Examining the body of evidence in Detroit's bankruptcy trial
Anatomy of a takeover.
Published: April 1, 2014
Detroit Emergency Manager Kevyn Orr stood behind a lectern in a ballroom on the University of Michigan’s campus, telling an attentive crowd how the civic-minded values absorbed here at his alma mater helped lead to a job that, when first offered, he wanted no part of. His initial response wasn’t just no, but an emphatic “Hell no.”
What “poor schmuck,” he thought, would want to take on a problem as big as Detroit, with its massive debt and crumbling infrastructure, its relentless exodus of residents and the epic blight they leave behind?
But then people close to him — in particular the managing partner at the Jones Day law firm where he worked, and his wife, a surgeon at Johns Hopkins Hospital in Baltimore — prevailed on his sense of civic duty, leaning on the do-gooder in him to forgo the pleasures of sunny Florida, where he was slated to head a new office for his high-powered firm. Instead, he took on the Herculean task of turning around a city that has been caught in downward spiral for the past 60 years.
It is a stirring narrative, given even more poignancy by the fact that this speech, delivered last Tuesday, marked the one-year anniversary of the day Orr stood behind another lectern, shoulder to shoulder with Gov. Rick Snyder and then-Mayor Dave Bing. Then, he talked about the challenges that awaited him as he took control of the city, enthusiastically accepting both the far-reaching power and staggering responsibilities he was about to assume.
There is, however, another narrative, one far more shadowy than the virtuous tale Orr served up in his University of Michigan presentation.
It is a story that developed in small pieces, emerging bit by bit in the Chapter 9 bankruptcy Orr claims was something he did his best to avoid but had to pursue after seeing no other solution to the city’s financial crisis.
U.S. Judge Steven Rhodes gave this alternate tale a name, calling it a “composite narrative” in his December decision granting the bankruptcy protections Orr and Gov. Snyder asked for.
“According to this composite narrative of the lead-up to the City of Detroit’s bankruptcy filing on July 18, 2013, the bankruptcy was the intended consequence of a years-long, strategic plan,” Rhodes observed. “The goal of this plan was the impairment of pension rights through a bankruptcy filing by the City.”
This telling of Detroit’s road to bankruptcy came from the lawyers representing what are known as “objectors.” A long line of them. Included in that group are current City employees and retirees who formerly worked for the city. There are bondholders and the corporations that insure those bonds. Essentially, everyone the city owes money to, or had provided promises of benefits far into the future.
All were afraid bankruptcy would leave them holding a small fraction of what is due them. And so, they did their best to convince Judge Rhodes that, for a variety of reasons, the request to enter bankruptcy should be rejected.
Over the course of many days, Judge Rhodes listened patiently to what attorneys and witnesses had to say, and paid close attention to reams of evidence entered into the record. Then he ruled against the objectors and allowed the bankruptcy to go forward. The thinking is that, freed from the bulk of debt and liabilities that are dragging it down further, Detroit will be in a position to once again start delivering the essential services that people in most other municipalities across America take for granted:
Police and firefighters and ambulances that respond quickly and effectively when called upon. Streetlights that work. Neighborhoods free from the blight of abandoned, boarded-up homes and the charred, skeletal remains of properties that have been torched. A reliable public transit system.
Detroit is in dire need of restructuring. About that there is no disagreement. What’s being disputed, in terms of economic and political philosophies, is the form that restructuring should take. In some ways it is part of an age-old struggle between the right and the left.
The debate about that is far from over.
What’s indisputable, though, is that some of the sharp-edged legal minds at Kevyn Orr’s former firm have long been touting a plan that targets men and women who’ve spent their working lives expecting to receive the pensions and health-care benefits long promised them. And if that plan can work in Michigan, a state where seemingly iron-clad pension protections are embedded in the state constitution, then it can be put in play far and wide.
JONES DAY PLAYBOOK
In a 2011 piece titled “Pensions and Chapter 9: Can Municipalities Use Bankruptcy to Solve Their Pension Woes?” that appeared in the Emory Law School’s Bankruptcy Developments Journal, attorneys Jeffrey B. Ellman and Daniel J. Merrett — both of whom work in the business restructuring and reorganization division of Jones Day — succinctly describe the problem they were attempting to address:
“As world markets and private industries struggle to recover from the financial collapse of the late 2000s, speculation has grown about the next wave of financial troubles. One area that has come under increasing scrutiny from experts and the media is the crippling debt loads of government entities. From local municipalities to sovereign nations, the risk of governments and governmental units defaulting on their debts is real … Rumors abound in the media that numerous United States cities and other municipalities are on the brink of defaulting on their obligations.”
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