By: J. Ellsworth Summers, Jr. & Scott At. Amand
The oral summary of Bankruptcy Judge Steven Rhodes’s opinion lasted roughly ninety minutes, and the forthcoming written opinion is rumored to be over one hundred and forty pages in length. In making his decision the Detroit bankruptcy judge green-lighted the City’s hopeful recovery through Chapter 9 bankruptcy.
The court noted that “this once-proud city cannot pay its debts. At the same time, it has an opportunity for a fresh start.” That Judge Rhodes allowed Detroit to continue under the protection of Chapter 9 is not overly surprising to anyone who has closely followed the case. In fact the major unions and creditors opposed to the continuation of the bankruptcy proceeding had already threatened to directly appeal the decision to the Sixth Circuit Court of Appeals, far in advance of the ruling.
What is surprising to many is Judge Rhodes’ holding that he would entertain pension cuts to finance Detroit’s “Plan of Adjustment,” the City’s proposal to restructure its debt and reshape government operations, through which it hopes to emerge from Chapter 9. Still, he emphasized that he would not agree to pension cuts in the City’s final Plan unless the entire Plan was fair and equitable.
As we explained in our prior post on Detroit’s bankruptcy filing, the court was faced with four main considerations to allow the bankruptcy to proceed. First, the court found that Michigan Governor Rick Snyder legally gave the city permission to file for bankruptcy in July. Second, the court found “that the city was generally not paying its debts as they became due. The court finds that the city of Detroit was and is insolvent.” The third and fourth elements concerning good faith were a bit less black and white.