A Preliminary Road Map To The Chapter 9 Bankruptcy Of The City Of Detroit

1. Background to Chapter 9 Filing

   Drowning in debt in excess of $18 billion, the city of Detroit yesterday reached for the lifeline of relief provided by Chapter 9 of the Federal Bankruptcy Code. Detroit filed its Chapter 9 petition with the United States Bankruptcy Court for the Eastern District of Michigan in downtown Detroit on July 18, 2013, at 4:06 p.m. (ET) in order to stave off a last-minute attempt by municipal retirement plans to obtain an injunction from a Michigan state court which, if granted, could have prohibited the bankruptcy filing. In terms of the overall amount of debt affected, this is the largest Chapter 9 bankruptcy in American history. The name and number of this case pending in the United States Bankruptcy Court for the Eastern District of Michigan is In re City of Detroit, Case No. 13-53846.

   Lawyers for the city of Detroit commenced this case by filing a voluntary Chapter 9 petition which immediately imposed an automatic stay prohibiting collection and foreclosure actions by creditors. The Chief Judge of the Sixth Circuit Court of Appeals who sits in Cincinnati, Ohio and that oversees the operation of bankruptcy courts in the states of Michigan, Ohio, Kentucky and Tennessee, will appoint a bankruptcy judge from the Circuit to handle this Chapter 9 case. This judge could hail from any of the four states in the Circuit and could elect to conduct hearings in this case in his or her home district.

   The Chapter 9 petition was signed by Kevyn Orr, the emergency manager of Detroit appointed earlier this year under a revamped state law designed to alleviate the financial problems of Michigan municipalities and school districts. With Michigan's written permission, Orr elected to pursue his restructuring efforts in bankruptcy court when these pre-bankruptcy attempts for a consensual debt restructuring plan with creditors failed to bear fruit.

2. What Does the Chapter 9 Filing Mean for the City and its Creditors?

   1. Automatic Stay Against Most Collection and Foreclosure Actions As noted above, most creditors of the city are now automatically stayed from commencing or continuing collection and foreclosure actions against the city and its property. Continuing these actions without first obtaining an order from the bankruptcy court could result in the imposition of financial and other penalties against the transgressing creditor. This stay however, does not prohibit the payment of special revenue pledged to holders of special revenue bonds issued by the city.

   2. "Business as Usual" for the City The city will continue to operate its business...