Q & A on C of D

Yesterday's Is. It. Legal. provoked some comments and questions. Some quick replies above the line, so to speak.

Q: Is it clear that this is going to be a cramdown plan?

    Multiple groups of creditors have not settled with the City (e.g., those with financial interests in certificates of participation, water and sewer bonds, LTGO, a few police and fire groups). Non-settling claimants are actively challenging plan confirmation from top to bottom, including whether Detroit's current plan passes muster under the standards applicable to nonconsensual plans. Those who hold or insure COPs are most relevant to yesterday's comments on unfair discrimination.  In addition to offering little payment, the City has challenged the COPs' validity altogether. Will all of that get settled?  Stranger things have happened in the history of bankruptcy and municipal finance law. But I would guess that result would necessitate some sharing in the Grand Bargain premium.

Q: If it is not a cramdown, then all of the unfair discrimination and absolute priority issues are moot.

    I disagree. The strength of the cramdown-related arguments contribute to the leverage of the parties to compromise and settle.

Q: Isn't Detroit's Grand Bargain is pretty readily distinguishable from previous gifting situations?   Detroit involves a truly donative contribution from a non-creditor third party that is essentially adding assets to the estate conditioned on a particular distribution.

   Putting aside whether any of the components to the Grand Bargain are purely donative, the components cannot be uniformly characterized. The State of Michigan contribution, for example, is not purely donative. It is more akin to mass tort settlements in which insurers and third parties fund part of the plan in exchange for a broad release and channeling injunction. In addition, creditors challenge whether some foundation gifts, principally motivated by a desire to save the art, were actually conditioned on a distribution that excludes financial creditors. Will be hard to prove, of course, but goes to the asserted premise that this was the only way to get the deal done.

    Someone may be able to distinguish Detroit's plan from the gifting plans that did not pass muster with the Second and Third Circuits - which are not binding on the Detroit court in any event. It is the City's reply brief that leaned on WorldCom, triggering my reaction. If this plan is found to be acceptable, it need not, and should not, depend on a broad holding that third-party contributions are categorically irrelevant to unfair discrimination analysis.  

    Pension claimants' health care losses can come into the analysis;  the structure of the argument depends on the test for unfair discrimination that is applied (raised in an earlier post in May).  I read the City's brief as doing something different: suggesting that the difference between the distribution to COPs and pension claimants is smaller than it seems because pension claimants face cuts in another class. COPs holders could have holdings in other classes too.