With Detroit raising the white flag on Thursday as the largest U.S. city to ever declare bankruptcy, there are lessons to learn from municipalities that have sought Chapter 9 relief in the past.
The National Law Journal spoke with three lawyers who step in when local governments crater, to get their perspectives on the Detroit bankruptcy. All were involved in the Orange County, Calif., bankruptcy, the largest municipal insolvency of its time in 1994.
Weighing in were Morrison & Foerster partner Larry Engel, who represented 19 public agencies that were Orange County, Calif., creditors, and Kenneth Klee, who represented Orange County in its Chapter 9 petition. Klee, with Klee, Tuchin, Bogdanoff & Stern, represents Jefferson County, Ala., which filed for bankruptcy in 2011. The NLJ also spoke with Buchalter Nemer shareholder Benjamin Seigel, who represented the Orange County Employees Retirement System.
They view Detroit’s problems as widespread and more complex than other municipalities that have sought Chapter 9 relief. Orange County’s difficulties, for example, stemmed from $1.6 billion in bad investments, an obstacle that the wealthy Southern California county was able to get past in just 18 months.
Here’s what they expect in the Detroit matter.
- The resolution of Detroit’s bankruptcy could take at least two years and as long as three. “There are going to be a tremendous number of negotiations,” Seigel said.
- Reductions in employee pension benefits could lead to a major increase in personal bankruptcy filings.
- The pension funds and health care costs of public employees are likely to be the major obstacle to recovery. Litigation under laws protecting pension holders’ claims is likely. “There are untried issues of law that could likely go up to the Sixth Circuit,” Klee said.
- Related to that, negotiating with the city’s 48 unions will be a time-consuming, expensive process.
- A major battle could arise between bondholders and public employee retirees, with one seeking a bigger allocation of limited resources at the expense of the other.
- A big question mark is whether the city, going forward, can remain viable by negotiating its debt obligation low enough. “It is not just the capacity to pay that is at issue, but also the mindset about being creditworthy,” Engel said.
- Widespread urban blight is serious problem and a major drag on consumer and creditor confidence, which could hinder long-term recovery.
- Creative lawyering over the ownership of the city’s assets, including historic buildings and art inventories, is likely.
- The bankruptcy will bring work to lots of attorneys, financial advisers, accountants and expert witnesses. “There are going to be a lot of lawyers involved,” Seigel said.
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