02 September 2014

WSJ Follows My Lead

Go here to read an editorial in today's Wall Street Journal (warning: behind paywall). The subtitle makes a straightforward point: "Bond insurers have a good case against Detroit for unfair treatment in bankruptcy." Yes they do, as a matter of law.

Treating similarly-situated creditors similarly is the gist of the Bankruptcy Code's prohibition of "unfair discrimination." As the bond insurers led by Syncora argue, Detroit's retirees are getting much more than creditors Syncora and Financial Guaranty Insurance Company. As I argued in Municipal Bankruptcy: When Doing Less Is Doing Best (download here), the court should not confirm such a discriminatory plan over the objection of the short-changed creditor.

But the other half of my argument is also important: the court should not confirm a plan that is not in the "best interests" of creditors. Paying retirees the same as other creditors violates this rule in a state, like Michigan, that gives municipal employees an inviolable right to be paid their benefits.

In other words, Judge Rhodes is faced with a dilemma; confirming the current plan would violate one provision of the Bankruptcy Code but confirming a plan to the satisfaction of the bond insurers over the objection of retirees would violate another provision of the law.

So what's a court to do? Read my article to see but the bottom line is a pox on both houses. Without consent, no plan can be confirmed where it would violate one or the other of these requirements. In other words, send the parties back to the drawing board and, if they can't agree, dismiss the case and then let folks see what they can get.

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