Rod Meloni: The Heavy lifting of Detroit

Detroit's bankruptcy case on fast track

By Rod Meloni - Reporter, CFP ®

DETROIT - In 2009 President Obama's Auto Industry Task Force showed us how a "quick rinse" bankruptcy could wash away a century of financial sins in 30 days or less.

It moved both General Motors and Chrysler through the rarely used and less heard of 363 bankruptcy process that turned the traditionally glacial pace of previous bankruptcies on their collective ears. So it is difficult telling Metro-Detroiters who remember that how traditional bankruptcy and in particular municipal bankruptcy are slow-as-snails court proceedings. They are. That is, unless you are federal Judge Steven Rhodes. He is now operating his own version of a quick rinse.

Read more: Detroit bankruptcy case on fast track

Judge Rhodes has published his desired schedule for Detroit's historic Chapter 9 filing. He wants to hold the eligibility trial, the process of deciding whether Detroit is truly broke, on Oct. 23 and 24, 2013. Consider that other municipal bankruptcies have taken a year to argue the eligibility issue and in one instance the court ruled the city did not qualify! That's right, after a year. Stockton, California is currently in its second year of municipal bankruptcy hearings.
That Rhodes would take up the eligibility case three months after filing and assign a quick schedule of motion hearings in between dramatically moves the case speedily ahead. He also is looking to have a full plan of adjustment for the City of Detroit, the way to exit Chapter 9 on March 1, 2014; just seven and a half months after the initial filing and two months before Easter. We are not saying here Judge Rhodes has already decided Detroit's eligibility, he will hear the case. But unless something dramatic happens, it's likely he will green light Detroit's Chapter 9 before Thanksgiving.

Local 4 bankruptcy expert and Plunkett Cooney bankruptcy practice director Doug Bernstein told Local Four "it's faster than anybody else has put in place thus far and he's got to balance the requirement everybody get their due process and their day in court."

Former Detroit Bankruptcy Judge Ray Reynolds Graves agrees.

"Everyone is aware that the judge means business and we're gonna get this done because he knows having this thing drag on three or four years is in no one's best interest" he said.

Graves adds there are considerable political as well as financial issues at play.

"Mr. Orr wants this done before his appointment expires. The Governor probably wants this done before the 2014 election campaign gets serious."

But the biggest reason they say Rhodes is moving so quickly through Chapter 9 is because it so ridiculously expensive. Herds of lawyers with the meter running have already run up Detroit's cost above ten million dollars. Chapter 9 municipal bankruptcy requires the city come out on the other side able to function and grow. If it is sitting on a mountain of debt because of attorney fees, that goal is not easily accomplished. So Rhodes intends to stop the meter running as soon as possible.

In the meantime today he went about the business of disposing of union activist Robert Davis' claims about the unconstitutional nature of Kevyn Orr's appointment. Rhodes told Davis' attorney there is no way he would back any attempt to unseat Kevyn Orr. But he is willing to allow Davis to go to Ingham County Court and hold his possibly embarrassing hearing over whether Governor Snyder and State Treasurer Andy Dillon broke the law in the state's emergency loan board's hiring of Kevyn Orr as Detroit's Emergency Manager.

With Rhodes' blessing [removing the case from the Chapter 9 automatic stay halting all legal actions against the City of Detroit] Davis looks to have a trial, telling Local 4 today "Judge Collette has the freedom to determine whether or not a trial should be had and if a trial is ordered then you already knew the key witnesses at the trial will be the Governor, the State Treasurer and Kevyn Orr and the members of the Emergency Loan Board."

The judge later slammed the City of Detroit's attorneys who defended Kevyn Orr's requirement of having everyone looking into the City's "data room" computer program of extensive financial data sign a confidentiality agreement. He will rule on that in the next week. Finally Judge Rhodes also put off a decision on whether to allow a bond insurer named Syncora to snap up Detroit's casino tax revenues until next week as well. That's a $120 million dollar a year decision.

The judge and Bernstein ultimately say we all need to know that Wall Street and every teetering-on-the-edge American city is watching Detroit's Chapter 9 process. Wall Street is very interested because municipal lending could dry up coast to coast if Detroit prevails in making its bondholders unsecured creditors. Other cities will be looking at how to do these cases well themselves because there are many on the brink of financial disaster; Baltimore and Los Angeles are two among many we are hearing could follow Detroit down this road.

In wrapping up all of these concerns Judge Graves said it best: "I think it is remarkable, it is unusual and Detroit is gonna write the book on how to do a Chapter 9 expeditiously and fairly."

There is no doubt a lot at stake; we'll be there for every twist and turn.

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