In re City of Detroit

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

I.

Introduction

159

II.

The Plan Confirmation Process

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 grants that help to the State of Michigan (the “State”) and the City of Detroit (the “City”).

On December 5, 2013, ...