In re City of Detroit

• Decision Date: 31 December 2014
• Docket Number: No. 13–53846.,13–53846.
• Citation: 524 B.R. 147
• Parties: In re CITY OF DETROIT, Michigan, Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Michigan

524 B.R. 147

In re CITY OF DETROIT, Michigan, Debtor.

No. 13–53846.

United States Bankruptcy Court, E.D. Michigan, Southern Division.

Signed Dec. 31, 2014.

Bruce Bennett, Los Angeles, CA, Judy B. Calton, Honigman Miller Schwartz & Cohn LLP, Eric D. Carlson, Tamar Dolcourt, Timothy A. Fuscon, Eric B. Gaabo, Jonathan S. Green, Jeffrey S. Kopp, Foley & Lardner LLP, Stephen S. LaPlante, John A. Simon, Marc N. Swanson, Miller Canfield Paddock and Stone, P.L.C., Detroit, Robert S. Hertzberg, Deborah Kovsky–Apap, Pepper Hamilton LLP, Kay Standridge Kress, Southfield, MI, David Gilbert Heiman, Cleveland, OH, Heather Lennox, New York, NY, for Debtor.

Sean M. Cowley, Richard A. Roble, United States Trustee, Detroit, MI, for Trustee.

Brett Howard Miller, New York, NY, Geoffrey T. Pavlic, Mark H. Shapiro, Southfield, MI, for Creditor Committee.

Supplemental Opinion Regarding Plan Confirmation, Approving Settlements, and Approving Exit Financing

STEVEN W. RHODES, Bankruptcy Judge.

Table of Contents

The Plan Confirmation Process

I.	Introduction	159
II.	161

A.	The City's Plans of Adjustment	161
B.	An Overview of the City's Eighth Amended Plan of Adjustment	162
C.	Objections Filed by Represented Parties	163
D.	The Participation by Unrepresented Parties	165

1.	The Unrepresented Parties' Oral Presentations	165
2.	The Unrepresented Parties' Participation in the Confirmation Hearing	166

E. The City Tour 166

III. The Settlements in the Plan 167

A.	Mediation	167
B.	The Applicable Law	168
C.	The Bard Considerations Applicable to All of the Settlements	169
D.	The Grand Bargain	169
E.	The State Contribution Agreement	170

1.	The Potential Claim Against the State of Michigan	170
2.	The Terms of the State Contribution Agreement	170
3.	The State Contribution Agreement Is Fair and Equitable	171

a.	The State Contribution Agreement Is Reasonable in Amount	171
b.	The Releases in the State Contribution Agreement Are Reasonable	172

F. The DIA Settlement 176

1.	The Dispute over the DIA Art	176
2.	The Terms of the DIA Settlement	176
3.	The DIA Settlement Is Fair and Equitable	177

G. The Pension Global Settlement 179

1. The Terms of the Pension Global Settlement 179

a.	The Treatment of Pension Claims	179
b.	Restoration of Pension Benefits	180
c.	Governance and Oversight	180

2. The Pension Global Settlement Is Fair and Equitable 180

H. The Annuity Savings Fund Recoupment Settlement 182

1.	The Dispute Over the Excess ASF Credits	182
2.	The Terms of the ASF Settlement	182
3.	Objections to the ASF Settlement	182
4.	The ASF Settlement Is Fair and Equitable, and Does Not Violate the Bankruptcy Code	183

I. The OPEB Settlement 184

1.	The Disputes Over the OPEB Claims	184
2.	The Terms of the OPEB Settlement	185
3.	The OPEB Settlement Is Fair and Equitable	186

J.	The 36th District Court Settlement	186
K.	The UTGO Settlement	187

1.	The Dispute Regarding the UTGO Bonds	188
2.	The Terms of the UTGO Settlement	188
3.	The UTGO Settlement Is Fair and Equitable	189

L. The LTGO Settlement 190

1.	The Dispute Regarding the LTGO Bonds	190
2.	The Terms of the LTGO Settlement	191
3.	The LTGO Settlement Is Fair and Equitable	191

M. The Settlements Related to the Certificates of Participation 192

1.	The Dispute Relating to the COPs Transactions	192
2.	The Terms of the COPs Settlement	193
3.	The Terms of the Syncora Global Settlement	194
4.	The Syncora Global Settlement Is Fair and Equitable	195
5.	The Terms of the FGIC Global Settlement	196
6.	The FGIC Global Settlement Is Fair and Equitable	197

IV. Settlements That the Court Approved During the Case 197

A.	The Swaps Settlement	197
B.	The DWSD Bondholders Settlement	198
C.	The MIDDD Settlement	198

V.	The Creation of the Great Lakes Water Authority	198
VI.	The Classes of Claims in the City's Plan and the Results of the Balloting	199
VII.	The Statutory Requirements for Chapter 9 Plan Confirmation	200
VIII.	The Court's Findings Regarding Confirmation of the City's Eighth Amended Plan of Adjustment	202
IX.	The Outstanding Objections to the City's Plan	203

A.	Objections Filed by Represented Parties	203
B.	Objections Filed by Unrepresented Parties	203

X. Issues Relating to Plan Confirmation 204

A. The City's Professional Fees Will Be Fully Disclosed and Reviewed for Reasonableness As Soon As Practicable, As Required by § 943(b)(3) 204

1.	The City's Professional Fees Will Be Fully Disclosed	204
2.	Section 943(b)(3) Requires the Court to Determine Whether the City's Professional Fees in the Case Are Reasonable	205

a.	The Scope of § 943(b)(3)	206
b.	Deferring to the Fee Examiner's Determination of Reasonableness in This Case Is Insufficient to Comply with § 943(b)(3) and City of Avon Park	210
c.	The Process for Reviewing Fees	211

B.	The Debtor Is Not Prohibited by Law from Taking Any Action Necessary to Carry Out the Plan, As Required by § 943(b)(4)	211
C.	The Plan Is in the Best Interests of Creditors, As Required by § 943(b)(7)	212

1.	The Applicable Law	212
2.	If the Case Were Dismissed, State Law Remedies Would Not Provide Creditors with a Better Result Than the Plan	213

a.	The Creditors' Legal Remedies in the Event of a Dismissal	213
b.	The Creditors' Recoveries in the Event of a Dismissal	215
c.	The Creditors' Loss of Other Plan Benefits	217

3.	The Creditors Can Access No Other Assets in This Bankruptcy Case	218
4.	The Best Interests of Creditors and Feasibility	219

D. The Plan Is Feasible, As Required by § 943(b)(7) 108 219

1.	Applicable Law	219
2.	An Overview of Feasibility	220
3.	Evidentiary Issues Regarding the Report and Testimony of the Court's Feasibility Expert	222
4.	The Expert's Standard for Feasibility	222
5.	The City's Plan Is Feasible	223
6.	The City's Revenue and Expense Projections	224

a.	The City's Ten–Year Revenue Projections	224
b.	The City's Ten–Year Expense Projections	224
c.	The City's Forty–Year Revenue Projections	225
d.	The City's Forty–Year Expense Projections	225
e.	The Resulting Forty–Year Projections	225
f.	The Expert's Review of the Plan Projections	226
g.	The Revenue in the Plan Projections	226
h.	The Expenditures, Revenue and Cost Savings Associated with the RRIs	228

7. The City's Obligations to Creditors Under the Plan 228

a.	The City's Post–Bankruptcy Debt	229
b.	The Cost of Servicing the Post–Bankruptcy Debt	229
c.	The City Will Be Able to Service Its Post–Bankruptcy Debt	230

8. The Feasibility of the City's Plan to Address Its Pension Obligations 231

a.	The City's Plan Regarding Its Pension Obligations	231
b.	Evaluating the Risks in the City's Plan to Address Its Pension Obligations	232
c.	Recommendations for Enhanced Disclosures to Reduce the Risk of Unmanageable Pension Obligations	233

9. The City Will Be Able to Sustainably Provide Adequate Services 234

a.	The Blight Initiatives	235
b.	The Public Safety Initiatives	236
c.	The Organizational Efficiency Initiatives	238
d.	The Resident Services Initiatives	240
e.	The Business Services Initiatives	240

10.	The City's Commitment to Implement the Plan	241
11.	Final Thoughts and Recommendations on Feasibility	244

E. Each of the Claims in Each Class Is Substantially Similar to the Other Claims in the Class, As Required by § 1122(a) 245

1.	The Applicable Law	245
2.	Creditors' Objections to Classification Are Overruled	246

F. The City Proposed the Plan in Good Faith, As Required by § 1129(a)(3) 247

1.	The Applicable Law	247
2.	The City's Good Faith	248
3.	The City's Long–Term Solvency	249
4.	Federalism Considerations in the Court's Good Faith Analysis	250

G. The City Has Complied with the Applicable Provisions of the Bankruptcy Code, As Required by § 1129(a)(2) 251

1.	The ASF Interest Rate Disclosure Issue	252
2.	Successive Plan Modifications Did Not Require Re–Solicitation of Ballots	253

H. The Plan Does Not Discriminate Unfairly Against Dissenting Classes 14 and 15, As Required by § 1129(b)(1) 253

1.	The Plan Discriminates Against Dissenting Classes 14 and 15	253
2.	The Unfair Discrimination Standard	255
3.	The Discrimination Against the Classes of General Unsecured Creditors and Convenience Creditors Is Not Unfair	257

a.	The Discrimination in Favor of the Pension Classes Is Not Unfair	257
b.	The Discrimination in Favor of the UTGO, LTGO and 36th District Court Classes Is Not Unfair	258
c.	The Discrimination Against Classes 14 and 15 Is Not Unfair Even Though Some Creditors in Those Classes May Be Involuntary Creditors	258

I. The Plan Is Fair and Equitable with Respect to the Dissenting Classes, As Required by § 1129(b)(1) 259

1.	The Test of “Fair and Equitable” in Chapter 9	260
2.	The Plan Is “Fair and Equitable”	261

J. The Objections of the Creditors with Constitutional Claims Are Sustained in Part and Overruled in Part 262

1.	The Relevant Plan Provisions	262
2.	The § 1983 Creditors' Objections	262

a.	Impairing and Discharging the § 1983 Claims Against the City Does Not Violate the Fourteenth Amendment	263
b.	The Bankruptcy Code Does Not Provide for the Discharge of § 1983 Claims Against the City's Officers in Their Individual Capacity	265
c.	The City Has Not Established That a Third–Party Release of § 1983 Claims Against Its Officers in Their Individual Capacity Is Essential to Its Plan	266

3. The Takings Clause Creditors' Objection 267

a.	Discharging Takings Clause Claims Would Violate the Fifth Amendment	268
b.	The Takings Clause Claims Must Be Excepted from Discharge	270

K.	The Plan Does Not Violate the Funding Clause of the Michigan Constitution	270
L.	The Pension Creditors' Claims Are Against the City, Not the Retirement Systems	271
M.	The Pensions of DWSD and Library Employees Are Properly Included in the Plan	272
N.	The Plan Does Not Violate the Blighted Area Rehabilitation Act	273
O.	The Grand Bargain Is Not an Improper Use of Tobacco Settlement Money	273
P.	The Plan Does Not Violate the Federal Transit Act	273

XI.	The Exit Financing Proposed in the Plan is Approved	275
XII.	Conclusion	276

I. Introduction¹

In chapter 9 of the bankruptcy code, the federal government offers help to the states in solving a problem that, under our constitutional structure, the states cannot solve by themselves. That problem is the adjustment of the debts of an insolvent municipality. In this case, this Court...