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 Legal experts said U.S. Judge Steven Rhodes' ruling appears firmly
rooted in the facts about Detroit's financial failure presented to
him at last month's eligibility trial, and that will be more
difficult to overcome on appeal than a ruling based solely on the
judge's reading of a law.
"It's really hard to overturn that kind of finding," said Emanuel
Grillo, a bankruptcy attorney with Goodwin Procter in New York.
"That's a factual finding, and a factual finding is subject to a
clearly erroneous standard."
Rhodes cited in his ruling details of the city's financial decline,
such as the time it takes for police to respond to calls, as well as
the spread of blight throughout the city. Rhodes has not released
the text of his ruling but read from it on Tuesday.
Still, the appeals process will carry some risk for Detroit that
some portions of Rhodes' ruling could be overturned, in part because
there is no precedent for a city as large as Detroit to file for
bankruptcy protection.
Fewer than 700 cities, counties and other government agencies have
filed for Chapter 9 bankruptcy protection, which is reserved for
government entities, since the Great Depression. Detroit is by far
the largest. The city of 700,000 residents has more than $18.5
billion in debt and thousands of creditors.
BATTLE LINES
Rhodes found the city met a menu of eligibility tests for
bankruptcy, such as being both insolvent and authorized by the state
to seek protection from creditors.
That said, Rhodes found the city had failed to meet a requirement
that it negotiate in good faith with creditors but had met an
alternative standard that it had so many creditors as to make
negotiating with them all an impractical undertaking.
Battle lines for the appeals were being sketched out even before a
text of Rhodes' ruling had been published.
Moments after the judge delivered his ruling from the bench, the
American Federation of State, County and Municipal Employees filed a
notice of appeal.
The AFSCME attorney, Sharon Levine of a Lowenstein Sandler, said
after Rhodes' ruling that the city filed for bankruptcy just 30 days
after presenting a plan to creditors, which is not enough time to
prove talks were unfeasible.
Overturning Rhodes on that issue will be difficult, Grillo said,
because his ruling relies so heavily on the evidence and testimony
presented in his court.
Critically for Detroit, Rhodes did not stay the proceedings pending
the outcome of the appeal.
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That means unless the process is halted by the U.S. District Court,
Detroit's bankruptcy would continue as planned. The city will seek
court authority for its proposed plan to borrow $350 million, and
mediation would continue between the city and its creditors with the
aim of reaching a consensual plan to deal with the city's debts. The
mediation is being overseen by Gerald Rosen, the chief federal judge
in Detroit.
POSSIBLE TIME FRAMES
Still, expert opinion is divided on what impact a lengthy appeals
process might have on Detroit's progress through bankruptcy.
Stephen Lubben, a professor at Seton Hall Law School, took the view
an appeal should be heard at "Chrysler-like speed. You can't
negotiate a plan with that kind of uncertainty hanging over the
case," he said before Rhodes issued his ruling.
Chrysler's sale to Fiat SpA during its 2009 Chapter 11 case was
approved by the U.S. Bankruptcy Court and affirmed by U.S. Appeals
Court in New York in the same week.
Rhodes turned down efforts to bring appeals directly to the U.S.
Court of Appeals for the 6th Circuit in Cincinnati, a move that
surprised some as it might have sped up the review process. Rhodes
said those requests for direct appeal to the Circuit Court would
have to be filed separately.
The next big hurdle will be a plan to cut the city's debt which will
likely include reducing what is owed on city pension plans. However,
because Michigan's constitution bars cutting pensions, experts said
the debt plan may eventually end up in the U.S. Supreme Court.
But few expect the eligibility appeal to interest the highest court
in the United States.
"Merely being a sexy case is not enough for the Supreme Court," said
John Pottow, a professor at the University of Michigan Law School,
speaking before Rhodes' ruling. "I can't see the Supreme Court
caring if (Detroit's emergency manager) Kevyn Orr negotiated in good
faith with creditors."
[By Tom Hals]
(Reporting by Tom Hals in Wilmington, Del.; additional reporting by
Bernie Woodall and Joseph Lichterman in Detroit; editing by Matthew
Lewis)
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