Calif. Ch. 9 Cases Will Guide Detroit on Eligibility Issues

July 22, 2013 – In The News

Michael Sweet was quoted in the Law360 article "Calif. Ch. 9 Cases Will Guide Detroit on Eligibility Issues." While the full text can be found in the July 22, 2013, issue of Law360, a synopsis is noted below.

The bankruptcies of two California cities, Stockton and San Bernardino, will provide guideposts for Detroit as it navigates the eligibility process in its own Chapter 9 case. However, Stockton and San Bernardino are not dealing with problems the size of Detroit’s.

“The scope of the issues in the San Bernardino and Stockton cases is dwarfed by what Detroit is facing,” Michael Sweet said. “The numbers, in terms of its debt, crime and population outflow, are extraordinary. The depth of its despair is extraordinary. The number of different problems that need to be solved is daunting.”

Sweet noted that the California and Detroit cases could also serve as a model for other cities down the road, possibly even helping them to avoid filing Chapter 9. “Once that roadmap has been established, the parties in other cases could negotiate for debt adjustment without the need for an actual bankruptcy filing,” Sweet said.

With pension obligations for the city on the line, many other cities will be watching with a close eye to determine whether those obligations can be impaired in the bankruptcy process.

“If the courts rule that CalPERS is treated like any other general unsecured creditor, then a city will know if it files for bankruptcy, pension obligations to CalPERS will likely be impaired, and presumably, the city and CalPERS will reach an accommodation without having to file for bankruptcy,” Sweet said. “Similarly, if pensions are found to be protected and given priority status, a city will know that filing for bankruptcy probably doesn’t provide an avenue for reducing pension payments.”