DOWNLOAD: Summary of Judge Rhodes Eligibility Opinion
DOWNLOAD: City of Detroit bankruptcy opinion 12.3.13

P. 1      The City did not negotiate in good faith with creditors but was not required to because such negotiation was impracticable.


P. 2      One hundred nine parties filed timely objections to the City’s eligibility to file this bankruptcy case under § 109 of the bankruptcy code.


P. 3      On September 19, 2013, the Court held a hearing at which the individuals who filed timely objections without an attorney had an opportunity to address the Court. At that hearing, 45 individuals addressed the Court.


P. 5      The City no longer has the resources to provide its residents with the basic police, fire and emergency medical services that its residents need for their basic health and safety.  Moreover, the City’s governmental operations are wasteful and inefficient.


P. 11    During 2012, 38.6% of the City’s revenue was consumed servicing legacy liabilities. The forecasts for subsequent years, assuming no restructuring, are 42.5% for 2013, 54.3% for 2014, 59.5% for 2015, 63% for 2016, and 64.5% for 2017.


Pp. 11- 12  Summarizing the pension Certificates of Participation (COPs) and interest rate swaps


P. 13    In 2008, interest rates dropped dramatically. As a result, the City lost on the swaps bet.  Actually, it lost catastrophically on the swaps bet. The bet could cost the City hundreds of millions of dollars. The City estimates that the damage will be approximately $45,000,000 per year for the next ten years.


Pp. 13 -14 Summarizing the collateral agreement regarding the swaps and the city’s default on it in 2012


P. 14    As of June 28, 2013, the City estimated that if an event of default were declared and the Swap Counterparties chose to exercise their right to terminate, it faced a termination obligation to the Swap Counterparties of $296,500,000. This was the approximate negative fair value of the swaps at that time.


Pp. 14 – 15  Summarizing the Forbearance and Optional Termination Agreement on July 15, 2013 and the filing of the bankruptcy petition on July 18


P. 15    When the City filed this bankruptcy case, it also filed a motion to assume the Forbearance and Optional Termination Agreement. (Dkt. #17) Syncora and many other parties have filed objections to the City’s motion. However, because there are serious and substantial defenses to the claims made against the City under the COPs, these objections assert that the agreement should not be approved. After several adjournments, it is scheduled for hearing on December 17, 2013.


Pp. 15 – 16  Summarizing the Syncora litigation over casino tax revenues as security for the swaps


P. 16    The city’s estimated outstanding COPs amounts as of 6/30/13: $480,300,000 in outstanding principal amount of $640,000,000 Certificates of Participation Series 2005 A maturing June 15, 2013 through 2025; and $948,540,000 in outstanding principal amount of $948,540,000 Certificates of Participation Series 2006 A and B maturing June 15, 2019 through 2035


Pp. 16 – 17  Debt service from the City’s general fund related to limited tax and unlimited tax GO debt and the COPs was $225,300,000 for 2012, and is projected to exceed $247,000,000 in 2013. The City estimates that 38% of its tax revenue goes to debt service rather than to city services. It further estimates that without changes, this will increase to 65% within 5 years.


P. 17    Income tax revenues have decreased by $91,000,000 since 2002 (30%) and by $44,000,000 (15%) since 2008. Municipal income tax revenue was $276,500,000 in 2008 and $233,000,000 in 2012.  Property tax revenues for 2013 were $135,000,000. This is a reduction of $13,000,000 (10%) from 2012.  Revenues from the City’s utility users’ tax have declined from approximately $55,300,000 in 2003 to approximately $39,800,000 in 2012 (28%).  Wagering taxes receipts are about $170–$180,000,000 annually. However, the City projects that these receipts will decrease through 2015 due to the expected loss of gaming revenue to casinos opening in nearby Toledo, Ohio.  State revenue sharing has decreased by $161,000,000 since 2002 (48%) and by $76,000,000 (30.6%) since 2008, due to the City’s declining population and significant reductions in statutory revenue sharing by the State.


Pp. 17 – 19  Summarizing annual operating deficits, negative cash balances and deferred payments


Pp. 19- 22  Causes and Consequences of the City’s Financial Distress: Population and employment losses, credit rating, the Water and Sewerage Dept. (“DWSD’s cost of capital is inflated due to its association with the City.”), the crime rate, streetlights, blight, the Police Dept., the Fire Dept., Parks and Recreation, Information Technology (Payroll, Income Tax, Financial Reporting)


P. 23    The City’s Efforts to Address Its Financial Distress: layoffs, collective bargaining units, city employment terms; The City cannot legally increase its tax revenues. Nor can it reduce its employee expenses without further endangering public health and safety


Pp. 23- 37  A Brief History of Michigan’s Emergency Manager Laws; The Events Leading to the Appointment of the City’s Emergency Manager; Actions of the EMF up to filing the bankruptcy


P. 37    The city’s burden of proof


Pp. 37- 38   Individuals’ objections: The individuals’ presentations were moving, passionate, thoughtful, compelling and well-articulated.  These presentations demonstrated an extraordinary depth of concern for the City of Detroit, for the inadequate level of services that their city government provides and the personal hardships that creates, and, most clearly, for the pensions of City retirees and employees. These individuals expressed another deeply held concern, and even anger, that became a major theme of the hearing – the concern and anger that the State’s appointment of an emergency manager over the City of Detroit violated their fundamental democratic right to self-governance.

P. 38    The City of Detroit Is a Municipality


Pp. 39- 49  Constitutionality of Chapter 9 and PA 436; A bankruptcy court may determine matters that arise directly under the bankruptcy code, such as fixing a creditor’s claim in the claims allowance process. However, a bankruptcy court may not determine more tangential matters, such as a state law claim for relief asserted by a debtor or the estate that arises outside of the bankruptcy process, unless it is necessary to resolve that claim as part of the claims allowance process.  Lengthy discussion of Stern v. Marshall, 131 S. Ct. 2594 (2011) and related precedents: The Court concludes that it does have the authority to determine the constitutionality of chapter 9 under the United States Constitution and the constitutionality of P.A. 436 under the Michigan Constitution.


Pp. 49- 59  Chapter 9 Does Not Violate the United States Constitution; Uniformity Requirement of the Bankruptcy Clause; Contracts Clause; Tenth Amendment


P. 59- 73    The Supreme Court Has Already Determined That Chapter 9 Is Constitutional in United States v. Bekins, 304 U.S. 27, 58 S. Ct. 811 (1938)


Pp. 73- 80  Chapter 9 Is Constitutional As Applied in This Case; regarding filing a Chapter 9 petition without protecting state-guaranteed pensions, by far the most publicly controversial aspect of the ruling so far: Because under the Michigan Constitution, pension rights are contractual rights, they are subject to impairment in a federal bankruptcy proceeding.


P. 80    Nevertheless, the Court is compelled to comment. No one should interpret this holding that pension rights are subject to impairment in this bankruptcy case to mean that the Court will necessarily confirm any plan of adjustment that impairs pensions. The Court emphasizes that it will not lightly or casually exercise the power under federal bankruptcy law to impair pensions.  Before the Court confirms any plan that the City submits, the Court must find that the plan fully meets the requirements of 11 U.S.C. § 943(b) and the other applicable provisions of the bankruptcy code. Together, these provisions of law demand this Court’s judicious legal and equitable consideration of the interests of the City and all of its creditors, as well as the laws of the State of Michigan.


Pp. 81-93  Public Act 436 Does Not Violate the Michigan Constitution; The Voters’ Rejection of Public Act 4 Did Not Constitutionally Prohibit the Michigan Legislature from Enacting Public Act 436; Even If the Michigan Legislature Did Include Appropriations Provisions in Public Act 436 to Evade the Constitutional Right of Referendum, It Is Not Unconstitutional; and it doesn’t violate either home rule or the pensions clause


Pp. 93- 94  Detroit’s Emergency Manager Had Valid Authority to File This Bankruptcy Case Even Though He Is Not an Elected Official


P. 94    The Governor’s Authorization to File This Bankruptcy Case Was Valid Under the Michigan Constitution Even Though the Authorization Did Not Prohibit the City from Impairing Pension Rights


Pp. 95 -104  The state court judgment obtained by the pension systems on the even of bankruptcy does not prevent the city from asserting the validity of the Governor’s authorization to file the bankruptcy


Pp. 104 – 109  The City Was “Insolvent.  The City was operating on a razor’s edge for several months prior to June 2013. … The evidence established that there are many, many services in the City which do not function properly as a result of the City’s financial state.  Emphasizing testimony of Police Chief Craig.


P. 110     When the expenses of an enterprise exceed its revenue, a one-time infusion of cash, whether from an asset sale or a borrowing, only delays the inevitable failure, unless in the meantime the enterprise sufficiently reduces its expenses and enhances its income. The City of Detroit has proven this reality many times.


Pp. 110 – 112 The City Desires to Effect a Plan to Adjust Its Debts.  The Court concludes that the evidence overwhelmingly established that the City does desire to effectuate a plan in this case. Mr. Orr so testified.


Pp. 112 – 119  The City Did Not Negotiate with Its Creditors in Good Faith.


Pp. 119 – 125 The City Was Unable to Negotiate with Creditors Because Such Negotiation Was Impracticable.  The Court is satisfied that when Congress enacted the impracticability section, it foresaw precisely the situation facing the City of Detroit. … The sheer size of the debt and number of individual creditors made pre-bankruptcy negotiation impracticable – impossible, really.


Pp. 125 – 127    The City Filed Its Bankruptcy Petition in Good Faith.


Pp. 127 – 134 A ludicrous conspiracy version of bad faith as a composite of the actual claims of bad faith made by objectors: The plan was executed by the top officials of the State of Michigan, including Governor Snyder and others in his administration, assisted by the state’s legal and financial consultants – the Jones Day law firm and the Miller Buckfire investment banking firm. The goals of the plan also included lining the professionals’ pockets while extending the power of state government at the expense of the people of Detroit.  Always conscious of the hard-fought and continuing struggle to obtain equal voting rights in this country and an equal opportunity to partake of the country’s abundance, some who hold to this narrative also suspect a racial element to the plan. The Court acknowledges that many people in Detroit hold to this narrative, or at least to substantial parts of it. … The Court finds, however, that in some particulars, the record does support the objectors’ view of the reality that led to this bankruptcy filing. It is, however, not nearly supported in enough particulars for the Court to find that the filing was in bad faith.


Pp. 134 – 135            At what point in Detroit’s financial slide did it lose the ability, without bankruptcy help, to restructure its debt in a way that would firmly ground its economic and social revitalization? Was it after the disastrous COPs and swaps deal in 2005? Or even sometime before? The record here does not permit an answer to that question. Whatever the answer, however, the Court must conclude that Detroit’s bankruptcy filing was certainly a “foregone conclusion” during all of 2013.  For purposes of determining the City’s good faith, however, it hardly matters. As noted, many in financial difficulty, Detroit included, wait too long to file bankruptcy.


P. 135              The Court must acknowledge some substantial truth in the factual basis for the objectors’ claim that this case was not filed in good faith.


Pp. 135 – 139            The City Filed This Bankruptcy Case in Good Faith.  It is true that the City does not have a clear picture of its assets, income, cash flow, and liabilities, likely because its bookkeeping and accounting systems are obsolete.


P. 139              The Residents of Detroit Will Be Severely Prejudiced If This Case Is Dismissed.


P. 143              The Court reminds all interested parties that this eligibility determination is merely a preliminary matter in this bankruptcy case. The City’s ultimate objective is confirmation of a plan of adjustment. It has stated on the record its intent to achieve that objective with all deliberate speed and to file its plan shortly. Accordingly, the Court strongly encourages the parties to begin to negotiate, or if they have already begun, to continue to negotiate, with a view toward a consensual plan.

DOWNLOAD: Summary of Judge Rhodes Eligibility Opinion
DOWNLOAD: City of Detroit bankruptcy opinion 12.3.13