- Detroit Bankruptcy Update: Restructuring the Restructuring Plan
- August 6, 2014 | Authors: Scott St. Amand; J. Ellsworth Summers
- Law Firms: Rogers Towers, P.A. - Jacksonville Office ; Rogers Towers, P.A. - Fort Lauderdale Office
On Friday July 25, 2014, the City of Detroit released a revised restructuring plan that provides for a reserve fund that may enhance the recovery for certain classes of unsecured creditors. The plan also creates a post-bankruptcy “monitor” whose role and responsibility would be to evaluate the city’s ongoing compliance with the plan and confirmation order and to report to the bankruptcy court on such matters on a periodic basis.
The revision was the fifth such alteration since Detroit filed its $18 billion bankruptcy last year. The reserve fund is structured as a litigation trust related to the lawsuit in which Detroit has sought to void nearly $1.5 billion in pension certificates sold between 2005 and 2006. If Detroit prevails on the suit, and the certificates are voided, the city would divide the money in the trust: 65% going towards retiree health care costs and 20% going towards limited-tax general obligation bondholders. The remaining 15% would be paid to a heretofore undetermined “miscellaneous” class.
The plan’s schedule provides unsecured bond claims with unlimited-tax general obligation bonds with the biggest piece of the pie at 74%. As it stands now, recovery for claims involving the unsecured certificates and limited-tax general obligation bonds stand to recover much less. If, however, Detroit loses its lawsuit to void the certificates, the recovery for the certificate holders and limited-tax general obligation bond holders would rise to approximately 34%.
Assuming the restructuring plan is approved by a majority of the city’s creditors, which appears more likely by the week, the new iteration of the plan provides for a post-confirmation monitor, who would be an officer of the court, immune from lawsuits and possessing subpoena power. The monitor will likely be chosen from a group of candidates with financial experience with cities or municipalities with over $250 million in annual revenue. The monitor will also be a neutral party, having never been appointed to the city or state governments.
The monitor would be responsible for submitting quarterly reports on reserves, distributions and the state of litigation and settlements. He or she will also be responsible to ensure that the “Grand Bargain” meant to protect Detroit’s multi-million dollar municipal art collection while lessening the burden on the city’s pensioners is carried out according to plan.
On Tuesday July 29, 2014, Judge Steven Rhodes agreed to delay the confirmation hearing one week until August 21st; thus this change is likely one of the last we will see to the restructuring plan. Nevertheless, the cogs are continuously turning in Detroit, and there are likely to be compromises on both sides of the battle before the matter reaches Judge Rhodes’ courtroom.
We will continue to monitor the progress of the ever changing landscape of the Detroit bankruptcy saga as it heats up in anticipation of the August 21st deadline.