October 3, 2024

Federal Judge Halts Legal Challenges in Detroit Bankruptcy Case

The decision by Judge Steven Rhodes of the United States Bankruptcy Court freezes all litigation against the city, its emergency manager and Gov. Rick Snyder of Michigan during Detroit’s bankruptcy process.

Judge Rhodes said challenges to the city’s Chapter 9 filing, including protests by retired city employees about potential pension cuts, would be addressed in coming hearings. The federal bankruptcy court has “exclusive jurisdiction” over the case, he said.

It was a dramatic beginning to the largest municipal bankruptcy case in American history. As protesters circled the courthouse downtown, the judge heard arguments about whether Mr. Snyder had overstepped his authority in forcing the city into bankruptcy.

He was attempting to resolve a legal muddle that began almost immediately after Detroit filed for bankruptcy last Thursday.

The next day, Judge Rosemarie Aquilina of Ingham County Circuit Court ruled that the filing violated the Michigan Constitution, which protects the pensions of retired public employees. The city, led by the state-appointed emergency financial manager, Kevyn D. Orr, is expected to seek reductions in pensions in bankruptcy as part of its broader efforts to reduce Detroit’s estimated $18 billion in debt.

Judge Aquilina’s ruling was appealed by the state attorney general to the Michigan Court of Appeals, which on Tuesday issued a stay of her order pending an appellate decision.

But on Wednesday, in the first hearing in the case, Judge Rhodes settled the matter by approving a motion by Mr. Orr to freeze all litigation against the city during its bankruptcy. The judge said that concentrating all legal issues in federal court increased the chances that Detroit could reorganize its debts and emerge from bankruptcy in better financial shape.

“My orders enhance the likelihood of Chapter 9 reorganization, speeds the bankruptcy case and cuts costs to taxpayers,” he said.

The judge also extended protection from litigation to Mr. Orr, Governor Snyder and other state officials directly involved in the bankruptcy.

Mr. Orr attended the court arguments, but was not present when the judge made his decision. Afterward, a spokesman for the emergency manager, William Nowling, said he was pleased with the court’s action. “This clears the way so we can proceed in an orderly fashion with bankruptcy proceedings and restructuring Detroit,” Mr. Nowling said.

Lawyers representing retired police officers, firefighters and other city employees declined to say whether they would appeal the ruling by Judge Rhodes.

Union officials gathered outside the courthouse said they expected to raise the pension issues and the constitutional questions at future hearings on whether Detroit has met all legal requirements for a bankruptcy filing.

“We are going to fight this all the way,” said Edward McNeil, an official with the American Federation of State, County and Municipal Employees. “We don’t believe the city should even be in bankruptcy court.”

Both Mr. Snyder and Mr. Orr have said that a bankruptcy filing was the only option to reverse Detroit’s long decline, improve city services and settle its crushing debt load. But city workers, retirees, bondholders and other creditors have accused Mr. Orr of failing to negotiate deals on outstanding debts that could have averted the filing.

Judge Rhodes made it clear on Wednesday that he had not ruled on whether the filing violated the state’s Constitution, or whether pensions should be protected.

“All of the issues in which the court is not ruling are fully preserved,” he said.

Those issues and others will be part of what is likely to be a protracted legal battle over the city’s eligibility to file for bankruptcy. Hearings will begin later this summer, and will include testimony by Mr. Orr on the dismal condition of Detroit’s finances.

Mr. Nowling said the eligibility hearings were the first critical step in Mr. Orr’s road map for the city’s recovery. “One thing that was clear was that Judge Rhodes wanted an efficient and speedy process, and we think that’s essential for turning the city around,” he said.

The bankruptcy filing has riveted the attention of the city and surrounding region, and spurred a small but loud group of protesters to form outside the courthouse on Wednesday.

About two dozen men in red T-shirts representing the Detroit Fire Department chanted “Help us help you” as they marched down Lafayette Boulevard.

Darryl Brown, a firefighter who went on disability last year, criticized Mr. Snyder and other state officials for targeting retiree pensions. “They can’t touch it; it’s protected by the Constitution,” Mr. Brown said. “But they’re still doing everything they can to figure out how to get at it.”

A Detroit police officer, Rodney Fresh, said he feared the bankruptcy would gut what was left of the city’s dwindling middle-class population.

He accused Mr. Snyder of failing to consider the hardship the bankruptcy would cause retirees. “I want him to look at the situation and just be fair,” Mr. Fresh said. “He’s looking at everything from his point of view.”

Mary M. Chapman contributed reporting.

Article source: http://www.nytimes.com/2013/07/25/us/judge-clears-path-for-detroit-bankruptcy-case.html?partner=rss&emc=rss

Judge Clears Path for Detroit Bankruptcy Case

The decision by Judge Steven Rhodes of United States Bankruptcy Court freezes all litigation against the city during the bankruptcy process and consolidates state-level legal challenges to Detroit’s Chapter 9 filing into the federal bankruptcy case.

The federal bankruptcy court has “exclusive jurisdiction” over the case, he said, adding, “There is no case law that holds otherwise.”

It was a dramatic beginning to the largest municipal bankruptcy case in American history.

The judge was attempting to put to rest a legal spat that began almost immediately after Detroit filed for bankruptcy last Thursday, the largest American city ever to do so. On Friday a state judge, Judge Rosemarie Aquilina of Ingham County Circuit Court, ruled that the filing violated the state Constitution, which protects the pensions of retired public employees. The city has been expected to seek reductions in pensions in bankruptcy court as part of its broader efforts to reduce Detroit’s estimated $18 billion in debts and other obligations.

Judge Aquilina’s ruling was appealed by the state attorney general to the Michigan Court of Appeals, which on Tuesday issued a stay of her order pending their appellate decision.

But on Wednesday, in the first hearing on the Chapter 9 case, Judge Rhodes approved a motion by the city’s emergency financial manager, Kevyn D. Orr, to freeze all litigation against the city during the bankruptcy process.

The move effectively gives Judge Rhodes the authority to rule on the issues raised by retired public employees regarding their pensions.

Judge Rhodes also granted a second motion by the emergency manager that extends protection from litigation to Gov. Rick Snyder of Michigan and other state officials.

Last week, Mr. Snyder accepted the city’s emergency manager’s recommendation and ordered Detroit to file for Chapter 9.

Both Mr. Snyder and Mr. Orr have said that a bankruptcy filing was the only option to reverse Detroit’s decades-long decline and settle its crushing debt.

As the case began, protesters gathered outside the federal courthouse downtown. Some of those were city employees who said the governor had illegally taken over control of the city from residents and elected public officials.

Article source: http://www.nytimes.com/2013/07/25/us/judge-clears-path-for-detroit-bankruptcy-case.html?partner=rss&emc=rss

American and US Airways Merger Clears Bankruptcy Court

“The merger is an excellent result. I don’t think anybody disputes that,” Judge Sean H. Lane said in Federal Bankruptcy Court in Manhattan before issuing his decision.

But the judge declined to sign off on a proposed $20 million severance package for Thomas W. Horton, currently the chief executive of American’s parent company, the AMR Corporation.

The court’s approval is an important milestone for American, which filed for Chapter 11 bankruptcy in November 2011 after having long resisted using the bankruptcy process to cut labor and other costs. The merger still needs approval from Justice Department antitrust regulators and US Airways shareholders. It is expected to close by the fall.

The combined airline will have 6,700 daily flights and annual revenue of roughly $40 billion. The new American Airlines will fly slightly more passengers than United, the current No. 1. It will be run by Doug Parker, the chief executive of the US Airways Group, who began pursuing a merger shortly after American entered bankruptcy protection.

The federal bankruptcy trustee for AMR had objected to the severance package for Mr. Horton. While he didn’t question the amount, Judge Lane agreed that the timing of it seemed to violate prohibitions in the bankruptcy law.

“Approving it today is just not appropriate,” Judge Lane said. The judge plans to issue a written decision at a later date detailing his reasoning.

In 2011, Mr. Horton was paid a salary of $618,135. He also received stock awards and options that were valued that year at nearly $2.7 million, but the company argued those could be nearly worthless after the bankruptcy reorganization. Figures for 2012 aren’t yet available.

The proposed severance package includes $19.9 million in cash and stock as well as a lifetime of free first-class tickets on American for Mr. Horton and his wife.

He could still receive the payout. American’s lawyers offered a possible solution during the hearing: American and US Airways would amend their merger agreement to say that Mr. Horton’s severance would be subject to ratification of the board of the new airline after the merger closes.

In most bankruptcy cases, creditors lose part of the money they are owed. In part because of the merger, creditors in this case will get back what they are owed. Onetime shareholders of AMR are to get 3.5 percent of the new airline.

Article source: http://www.nytimes.com/2013/03/28/business/american-and-us-airways-merger-clears-bankruptcy-court.html?partner=rss&emc=rss

Blacks Face Bias in Bankruptcy, Study Suggests

The disparity persisted even when the researchers adjusted for income, homeownership, assets and education. The evidence suggested that lawyers were disproportionately steering blacks into a process that was not as good for them financially, in part because of biases, whether conscious or unconscious.

The vast majority of debtors file under Chapter 7 of the bankruptcy code, which typically allows them to erase most debts in a matter of months. It tends to have a higher success rate and is less expensive than the alternative, Chapter 13, which requires debtors to dedicate their disposable income to paying back their debts for several years.

The study of racial differences in bankruptcy filings was written by Robert M. Lawless, a bankruptcy expert and law professor, and Dov Cohen, a psychology professor, both with the University of Illinois; and Jean Braucher, a law professor at the University of Arizona.

A survey conducted as part of their research found that bankruptcy lawyers were much more likely to steer black debtors into a Chapter 13 than white filers even when they had identical financial situations. The lawyers, the survey found, were also more likely to view blacks as having “good values” when they expressed a preference for Chapter 13.

“Unfortunately I’m not surprised with these results,” said Neil Ellington, executive vice president of Consumer Education Services, a credit counseling agency in Raleigh, N.C. “The same underlying issues that created the problem in mortgage lending, with minorities paying higher interest rates than their white counterparts having the same loan qualifications, are present in all financial fields.”

The findings, which will be published in The Journal of Empirical Legal Studies later this year, did not suggest that there was any obvious evidence of discrimination in the bankruptcy process. “I don’t think there is any overt conspiracy,” Professor Lawless said. “But when you have a complex system, these biases can play out and the people within the system don’t see the pattern because nobody is in charge of looking at these big issues.”

Changes in the bankruptcy law in 2005 were intended to force more debtors to file under Chapter 13 and repay some of their debts, but that has not been the effect. In fact, the rate of Chapter 13 filings has remained relatively steady, at about 30 percent. Last year, overall bankruptcy filings were 1.4 million.

Chapter 13 is not always an inferior choice. Many distressed borrowers go that route because they may be able to save their homes from foreclosure. But even that does not explain away the difference: among blacks who did not own their homes, the rate of filing for Chapter 13 was still twice as high as the rate for other races. And the trend persists across the country, beyond regions like the South where Chapter 13 tends to be a more popular option among all debtors (perhaps, in part, because Chapter 13 originated in the South).

If a debtor chooses an inappropriate chapter, there can be serious implications. Chapter 13 plans, for instance, are more likely to fail than a Chapter 7. Nearly two of every three Chapter 13 plans are not completed, which means the filers’ remaining debts are not discharged, leaving them right where they started. One bankruptcy judge, who sees filers once they can no longer make the required payments in the plans, said the debtors usually do not have enough income to stick with the budget.

“They thought they could cut back on this or that, and you might be able to do that for three or four months,” said the judge, C. Ray Mullins, chief judge for the United States Bankruptcy Court in the Northern District of Georgia. “But in a Chapter 13, it will be either three or five years. There are certain things you can’t anticipate — a spike in gas prices.”

The study has two parts. One used data from actual bankruptcy cases from the Consumer Bankruptcy Project, the most detailed trove of information on filers currently available. The project surveyed 2,400 households nationwide who filed for bankruptcy in 2007.

Article source: http://feeds.nytimes.com/click.phdo?i=1c3ea0ab08c9868aeb470a88e4e11cc6

Economix: The Problem With the F.D.I.C.’s Powers

Today's Economist

Simon Johnson, the former chief economist at the International Monetary Fund, is the co-author of “13 Bankers.”

Under the Dodd-Frank financial regulation legislation (in Title II of that act), the Federal Deposit Insurance Corporation is granted expanded powers to intervene and manage the closure of any failing bank or other financial institution. There are two strongly held views of this legal authority: that it substantially solves the problem of how to handle failing megabanks and therefore serves as an effective constraint on their future behavior, and that it is largely irrelevant.

Both views are expressed by well-informed people at the top of regulatory structures on both sides of the Atlantic, at least in private conversations. Which view is right?

In terms of legal process, the resolution authority could make a difference. But as a matter of practical politics and actual business practices, it means very little for our biggest financial institutions.

On the face of it, the case that this power to deal with failing banks — known as resolution authority — would help seems strong. Timothy F. Geithner, the Treasury secretary, has repeatedly argued that these new powers would have made a difference in the case of Lehman Brothers.

And a recent assessment by the F.D.I.C. provides a more detailed account of how exactly this could have worked.

According to the authors of the F.D.I.C. report, if its current powers had been in effect in early 2008, the agency could have become involved much earlier in finding alternative ways –- that is, unrelated to the bankruptcy process –- to “solve” the problems that Lehman Brothers had: very little capital relative to likely losses and even less liquidity relative to what it needed as markets became turbulent.

The F.D.I.C. report describes a series of steps that the agency could have taken, particularly around brokering a deal that would have involved selling some assets to other financial companies, such as Barclays, while also committing some money to remove downside risk –- both from buyers of assets and from those who continued to own and lend money to the operation that remained.

If needed, the F.D.I.C. asserts, it could have handled any ultimate liquidation in a way that would have been less costly to the system and better for creditors, who will end up getting very little through the actual court-run process.

But there are two major problems with this analysis: it assumes away the political constraint, and it ignores the most basic reality of how this kind of business operates.

At the political level, if you wish to engage in alternative or hypothetical history, you cannot ignore the presence of Henry M. Paulson Jr., then secretary of the Treasury.

Mr. Paulson steadfastly refused, even in the aftermath of the near-collapse of Bear Stearns, to take any active or pre-emptive role with regard to strengthening the financial system –- let alone intervening to break up or otherwise deal firmly with a potentially vulnerable large firm.

For example, in spring 2008, the International Monetary Fund — where I was chief economist at the time — suggested ways to take advantage of the lull after the collapse of Bear Stearns to reduce downside risks for the financial system.

Compared with the hypothetical variants discussed by the F.D.I.C., our proposals were modest and did not involve winding down particular firms. Perhaps in retrospect we should have been bolder, but in any case our ideas were dismissed out of hand by the Treasury.

Senior Treasury officials took the view that there was no serious systemic issue and that they knew what to do if another Bear Stearns-type situation developed –- it would be rescued by another ad-hoc deal, presumably involving some sort of merger. (Bear Stearns, you may recall, was taken over by JPMorgan Chase at the 11th hour, with considerable downside protection provided by the Federal Reserve.)

Mr. Paulson was very influential, given the way the previous system operates, and his memoir, “On The Brink,” is candid about why: he had a direct channel to the president, he was the most senior financial sector “expert” in the administration, and he was chairman of the President’s Working Group on Financial Markets.

Under the Dodd-Frank Act, however, he would have been even more powerful — as head of the Financial Stability Oversight Council and as the person who decides whether to appoint the F.D.I.C. as receiver.

It is inconceivable that the F.D.I.C. could have taken any intrusive action in early 2008 without his concurrence. Yet it is equally inconceivable that he would have agreed.

In this respect Mr. Paulson was not an outlier relative to Mr. Geithner or other people who are likely to become Treasury secretary. The operating philosophy of the United States government with regard to the financial sector remains: hands off and in favor of intervention only when absolutely necessary.

In addition, as a senior European regulator pointed out to me recently, the idea that any agency from any one country can handle a resolution of a global megabank in an orderly fashion is an illusion. Even if we had agreement among countries on how to handle resolution when cross-border assets and liabilities are involved — which we don’t — it would be a major mistake to assume that such a resolution would have no systemic consequences, that same person said.

These financial services companies are very large — more than 250,000 employees work for Citigroup, which operates in 171 countries and with more than 200 million clients, according to its Web site. The organizational structures involved are complex; it is not uncommon to have several thousand legal entities with various kinds of interlocking relationships.

Sheila Bair, the head of the F.D.I.C., has pointed out that “living wills” for such complicated operations are very unlikely to be helpful. Perhaps if the financial megafirms could be simplified, resolution would become more realistic (and the F.D.I.C. report, mentioned above, alludes to this possibility in its conclusions).

But any attempt at simplification from the government would need to go through the Financial Stability Oversight Council, where the Treasury’s influence is decisive.

And the market has no interest in pushing for simplification — anything that makes it harder to rescue a big bank, for example, will increase the probability that, in the downside situation, it will receive a too-big-to-fail subsidy of some form.

Many equity investors like this kind of protective “put” option.

F.D.I.C.-type resolution works well for small and medium-sized banks, and expanding these powers could help with some situations in the future. But it would be an illusion to think that this solves the problems posed by the impending collapse of one or more global megabanks.

Article source: http://feeds.nytimes.com/click.phdo?i=9e81bd0ddbfac9dc700508d73af30738