With any sudden death of someone who has been ill, the most common heard phrase is, “it’s a shock, but no surprise.” That is how Detroiters were feeling Thursday, on the unexpected news that Emergency Manager Kevyn Orr had filed a voluntary petition for a Chapter 9 bankruptcy.
The Detroit case potentially becomes the largest municipal bankruptcy case in the United States. The 16-page petition is breathtakingly short, compared with the kind of Chapter 11 filings by corporations seeking to restructure. It’s mainly a list of forms plus a couple of pages of abandoned property.
But there is one key exhibit, labeled “Governor’s Written Approval of Recommendation.” In it, Michigan’s Republican governor, Rick Snyder, gives his assent to Orr’s decision to seek Chapter 9 filing, as he is required to do by state law.
Although a Detroit filing has been rumored for weeks, and considered a fait accompli by a number of legal experts, there was almost no warning that Orr would actually file on Thursday, save for a Detroit Free Press story a few hours before the filing dropped at 4:06 pm ET.
But the action raises plenty of major questions about what will happen next in the Detroit case.
- Does the emergency manager actually have the right to file? Orr was appointed as emergency manager by Snyder on March 14. Under Michigan law, the emergency manager can seek a bankruptcy filing with the governor’s approval, as happened Thursday. But it isn’t clear whether he has the right to serve as the representative of the city. In many cases, the insolvent municipality is represented by the mayor, or the city council. Their role in the Detroit situation is far from clear, and it will be up to the court to decide whether Orr can serve as the debtor’s representative.
- Who will pay for the restructuring? In a conventional Chapter 11 case, an insolvent company arranges for debtor in possession financing, known as a DIP loan, or leaves enough cash on hand to run its operations. Detroit is deeply in debt, and Orr has already tried offering bond holders and other stake holders pennies on the dollar. But tax collections continue, Orr says in the filing that there will be money to pay unsecured creditors, and the Free Press reported he reached a $255 million deal for an initial DIP, so the city appears to be covered in the short term. The Obama administration has taken a hands off attitude toward a Detroit rescue plan, meaning that the state is the most likely source of money should the city need to cover expenses. That could cause a big political controversy for Snyder with the state’s conservative Republicans, already upset with him on other matters, and who might oppose any help for Detroit.
- What happens to city assets? Orr caused a ruckus a few weeks ago when he suggested treasures at the Detroit Institute of Arts might be auctioned in a bankruptcy case. (The museum is run by a non-profit organization but the city owns the artworks.) Orr has said all such matters are on the table, and has rolled out a restructuring plan that will probably serve as the basis for what he files in federal court. The city is already trying to sell vacant fire houses, and Orr is looking for ways that Detroit can escape the expense of running its park system, proposing that Belle Isle, its famous island park, be turned over to state jurisdiction. He also wants to sell parking garages and arrange for parking meters to be run by a private firm. Expect the city to consider selling just about everything, although it could get some push back that prompts it to eliminate ideas.
- What about union contracts? In a Chapter 11 case, the debtor can petition to abrogate labor contracts, and Orr has similar powers. He has already terminated some small union contracts with the city, and now it is likely that he will take much more extensive action. A bankruptcy judge is likely to seek evidence that the two sides negotiated cuts before imposing them. But the city’s labor unions have been adamantly opposed to concessions, and may hold off granting them to the city. Politically, union leaders could do better with their members by resisting the cuts rather than agreeing. But that tactic would lessen their influence at the bargaining table, where they might be able to avoid the most drastic actions.
- What will business leaders do? Although Detroit is known worldwide as the automotive capitol of the United States, in reality, Detroit automakers rank way down on the list of city employers. The most jobs are provided by the Detroit Medical Center, with the city, state and Wayne State University all in the top 10 employers, according to Crain’s Detroit Business. Billionaire Dan Gilbert’s Quicken Loans and Rock Ventures are among the city’s biggest employers. Chrysler, which has a major plant in the city, ranks 10th and General Motors GM -1.14% 11th, although Detroit is home to GM headquarters. In a different era, corporate leaders might have been concerned about the impact on their businesses. But people drawing civic paychecks are likely to be much more affected.
The 16-page bankruptcy filing is just the start of thousands of pages of documents soon to be filed by the city, pension funds, debt holders and others involved in the case. It’s likely that Docket Number 13-53846 will become a familiar case in the legal community. Even before the first hearing, the case has already made history for Detroit and the nation.
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