Detroit recovery from bankruptcy won’t be like GM’s

Kate Davidson Jul 19, 2013
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Detroit recovery from bankruptcy won’t be like GM’s

Kate Davidson Jul 19, 2013
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Detroit icons GM and Chrysler both sped through their 2009 bankruptcies in about 40 days. But Detroit’s own bankruptcy could take years. Of course, GM and Chrysler weren’t typical cases. They got a huge shove from Uncle Sam plus tens of billions in bailouts. Still, there are fundamental — and time consuming — differences between Chapter 11 bankruptcy for businesses and Chapter 9 for municipalities. 

GM struggled with a debt nearly ten times the size of Detroit’s when it filed for bankruptcy in 2009. But six weeks later it was back on its feet. Ken Noble represents creditors in corporate cases -– Chapter 11s. So he knows how they work.

“Chapter 11 cases used to last for years,” he says. “They don’t any longer.”

He says five to seven months is typical now. That’s because Chapter 11 has something Chapter 9 municipal bankruptcy doesn’t.

“There’s a deadline. And it works,” he says.

If a company doesn’t file a plan within 18-20 months of declaring bankruptcy, its creditors can file their own plan. Or they may ask the judge to dismiss the case.

But municipalities are protected by the Tenth Amendment. Federal bankruptcy courts have to be very careful not to interfere with local sovereignty.  Marc Levinson is a partner with Orrick, Herrington & Sutcliffe. He’s represented Vallejo and Stockton, California, two cities that have also filed for bankruptcy.  

The power of the federal judge is acutely limited. So the judge can’t say, I think you ought to sell a park in order to pay your creditors,” he says.

Federal judges can’t dictate outcomes. They can only make suggestions. That’s one reason Chapter 9 cases can get bogged down. How those suggestions are acted on is another, says Ken Klee, a partner at KTB&S. He represents Jefferson County, Alabama in what was until yesterday the largest municipal bankruptcy filing.

“The decision maker in a Chapter 11 is a chief executive officer. And when he or she talks and gives orders, it’s usually carried out throughout the debtor operation,” he says.

But he says when a political body is making decisions bankruptcy gets longer and more expensive. The fact that Detroit is currently operating under an emergency manager with broad authority may save the city some time.

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