Detroit Bankruptcy: The War Shifts to the Courts

July 22, 2013 – In The News
The Christian Science Monitor

Michael Sweet was quoted in the Christian Science Monitor article "Detroit Bankruptcy: The War Shifts to the Courts." While the full text can be found in the July 22, 2013, issue of Christian Science Monitor, a synopsis is noted below.

Detroit’s filing of a petition for Chapter 9 bankruptcy is just the beginning in what is expected to be prolonged legal battle, with the fate of $5.7 billion in unfunded retiree health insurance and $3.5 billion in unfunded pension payouts on the line.

Unlike a Chapter 11 bankruptcy filing for a corporation, the Chapter 9 process gives emergency manager Kevyn Orr a fast track, as it does not require allowing outside parties to make counterproposals. Outside of Chapter 9, the city would be more vulnerable to having another party gain control of the restructuring. If filed under Chapter 7, the city could expose itself to liquidation.

“But neither of those things can happen in a Chapter 9, which means the city holds more cards than they do in a private sector filing,” said Michael Sweet, a noted authority on financial restructuring and bankruptcy. “The judge can’t impose a plan on the city and no one else decides what they can do.”

A county judge filed an injunction to throw the bankruptcy out of federal court; a move Sweet says is “unprecedented,” and likely to be treated as a “side circus” to the federal bankruptcy judge.

“I don’t see a federal judge ordering [Detroit] out of bankruptcy because of something a state judge said,” Sweet noted.

Noting Detroit’s target deadline of September 2014, Sweet mentioned the timetable for Chapter 9 filings for California municipalities, which took as long as a year just for an eligibility hearing. “And those cities are puny compared to what you have in Detroit,” Sweet said.

“Having distractions at a time when people would want to be focused on how to get through it quickly is not constructive,” Sweet said. “That’s not to say they can’t be moving forward in bankruptcy while addressing these other issues in state court. But you’re fighting a war on two fronts. It could make it take longer.”

This story was also featured in the Daily Commercial Recorder and Daily Territorial.