Sixteen months after the filing of its Chapter 9 petition, the City of Detroit has achieved a plan of adjustment, with the help of law firm Jones Day. The plan is widely hailed as a historic step in the city’s emergence from the largest and most complex municipal bankruptcy in U.S. history. Alleviating Detroit’s $18 billion of debt by roughly $7 billion, the plan provides for reinvesting funds, outlines a far-reaching program for making the city safer and upgrading its IT systems, and – crucially in the eyes of many observers – avoids the sale of any of the priceless collection of artworks housed at the Detroit Institute of Arts Museum.
In an exclusive interview with IFLR1000, Jones Day’s lead partner representing Detroit, David Heiman, reflected on the outcome of a case that wended its way through bankruptcy court over 16 months.
“We have absolutely no disappointments, only great delight with the successful conclusion. We were hopeful that we’d get confirmation when we did. The great thing is that the judge did it with such intellect and perspective. I can’t say we were surprised, since we expected it for the last month or two. Certainly, we were quite pleased that we were able to meet our targets that we set at the outset. It is very much an extraordinary result in terms of the comprehensive settlements in the plan as well as the speed with which it was consummated,” Heiman said.
The success in reaching a plan of adjustment favorable to the city and the preservation of its artworks should not be taken to minimize the stiff resistance from the city’s bondholders.
“The bondholders certainly litigated the heck out of the thing, but they ultimately settled,” Heiman noted. “I can only speculate, but there were a number of factors at work here. One is the momentum we gathered as we went from settlement to settlement and the continued pressure. The other issue is the recognition that the bondholders were fighting for the right to appeal, because they probably felt that it was likely that the judge was going to approve the plan. For them to litigate through the appellate system would have been a very risky proposition,” he said.
Heiman identified one outcome in particular as surprising for observers. Every creditor constituency ultimately agreed to a reduction in its final recovery.
“At the outset, every single creditor constituency was adamant that they’re entitled to 100 cents on the dollar, but the only ones who did get that were the secured creditors,” Heiman said. “In any proceeding, as long as they have collateral, the secured creditors are legally entitled to get 100 cents on the dollar. Here, all the unsecured creditors took a reduction. So first and foremost, as a template for other municipal bankruptcies, nobody can say any more that it can’t be done or it hasn’t been done,” he added.
Yet another layer of significance lies in the judge’s determination with respect to bankruptcy laws and clauses of Michigan’s constitution that were at odds.
“The judge’s finding last fall, in connection with this eligibility ruling, that the Michigan constitutional provision that precludes reduction in pension benefits is superseded by the bankruptcy laws, is highly significant. There are many other precedent-setting decisions, but that was the biggest. We rolled up basically an almost totally consensual plan through a series of settlements. It’s essentially a fully consensual plan when you don’t take into account the one-offs who still object to the plan but are very insignificant,” Heiman reflected.
The difficult and protracted litigation has run its course. At this point the case effectively is consummated, and all that remains is for it to take effect, Heiman noted.
“There is a series of transactions that need to be documented or procedures that need to be effectuated, but that’s all technical lawyers’ work, that’s crossing the Ts. Not to sound melodramatic, but the people of Detroit won. Everything we did was in pursuit of that cause to help the people of Detroit and the surrounding areas know they have the fresh start, the new beginning that they’re entitled to have,” Heiman said.