It's Time to Talk about the Pros and Cons of Chapter 9 Municipal Bankruptcy

[corktownyuppie]

As most of you already know, municipal bankruptcy is different from corporate bankruptcy. Since the inevitable outcome of gridlock in City Hall is bankruptcy, we should discuss whether or not it is a preferable outcome to emergency management.

Here are some of the Pros and Cons from attorney who has represented municipalities in bankruptcy court:

http://www.pennlive.com/editorials/i...ter_9_ban.html

Bankruptcy ‘pros’
1. “Cram down” power of the judge. If the bankruptcy judge finds the settlement to be reasonable, the judge can impose the settlement against creditors’ will. This threat resulted in the favorable settlement in Westfall Twp.
2. Bankruptcy court interference is minimal. The bankruptcy court does not interfere with the running of a local government. There is no power to appoint a trustee to run the city or municipal government.
Unlike Chapter 11 corporate bankruptcies, in Chapter 9, the judge cannot force a city to sell assets. He or she cannot restrict the hiring of professionals such as accountants or lawyers or auditors, nor can he or she limit the city’s ability to go out in the market and try to issue more unsecured debt, although the judge must approve any issuance of secured debt.
3. No competing plans by creditors. The plan to solve the municipality’s debt problems can only come from the municipality. Creditors cannot submit their own plans. That said, under state law, the municipality must work in conjunction with the Department of Community and Economic Development during a Chapter 9 case.
4. Automatic stay. When Chapter 9 is filed, the municipality does not have to pay its debt obligations. It also stops all lawsuits, including mandamus, which is what the Westfall Twp. developer filed.
5. Executory contracts can be rejected or manipulated. Municipal contracts, including union contracts, can be rejected or changed. This provision has been used extensively in the bankruptcy filing of Vallejo, Calif., where the city claimed it could not meet its labor contract obligations.
6. “Preference.” If a creditor gets paid within 90 days before bankruptcy, it can be undone, although the payment of bonds isn’t considered a preference.

Bankruptcy ‘cons’
1. Expensive and time consuming. To give you an idea, it cost Westfall Twp. $600,000 for lawyers and accountants in the bankruptcy case, and Westfall’s Chapter 9 filing was about as straightforward a case as you can get.
2. Uncertain outcome. You can’t predict what a bankruptcy judge will do. We didn’t know how much the judge would allow us to reduce the debt. It’s not a given that the debt will even be able to be reduced. Everything depends upon the interpretation of what is a “reasonable” plan.

3. Difficult to get into Chapter 9. DCED must be consulted before filing for bankruptcy. Often it must approve the bankruptcy. We did an emergency filing, but we were in touch with DCED extensively in the months leading up to the filing.
The other key to filing is that a municipality must show that it has attempted substantial negotiations with creditors. When such negotiations run into a brick wall is when Chapter 9 might make sense, but you must prove that those negotiations took place and that the municipality is insolvent.
4. DCED is active in the case. In lieu of court supervision, DCED plays the role in overseeing the case. DCED appoints a “plan coordinator” — normally a consultant of some sort with experience in municipal finance — to develop a financial plan. The plan coordinator works in consultation with local government.

5. Need at least one class of “impaired” creditors voting to accept plan. This is a provision you do not hear much about. The judge cannot cram down a reasonable plan unless at least one class of creditors agrees to the plan.
In Westfall’s case, even though it was only one developer who was owed money, Westfall owed three other parties smaller sums. They all agreed to the plan even though the developer initially did not. Before Westfall filed for bankruptcy, we knew that at least one class of creditor would likely go along with the plan.
6. Credit market impact might be negative. The bond rating agencies have made it clear that they take a negative view of any city that files for bankruptcy, and that may impact credit ratings in an entire state. That said it is not clear what long-term impact this has. I have seen no studies on the matter.

J. Gregg Miller

The Westfall situation was unique because there was only one large creditor.Most times with a bond issue or union contracts [[as in the Vallejo situation), there are multiple parties involved making it far more complicated.
The key to Chapter 9 bankruptcy is that a judge must decide whether the plan the municipality presents is “reasonable.” The judge must ponder what can a city reasonably pay?
In the case of Westfall, it had no valuable assets to sell, but residents did end up with a 20 percent tax increase to meet even the reduced debt payment of $6 million.

It seems to me that Chapter 9 is best utilized only if you have what you believe is a reasonable plan and creditors will not agree.

[Richard]

Imho, I do not think Mr Snyder will allow it to happen as most of the problems seem to come from the inability of city government to work together to resolve issues,the money is there so it would be in essence making the rest of the state suffer for the cities inability to come to terms at the table,so they would be taking a big hit for a long time for not a good reason.

I think the gov will string the city along with just enough to survive on until upper management is changed out.Bankruptcy will not change status qoue it will do a lot of damage to the city and state for a long time which will hurt the city even more.It probably would be a lot easier if some at the top just said Monday morning,have a nice day I am out of here,so things could move along a bit faster.There is too much bad blood now with everybody working on their own little agendas instead of working together.A city in limbo would not be a good reason to chapter 9.

[cman710]

Stuck in Reverse, Detroit Edges Closer to Bankruptcy

At the Detroit Auto Show earlier this month, luxury was in the air. Pricey new Bentleys and Maseratis glittered - including a Maserati 2014 Quattroporte with a $132,000 price tag; U.S. Cabinet Secretaries and dignitaries rubbed shoulders; and many of the well-heeled attendees ponied up for a $300-a-ticket black-tie charity ball. But in a city that is slowly dying, the glitz didn't extend much beyond the Cobo Center exhibition hall.

For the rest of the article: http://www.cnbc.com/id/100414480

[iheartthed]

For the rest of the article: http://www.cnbc.com/id/100414480

I love how the only two politicians they quoted for the article [[maybe the only two who would speak to CNBC?) offered the most absurd solutions from each end of the ideological spectrum.

[mwilbert]

1) I suspect, despite the uncertainties, that it is probably the best option.

2) The argument that you have to wait until you have a competent administration doesn't seem strong to me. We probably don't even have until the next election, and under bankruptcy some of the mess would be cleaned up regardless.

3) No doubt there would be some damage to the state's reputation, but I doubt it would have any effect on the bond rating of the state or surrounding towns--bond investors aren't stupid, and Detroit's bankruptcy is irrelevant to the creditworthiness its neighbors.

4) Unless the state appoints a EM in the very near future, I doubt it can be avoided. The people running the city now aren't doing what would be necessary to keep the city solvent.

5) I suspect that if an EM is appointed, he will end up having to propose bankruptcy anyway. Maybe not, but there is a lot of debt that isn't going anywhere otherwise.

[Hypestyles]

for all the folks who are sure to be running for office this year, I wonder will they have the courage to speak with intellectual honesty about the state of affairs in the city, or will it mostly be all about 'just kick out all the vultures [[i.e., feds, state investigators, etc.)' and everything will just work out on its own'.. I've been hearing that it's going to take 20 years for Detroit to "come back" for the better part of the past 20 years...

[corktownyuppie]

for all the folks who are sure to be running for office this year, I wonder will they have the courage to speak with intellectual honesty about the state of affairs in the city, or will it mostly be all about 'just kick out all the vultures [[i.e., feds, state investigators, etc.)' and everything will just work out on its own'.. I've been hearing that it's going to take 20 years for Detroit to "come back" for the better part of the past 20 years...

They didn't show you the fine print.

===================

"It'll take 20 years for Detroit to come back!*"



*But that's assuming they start working on it tomorrow, which is unlikely.