Update: The Detroit Free Press reports on Judge Rhodes’s decision to allow Detroit’s Chapter 9 bankruptcy to proceed. His statement signals that he will not allow deep pension cuts but also hinted that windfall sales of art would not solve the city’s problems:

The city will now proceed with its plan to introduce a proposal to restructure its debt and reshape government operations. Lawyers for Jones Day, the law firm that represents the city in bankruptcy court, expect to file the first version of the so-called “plan of adjustment” by the end of the year.

The plan is expected to include controversial cuts to unsecured creditors and asset sales, including a potential spinoff of the water and sewer department and the possible sale of Detroit Institute of Arts property.

Judge rules Detroit eligible for historic Chapter 9 bankruptcy; says pensions can be cut  (Detroit Free Press )

The next chapter in the saga of Detroit, it’s municipal collapse and the battle between city workers, tax payers and the surrounding political entities will begin today when Judge Steven Rhodes rules on the city’s eligibility for bankruptcy:

Many legal specialists and government officials say they expect Detroit will be found eligible for bankruptcy protection. Under the provisions of municipal bankruptcy, a city must be deemed insolvent, a standard that many bankruptcy specialists say Detroit, which is buried beneath $18 billion in debts, is likely to meet. In fact, Detroit’s filing marks the nation’s largest municipal bankruptcy ever in terms of the size of the debt.

But a city must also show that it has negotiated in “good faith” with its creditors or is unable to negotiate with them because such talks are impracticable. Some public sector unions and retirees, who object to the possibility that their pensions may be cut, say Detroit’s leaders never made an earnest effort to bargain, but rather intended to seek bankruptcy all along. Outside bankruptcy, the Michigan Constitution prohibits reducing pensions that public workers have already earned.

Whatever Judge Rhodes rules, the legal battles will be far from over. Any decision is likely to bring a number of appeals. If Detroit is found ineligible for bankruptcy protection, the city, which has already begun defaulting on some debt, is also likely to find a barrage of demands and lawsuits from its creditors.

Detroit Braces for Bankruptcy Ruling (NYTimes)

 

The Wall Street Journal’s Emily Glazer summarizes the creditors call for an independent valuation of the city’s art. It’s important to remember than in a Chapter 9 bankruptcy, the city cannot be forced to sell assets without a judge’s approval:

The creditors said they have not seen any valuation by the city of its art collection after waiting for months, said the person. The art, including works by Vincent van Gogh and Diego Rivera, has been speculated as worth more than $1 billion, according to the filing. The value of the art, if sold, could become key to boosting creditors’ recoveries in the largest municipal bankruptcy in U.S. history.

The creditors requested that the art be assessed based on arms-length market transactions, which the court and creditors could match against estimates provided by the city of Detroit, according to the person. The creditors also said the city could avoid litigation if the creditors have a say in the art’s valuation, the person said.

The Detroit Free Press gives some more details:

In the filing, the creditors argued that Orr is not moving aggressively enough to monetize the art. They warned that the New York-based auction house Christie’s — which the city hired to assess the art’s value — may deliver an “inappropriately low assessment, substantially below the market value of the Art.”

Bond insurers FGIC, Syncora and Ambac Assurance; Michigan Council 25 of AFSCME, the city’s largest union; three European banks that own the lion’s share of the city’s pension obligation certificate debt; and several other creditors jointly filed the motion.

“To date, other than retaining Christie’s, the Emergency Manager has failed to provide creditors with any information regarding any further steps the City has taken or intends to take to explore options and strategies to monetize the art in a manner that maximizes value,” the creditors said in the filing.

The creditors called for Rhodes to appoint a committee of creditor representatives to hire a new outside authority to value the art, allowing the city and creditors to “explore a wide range of options to monetize the art, including options that preserve the DIA as a culturally relevant institution as well as enhance creditor recoveries, in order to reach a consensus about the treatment of the art under the plan.”

Detroit Creditors Push for a Price on City’s Art (WSJ)

Detroit bankruptcy creditors ask judge to take steps toward sale of DIA treasures (Detroit Free Press)