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Detroit tells judge it wants to file restructuring plan by year-end

The word 'Bankruptcy' is seen painted on the side of a vacant building by street artists as a statement on the financial affairs of the city
The word 'Bankruptcy' is seen painted on the side of a vacant building by street artists as a statement on the financial affairs of the city

By Nick Carey and Joseph Lichterman

DETROIT (Reuters) - Detroit aims to file a restructuring plan by the end of 2013, earlier than a date previously proposed by a federal bankruptcy judge, but the judge's appointment of a creditors' committee made up of retired workers - over objections from city unions and pension funds at a Friday hearing - was an early sign of controversy in the historic case.

Detroit's target filing date would be much sooner than the March 1, 2014 date proposed earlier this week by U.S. Bankruptcy Judge Steven Rhodes, who is overseeing the case. David Heiman, an attorney with Jones Day, the law firm representing Detroit, said while the city would "enthusiastically accept" the judge's deadline, it wants to move faster.

"Our view is that time is our enemy," Heiman said. "The facts are not going to change no matter how long we wait … So we aim to file a plan by the end of the year."

Judge Rhodes' decision to approve the formation of a creditors' committee representing retired city workers came despite objections to the move from unions and pension plans representing active and former city workers.

Unions argued the committee should include labor union representatives. They also asked the judge to adjust his timetable for the case to allow the committee to become established and permit negotiation and mediation with the city.

The judge approved the city's offer to pay costs associated with the committee's work.

Daniel McDermott, the United States Trustee, will form the committee. In a court filing on Thursday, McDermott had said the court can direct him to change the committee's composition if it finds it lacks adequate representation.

The aggressive target date for filing a reorganization plan may prove a tall order for Detroit if recent municipal bankruptcies are a worthy guide. But the timeline reflects the urgency Detroit's state-appointed emergency manager, Kevyn Orr, has expressed in his push to get the city's broken finances back on track.

Before it can file a reorganization plan, Detroit must prove its eligibility to proceed through the bankruptcy process in a trial the judge has proposed holding in late October. That alone would be remarkably fast if the timeline holds: Stockton, California, took nearly a year to be declared Chapter 9 eligible and San Bernardino, California, is still awaiting a declaration more than a year after filing for protection.

Detroit in its eligibility phase is required to prove it is insolvent and has negotiated in good faith with creditors owed more than $18 billion or that there are too many creditors to make negotiating feasible.

If Detroit meets the eligibility test, Judge Rhodes would allow the city to file a reorganization plan that creditors can object to and that the judge must then approve.

Jim Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler in Chicago, said that a "contentious" bankruptcy would take longer.

Judge Rhodes on Tuesday proposed October 23 for the start of a trial on potential objections to Detroit's eligibility to remain in court after filing the biggest municipal bankruptcy in U.S. history. Orr has told the court he wants the city to exit bankruptcy by September 2014.

Heiman told the judge that Detroit is continuing talks with its creditors, but "significant difficulties" make a deal hard to reach.

He added that Detroit held talks with the city's unsecured creditors last week and has scheduled more for Friday and next week.

In a court filing on Thursday, Detroit released a list of creditors, including current, former and retired workers, that filled 3,504 pages. Prominent among them are bondholders and pension funds.

A group of about 20 protesters outside the federal courthouse in Detroit on Friday held signs and chanted, "hands off our pensions" and "make the banks pay."

Detroit workers, retirees and pension funds have already tried to derail the bankruptcy petition in state court on Michigan constitutional grounds. But Rhodes suspended their lawsuits at the first hearing in the case on July 24, putting his court in full control of the case.

Rhodes also gave parties in the case seven days to nominate an independent fee examiner. The judge acknowledged that his power to appoint an examiner is not the same as in a Chapter 11 corporate proceeding. Still, he said, the "blunt truth" is that if fees are processed by an examiner "the city's professionals will be in a much better position to justify their fees and the city will thus be able to justify those fees to the public."

Meanwhile, Orr on Friday proposed a new healthcare plan for city workers that would save Detroit $12 million annually by raising deductibles and trimming the number of available plans.

(Writing by Karen Pierog; Editing by David Greising, Nick Zieminski and Phil Berlowitz)

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