Key Ruling Looms in Detroit Experts Predict Judge Will Rule City Is Eligible for Chapter 9 Protection By Matthew

Dolan December 1, 2013 A crucial court ruling is expected this week on Detroit's eligibility for bankruptcy, but the legal battle over the city's future is likely far from over. Many experts predict federal bankruptcy Judge Steven Rhodes will decide on Tuesday that Detroit can have Chapter 9 protection. The city became the largest in U.S. history to file for bankruptcy in July with an estimated $18 billion in liabilities and underwent a nine-day trial on the eligibility issue that ended last month. "It's almost a foregone conclusion that he's going to find that the city is eligible," said Michael Cook, a partner in the New York office of law firm Schulte Roth & Zabel and president of the American College of Bankruptcy. But legal challenges to the ruling and other aspects of the case could drag out the reorganization process. To grant eligibility, the judge must conclude that the city is insolvent and had the necessary legal authority to file for bankruptcy protection. The city must also have proved that it attempted to negotiate in good faith with its creditors which include pension funds, retired workers, unions and debt holdersbefore filing for bankruptcy, or that those talks were impracticable. During the trial on the issue, Judge Rhodes sharply questioned Detroit Emergency Manager Kevyn Orr on city pensions. Mr. Orr is seeking deep cuts in the estimated $3.5 billion portion of the pension obligations that is unfunded. But the judge has also challenged the idea put forward by pension holders that they should be treated more favorably than other unsecured creditors of the city. Winning on the eligibility issue would be an important political victory for Michigan Republican Gov. Rick Snyder and his appointee, Mr. Orr, who together steered the city of about 700,000 into a bankruptcy filing. On the other hand, unions, pensions funds and some other creditors are expected to appeal the issue if they lose, potentially tying the case up for months. If the unexpected happens and the city is kicked out of bankruptcy court, Mr. Orr said the city's already dire financial straits could worsen quickly, describing the outcome as an "Armageddon-type scenario" because the city has already defaulted on millions of dollars of debt and doesn't have the revenue to pay its obligations in full.

"If we're not eligible, it's a significant crisis for the city," Mr. Orr told a local journalists association last month. If the city is granted eligibility, Mr. Orr will forge ahead with efforts to complete Detroit's so-called plan of adjustment by mid-December. Creditors, some of whom are contesting the bankruptcy, will then have a chance to weigh in on the merits and feasibility of Mr. Orr's plan. If a majority of creditors approve the plan, the judge will hold a hearing to decide whether to certify it. It is unclear whether Judge Rhodes on Tuesday will rule on contentious issues such as whether the state's emergency-manager law is constitutional and whether Michigan's constitution protects public-employee pensions from cuts. In his initial plan on behalf of the city, Mr. Orr is offering $2 billion to settle $11 billion in obligations for unsecured debt, unfunded pension obligations and health care for retired city employees, a proposal the groups owed this money have opposed. "Bankruptcy is probably going to happen, but I'm praying that Judge Rhodes has some justice in his heart and goes about protecting our pensions, which we earned," said 42year-old Dennis Hunter, a 15-year veteran of the Detroit Fire Department. Meanwhile, city leaders have tried to draw attention to the city's efforts at revitalization. Last week, the federal government found $24 million for Detroit to hire 150 firefighters for its department. On Tuesday, top city and state leaders joined billionaire investor Warren Buffett and Goldman Sachs CEO Lloyd Blankfein to announce $15 million in lending capital by the investment bank to support small businesses in the Detroit metropolitan region. But the fate of the city's bankruptcy case still weighed on those who gathered a mile away from the courthouse last week to celebrate the city's newfound capital targeted at rejuvenation. "When you have uncertainty it makes it more difficult for people to get excited about investment and growing in the city," said Gov. Snyder on the sidelines of the event. "As soon as we get certainty, then we'll know what we're dealing with and we can move forward."