By George G. Benetatos
Law Office of George G. Benetatos
The City of Detroit is many things, few of them positive (at the moment), and all of them a warning to citizens and politicians throughout the country. The legal ramifications of a major city on the brink of economic collapse also warrant every lawyer’s attention.
The city’s bankruptcy proceeding, currently before Judge Steven W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan, represents the imminent conclusion to the decline and fall of the Motor City — provided Judge Rhodes encourages a deal that is fair to all creditors, focuses on a comprehensive restructuring of the city and has a long-term vision for resolving the city’s fiscal crisis.
As things currently stand, there is a significant risk that select creditors — like retired city employees — may enjoy priority status over other deserving parties. If pensioners prevail, this outcome would exclude certain creditors and motivate others to strike their own secret deals, while eliminating any possibility for a sustainable economic recovery on behalf of the city.
Most importantly, any such arrangement — including collusive actions between one set of creditors against another — would violate the rules of bankruptcy law. For example: The city’s approach, from the beginning of this process, is a case study in lopsided litigation, not an attempt (as required by Chapter 9 of the U.S. Bankruptcy Code) to maximize value for all creditors by treating them similarly.
Judge Rhodes should encourage a comprehensive settlement that, one, satisfies all creditors; and two, enables the citizens of Detroit to enjoy the benefits of a sound plan that restores and maintains the city’s financial health.
The city’s proposal, which lowers taxes and increases hiring, leaves pensioners with less than they deserve to receive. The plan reserves $1.5 billion in spending, and retains billions of dollars of assets, the value of which are not part of any calculated recovery with regard to politically unpopular creditors. The latter would receive a mere pittance from this so-called settlement.
And therein lies the chief problem with the city’s handling of this bankruptcy proceeding: A legal event is now a forum for political theater, centered on a “Grand Bargain” crafted by a supposedly impartial mediation team. That the team has a record of legislative lobbying for this program, along with multiple press conferences to win the PR war against other creditors, does not speak well of the true meaning of impartiality or a mediator’s independent role concerning such a contentious issue.
Take into account, too, that the city’s assets — starting with the Detroit Institute of Arts (DIA), and lucrative real estate holdings and infrastructure — should be appraised for their real value, to be reflected in recoveries for all creditors.
Try as they may, the city cannot direct the value of these things to a favored political class; it can no more practice crony capitalism than it can engage in the hoarding of assets, which is unfair and illegal, as the city has a legal duty to minimize creditor losses.
A fair valuation of the DIA and other substantial assets must happen. The city must also capture the value of its assets in credit recoveries for the good of all creditors.
As the largest Chapter 9 bankruptcy in history, Judge Rhodes’s decision will attract intense scrutiny — for the soundness of its reasoning — and set a precedent for future municipal bankruptcies.
If the ruling is free of partisan influence, and serves as a symbol of justice, then it may inspire other cities to reclaim their respective destinies; it may be a summons, finally, to lead, as opposed to succumbing to the temptations of power and the monetary allure of some post-political sinecure.
The alternative is already before us: A city where, if the powers that be are not already fiddling, they are busily pursuing a plan while Detroit burns.
Now is the time to extinguish the legal conflagration with fairness and transparency.
