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Detroit bankruptcy: The war shifts to the courts

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“All we’re talking about in this restructuring is the unfunded component of those pension funds,” Mr. Orr said. “There are going to have to be concessions. Concessions may be different for each fund. And they’re going to be focused on the unfunded component.”

With Detroit facing an immediate $18 billion shortfall, state officials are eager to get out of court as quickly as possible. The Chapter 9 process gives Orr a conceivable fast track, legal experts say, because it does not require allowing outside parties to offer counterproposals on how best to restructure. By contrast, in a Chapter 11 bankruptcy, if Detroit did not get its plan approved by a certain deadline, its creditors would have the right to step in and propose an alternate plan, which might include selling off assets.

“In a Chapter 11 bankruptcy, you have certain requirements that could allow [petitioners] to try and modify retiree benefits. But that’s not the case in Chapter 9. Collective bargaining contracts can be rejected without any protection whatsoever,” says Randye Soref, a bankruptcy attorney in Los Angeles with Polsinelli, a firm that handled several municipal bankruptcies in California.

Moreover, outside Chapter 9, Detroit would be vulnerable to not having its plan confirmed and having another party in control of its restructuring. Under Chapter 7, the city would be vulnerable to liquidation.

“But neither of those things can happen in a Chapter 9, which means the city holds more cards than they do in a private sector filing,” says Michael Sweet, a bankruptcy attorney with Fox Rothschild in San Francisco who helped a number of local governments in California avoid bankruptcy. “The judge can’t impose a plan on the city and no one else decides what they can do.”

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