14 July 2014

Voting in Detroit: Introduction

The New York Times has a short piece here about the closing of voting on Detroit's "plan of adjustment." Readers might be interested to know that a city's creditors are divided into "substantially similar" classes, such a holders of a particular bond issue, retirees governed by one of several retirement plans, ordinary creditors, equipment lessors, employees, etc. Ideally--and in fact most of the time--all classes vote in favor of the plan. (Log rolling in action.) But note, that for a class of creditors to vote for the plan more than one-half in number and two-thirds in amount of creditors in that class must vote for the plan, a sort of modified super-majority requirement.

The NYT piece also makes an important point although without explanation. At least one class must vote in favor of the plan for it even to be considered by the court. What does this mean if, in fact, typically all classes vote for a plan?

If one or more classes vote against the plan but at least one votes for it, the court may go ahead and confirm the plan anyway, a process known as cramdown. If the city asks the court to cram the plan down the throats of non-consenting creditors, the plan must meet several additional requirements. One of those is that the plan be "fair and equitable," something Syncora, for example, would claim this plan fails to accomplish.

There is a second speed bump on the way to cramdown: the plan must also "not discriminate unfairly." This hurdle will be the most difficult for Detroit to overcome. You can learn all you want to know (and more) about "unfair discrimination" by reading my article Municipal Bankruptcy: When Doing Less Is Doing Best by downloading it here. Many classes of bondholders might use this requirement to fight cramdown.

But remember: Detroit doesn't even get to try to cram down its plan unless at least one class votes in its favor, which is why the prevailing sense that the retirees are voting "yes" is so important. Even if the retirees are on board, Detroit may still face a tough battle for confirmation. But without them, the current plan is dead in the water.

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