The city of Detroit, whose bankruptcy I've posted about most recently here and here, has filed its plan of adjustment. Detroit's plan provides for small discounts to its retirees and substantial (some might say huge) haircuts for its bondholders. You can read a good news account here.
I argue at length in my article, Municipal Bankruptcy: When Doing Less is Doing Best (pictured here), that such discrimination among creditors whose claims have the same legal priority should not be confirmed over the bondholders' objections. (The article can be found at vol. 88 of the American Bankruptcy Law Journal, page 85. At this time its availability online is limited to the subscription services WestLaw and Lexis. Let me know if you want a reprint and I'll try to accommodate.)
The technical--if disconcerting--term for confirming a plan over the objections of dissenting classes is cramdown. The Bankruptcy Code, however, prohibits cramdown of a plan that "discriminates unfairly." Certain kinds of discrimination are okay but others are not.
Detroit's argument for its discriminatory plan is essentially that retirees need the money more than bondholders. True enough, I suspect. Yet that's the sort of calculus that makes discrimination political and thus unfair. Courts have historically permitted discrimination in payouts only because the preferred creditors would be in a position to continue to do business with a debtor in the future, something the retirees by definition will not be doing.
Unfairness is built into the system and it's beyond the remit of the bankruptcy court to resolve it. Congress could give the claims of municipal retirees a priority over those of bondholders but it hasn't. Until it does, Detroit's present plan should not be confirmed unless the bondholders agree to take less.
I argue at length in my article, Municipal Bankruptcy: When Doing Less is Doing Best (pictured here), that such discrimination among creditors whose claims have the same legal priority should not be confirmed over the bondholders' objections. (The article can be found at vol. 88 of the American Bankruptcy Law Journal, page 85. At this time its availability online is limited to the subscription services WestLaw and Lexis. Let me know if you want a reprint and I'll try to accommodate.)
The technical--if disconcerting--term for confirming a plan over the objections of dissenting classes is cramdown. The Bankruptcy Code, however, prohibits cramdown of a plan that "discriminates unfairly." Certain kinds of discrimination are okay but others are not.
Detroit's argument for its discriminatory plan is essentially that retirees need the money more than bondholders. True enough, I suspect. Yet that's the sort of calculus that makes discrimination political and thus unfair. Courts have historically permitted discrimination in payouts only because the preferred creditors would be in a position to continue to do business with a debtor in the future, something the retirees by definition will not be doing.
Unfairness is built into the system and it's beyond the remit of the bankruptcy court to resolve it. Congress could give the claims of municipal retirees a priority over those of bondholders but it hasn't. Until it does, Detroit's present plan should not be confirmed unless the bondholders agree to take less.
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