballots. Assuming that the requisite votes materialize, the City has the burden to prove that its plan of adjustment meets all requirements of the Bankruptcy Code by a preponderance of the evidence. Due to a series of document production delays on the City side, the trial will likely be postponed by at least a few weeks.

Since I last wrote about Detroit, the City filed an omnibus reply to plan objections (doc #5034). Exceeding 250 pages, brief it is not. But the City had much ground to cover, and the end pages are a very useful chart breaking down who made which objections. Several assertions I found troubling relate to whether the plan unfairly discriminates in favor of pension claimants who benefit from the Grand Bargain premium and against dissenting classes of creditors who do not.

For example, the City argues that payments coming from a third party - the state, foundations, anyone - can be disregarded in an unfair discrimination analysis (p. 30). The City's lead citation is a 2003 unpublished SDNY bankruptcy court decision in the WorldCom case, in which the judge held  (p. *60) that heightened returns contributed by one creditor class to another did not make for unfair discrimination or a violation of the absolute priority rule. Even with a requirement of good faith policing the boundaries, couldn't any and every reorganization be structured such that some non-debtor entity or individual contributes resources directly to a class of claims, thus gutting the unfair discrimination test?  But also, since the decision in WorldCom, the Second and Third Circuits have held that "gifting" between classes in the DBSD and Armstrong cases violated the absolute priority rule. Unfair discrimination and the absolute priority rule are separate tests, and the latter does not apply neatly to an ownerless city. But the principles underlying the Second and Third Circuit decisions make earlier decisions like WorldCom less helpful, at the very least.

Also, the City points out that pension claimants are experiencing major cuts to health care benefits (OPEB), and taking those cuts into account reduces the discrimination between pension claimants and financial creditors, although does not cite cases for this proposition, at least in this reply brief (see pp 33-34).  Let me shout from the rooftops that the OPEB changes are significant and painful for employees and retirees. But OPEB claims are in a separate class of Detroit's plan, and unfair discrimination is arguably best understood as class based, not claimant based. In many bankruptcy cases, creditors considerably less sympathetic than city workers are forever slipping in and out of holding claims and interests in multiple classes.  What then? 

These concerns do not answer the query posed by Detroit Free Press reporter Nathan Bomey. My comments do not foreclose the possibility that the plan passes muster. Consider me quaint for awaiting the confirmation hearing. But the significance of these two issues should not be lost in the shuffle. If you rationalize, "no worries, this is a once in a lifetime case...sui generis...the arguments won't be used again," I have a valuable art collection I'd like to sell.  

For more thoughts and news on how Detroit's case is unfolding, among other things, follow me on Twitter at @melissabjacoby.