Is it time to replace Detroit’s emergency manager?

January 17, 2014

In a stunning decision, bankruptcy judge Steven Rhodes refused to approve a $165 million settlement proposed by Detroit emergency manager Kevyn Orr to pay off Bank of America/Merrill Lynch and UBS for dubious interest rate swaps. Orr’s swap proposal has been contentious since Detroit formally filed for bankruptcy on July 18th, 2013. The Detroit News reported:

U.S. Bankruptcy Judge Steven Rhodes on Thursday denied a deal that would have allowed Detroit to pay two banks $165 million to terminate a troubled pension debt deal blamed for pushing the city into bankruptcy.

Rhodes ruled the settlement was too expensive and that Detroit was ‘reasonably likely’ to win a lawsuit against two banks involved in the pension debt deal.

In sharp terms, the judge said he will not let Detroit continue to make bad financial decisions, the likes of which triggered the biggest municipal bankruptcy in U.S. history. ‘The court … will not participate or perpetuate hasty and imprudent financial decision-making,’ Rhodes said. ‘It’s just too much money.’

Orr and his former law firm Jones, Day have bungled the handling of this swap issue by not following state procedures and seemingly not pressing the banks on the various points of law. Nathan Bomey of Detroit Free Press explained what was wrong:


Detroit’s pension funds, unions and bond insurers pointed out that the Orr’s decisions were not beneficial to the people of Detroit and seemed to be either sloppy law practice or a rush to conclude the bankruptcy as quickly as possible, at any cost. Now Orr’s rush to finalize the swaps deal has blown up in his face with the judge’s stinging indictment: “The court … will not participate or perpetuate hasty and imprudent financial decision-making.”

I wrote last July:

Since Kevyn Orr was appointed Detroit’s emergency manager on March 18, his approach always seemed a little off, especially when bankruptcy is concerned. For a Chapter 9 municipal bankruptcy to work, most of the parties must come to a mutual agreement about what each will sacrifice. Federal bankruptcy judges only have the authority to ‘cram down’ a minority of creditors in a specific class when the majority agrees. Federal bankruptcy judge Steven Rhodes, for example, can’t force all bondholders in a class to take a 50 percent haircut. Absent that power, municipal bankruptcy usually lasts much longer than others, as parties come to an agreement.

This balancing act is no easy task for a bankruptcy leader (city official, receiver, emergency manager or lead attorney). But when Orr laid out his creditor proposal on June 14, his aggressive treatment of retirees and bondholders seemed to me like he was wielding a chainsaw where a paring knife would have been the best tool to begin the work. The law firm Jones Day, the firm Orr left before becoming emergency manager, had been involved in the corporate bankruptcy fight of Chrysler. Orr’s opening punch felt like a move from corporate bankruptcy.

The only parties over which Orr had not wielded a chainsaw are the swaps counterparties. There is no benefit to the people of Detroit from Orr’s preferential treatment of the banks.

From the outside, it appears that Orr has been handling this process like a corporate bankruptcy, where quick and decisive moves rule the outcome. In contrast, municipal bankruptcies involve retirees with broad legal rights, creditors with various levels of seniority and a large overhang of public opinion. Now Jones, Day is trying to organize creditors ahead of a possible Puerto Rico bankruptcy. I think it may be time for Michigan governor Rick Snyder to think about replacing Orr and possibly his former law firm Jones, Day as Detroit proceeds through its bankruptcy.

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