Detroit Looks to Reengineer How City Government Works

Detroit Looks to Reengineer How City Government Works

ABI Bankruptcy Brief | November 11, 2014
 
  

November 11, 2014

 
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DETROIT LOOKS TO REENGINEER HOW CITY GOVERNMENT WORKS

The nation's largest municipal bankruptcy case revealed a startling level of dysfunction inside Detroit's government, including meter maids who were required to wear pants without pockets to prevent the theft of city funds and a jury-rigged firehouse alarm system that relied on a fax machine, the Wall Street Journal reported yesterday. "We found many practices that made no sense," said Chuck Moore, a consultant from restructuring firm Conway MacKenzie Inc. whose team has been embedded in the city's government for more than a year. As the city prepares to exit bankruptcy court, it will have to learn a new approach to providing basic services while staying within its means. Detroit plans to spend $1.7 billion over the next decade to improve services, earmarking about $400 million to tear down abandoned houses, $100 million toward a more reliable bus system, $260 million to make its streets safer and more than $150 million to upgrade outdated technology. "Detroit's inability to provide adequate municipal services runs deep and has for years," U.S. Bankruptcy Judge Steven Rhodes said in his ruling Friday approving the city's restructuring plan, which calls for cutting $7 billion in debt. "It is inhumane and intolerable, and it must be fixed." The process of re-engineering how Detroit works is expected to be bumpy. Financial experts who examined the city's operations say that Detroit remains burdened by out-of-date union rules, local laws and charter provisions. Consequently, Detroit is facing pressure to change the way it does business. Click here to read the full article (subscription required).

Click here to read the transcript of the Oral Opinion on the Record from the Detroit proceedings. To hear a reading of the transcript, click here.

OPPONENTS SAY DETROIT BANKRUPTCY ILLEGAL, PLAN APPEAL

Critics of Michigan's emergency manager law and Detroit's bankruptcy pledged yesterday to keep up their fight against what they called an illegal and immoral attack on a predominantly African-American city, the Detroit Free Press reported yesterday. The groups alleged that the city's bankruptcy exit plan unfairly benefits financial institutions on the backs of retirees of modest means and the poor. Members of Detroiters Resisting Emergency Management and other activist groups say that Detroit's bankruptcy amounted to wealthy banks and other investors getting off easily while impoverished Detroiters continue to face deep sacrifices, including losing homes and access to affordable water, and enduring cuts to pensions and health care. The group We the People of Detroit has also spoken out against bankruptcy deals that reduced pensions and health care for city workers and retirees while giving creditors valuable city real estate. Detroit Water and Sewerage Department retiree William Davis, a member of the Detroit Active and Retired City Employees Association, said that he and others in his group were formulating appeals of U.S. Bankruptcy Judge Steven Rhodes' ruling. Davis, an African-American, said that black Detroiters are bearing the brunt of the bankruptcy, and that few seem to care. "I personally think they all need to go to jail," Davis said of the leaders behind the bankruptcy. "We think this whole process is illegal and just wrong." Click here to read the full article.

ANALYSIS: CAN YOU REALLY END "TOO BIG TO FAIL"?

Taxpayer bailouts of banks will be a thing of the past once rules being hammered out in Switzerland are implemented, or so regulators would have us believe, according to an analysis in the Wall Street Journal yesterday. The world's 30 biggest and most systemically important banks will have to hold up to a fifth of their risk-weighted assets in equity or debt on which investors can take losses if total loss-absorbing capacity (TLAC) proposals unveiled Monday by the Financial Stability Board, a Basel-based international regulatory committee, are adopted. The plans, which would be set in place in 2019 at the earliest, are intended to avoid the chaos, confusion and public-sector rescues of private institutions that characterized the financial crisis triggered by the Lehman Brothers bankruptcy. Instead, if one of these institutions runs into problems because it's been badly run, shareholders and investors of its riskiest tranches of debt will have to suffer the losses. But if investors know they'll be rescued ahead of time, markets might tend to break down more often on the theory that people who are insured will take greater risks than they might have otherwise taken. Banks are critical to the efficient running of a market economy in ways other firms aren't, so when a financial crisis hits, the ramifications can be widespread and self-sustaining — and bank failures trigger further failures in a domino effect. Given the moral hazard risk, central banks are keen to ensure that banks have enough capital to bear the costs of their own bad judgment rather than shifting them onto the general population — hence, a 16 to 20 percent buffer, although even that understates the true scale of the buffer, according to banking specialists. Firms forced into liquidation typically sell assets at a discount to the going rate. Factoring those losses in, the actual buffer will be as much as a quarter of risk capital. But will it work? Click here to read the full analysis.

DINGED CREDIT? CARD ISSUERS ARE HAPPY TO LEND

Consumers with dinged credit are back in a borrowing mood, and lenders are more than happy to give them new credit cards, CNBC reported yesterday. Since the Great Recession ended five years ago, consumers have been gradually taking on more debt and lenders have been accommodating them, easing up on tighter standards. Much of the growth has been in so-called non-revolving credit, especially car loans, thanks to record-low interest rates. But revolving credit — mainly in the form of credit cards — is picking up. And the biggest growth in new credit cards is coming from subprime borrowers whose credit scores are less than 660, according to the latest Equifax data. Through July of this year, banks handed out cards to 9.8 million subprime consumers, a six-year high and an increase of 43 percent from the same period last year. Lenders are also giving subprime borrowers higher credit limits. Part of the growth is the result of an easing of the tighter standards that followed the 2008 credit bust after the boom of the early-2000s. Now that banks have repaired the damage from billions of dollars in bad debts, they're better able to take on more risk. As they hand out more accounts and higher limits to consumers with lower credit scores, though, lenders face a higher risk that they won't get paid back. As a result, some card issuers are bracing for a fresh round of bad debts by setting aside more in reserve to cover the cost of charging off unpaid card balances. But card companies are largely banking on profits from issuing new credit cards more than offsetting those higher loan losses. Click here to read the full article.

ANALYSIS: WHAT IF THE MUCH-EXPECTED ECONOMIC GROWTH BURST IS ACTUALLY A BUST?

After last Friday's good news of continued job growth and falling unemployment, economists are starting to wonder aloud how soon unemployment will reach its "natural" or "long-term" rate, according to a Wall Street Journal analysis today. If 5 percent unemployment is achieved in 2015, as some predict, how much room will be left for economic recovery? We've been thinking of the U.S. economy as being below its potential for so many years that it comes as a shock when the data suggest that we might be approaching a new normal, according to the analysis. A working paper by Northwestern University economist Robert Gordon in August lays out the case for pessimism. He runs through several scenarios to try to justify optimistic growth forecasts like that of the Congressional Budget Office. During economic recoveries, growth and employment usually rise hand-in-hand. If the unemployment rate is an accurate indicator, Gordon argues, there is little room left for recovery in growth, and there is little room for improvement in the utilization of industrial capacity, which is only slightly below the levels attained during recent expansions. The last hope for a sudden return of growth is an unexpected boost in productivity. That would be welcome, but there is no reason to expect a sudden change. With the distinct possibility that the long-predicted growth burst will never arrive, policymakers should take seriously warnings about unfunded U.S. obligations and should welcome even small tweaks to policy that could improve efficiency by easing regulations on economic activity. Click here to read the full analysis.

Click here to read Robert Gordon's report, "A New Method of Estimating Potential Real GDP Growth: Implications for the Labor Market and the Debt/GDP Ratio."

USTP NOTICE OF PROPOSED RULEMAKING ON CHAPTER 11 MONTHLY OPERATING REPORTS

Section 602 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) authorizes the U.S. Trustee Program (USTP) to issue rules requiring uniform periodic reports by debtors in possession or trustees in non-small business cases under chapter 11. The USTP just published in the Federal Register a notice of proposed rulemaking seeking public comment on the proposed rule and periodic report forms. The proposed rule is published in the Federal Register at 79 FR 66659 (Nov. 10, 2014) (to be codified at 28 C.F.R. pt. 58). The proposed rule, along with the proposed periodic report forms and instructions, may be viewed on the USTP's website. The proposed rule may also be accessed at www.regulations.gov. All public comments must be submitted on or before January 9, 2015, via www.regulations.gov. Please note that the proposed rule and forms only apply in chapter 11 cases filed by debtors that are not small businesses. Small business debtors are already required to use Official Form 25C, "Small Business Monthly Operating Report."

NOW AVAILABLE FOR PRE-ORDER: BEST OF ABI 2014 BOOK BUNDLE

Now available for pre-order in the ABI Bookstore is the Best of ABI 2014 book bundle containing The Year in Business Bankruptcy and The Year in Consumer Bankruptcy. These must-have references contain the best ABI Journal articles and papers from ABI's top-rated educational seminars, with Spring 2014 ABI Resident Scholar Prof. Charles Tabb selecting the most important developments in business bankruptcy and Fall 2014 ABI Resident Scholar Prof. Lois Lupica choosing important consumer bankruptcy developments. Make sure to log in to the site to get your discounted ABI member pricing. The ABI member price for each book is $50, but take advantage of this bundle offer and save even more! The books will ship in early December. Click here to order.

NEXT FREE COMMITTEE TELECONFERENCE WILL BE TOMORROW'S ASSET SALES COMMITTEE CALL ON CHAPTER 11 COMMISSION PROPOSAL!

Members are encouraged to dial-in and listen to or participate on upcoming ABI Committee conference calls. While committee membership is encouraged, it is not required to join the free teleconferences. Upcoming committee teleconferences include:

- Asset Sales Committee: Wednesday, Nov. 12; 4 p.m. ET
Topic: "Chapter 11 Reform Commission's Consideration of a Proposal to Surcharge Secured Lenders for 363 Asset Sales"
Speakers: Kathryn A. Coleman of Hughes Hubbard & Reed LLP and Gregory A. Bray. Moderator: Risa Wolf-Smith of Holland & Hart LLP.

All committee teleconferences are free to ABI members, and registration is not required. Simply utilize the following dial-in information:

Call in: (712) 432-1500
Participant code: 692933

NEXT ABI LIVE WEBINAR ON NOV. 20 FOCUSES ON PROFESSIONAL FEE CASE BEFORE THE SUPREME COURT

The next abiLIVE webinar will be held on Nov. 20 and will feature a discussion on a case before the Supreme Court that could have a major impact on professional fees for bankruptcy practitioners. In this 75-minute webinar, Thomas J. Salerno of Gordon Silver (Phoenix) and J. Maxwell Tucker of Squire Patton Boggs LLP (Dallas), along with moderator Judge Gregg W. Zive (D. Nev.; Reno, Nevada), will discuss the professional fee issues presented in Baker Botts LLP v. ASARCO LLC, No. 14-103, which was granted certiorari by the Supreme Court on Oct. 2. Click here to register for this important webinar!

ABI MEMBERS IN SOUTHERN CALIFORNIA: DON'T MISS TOMORROW'S SPECIAL TMA EVENT TO BENEFIT THE WOUNDED WARRIOR PROJECT

ABI members are invited to attend TMA Southern California's special fundraiser to support the Wounded Warrior Project and SoCal veteran support groups on Nov. 12 at the Beverly Hilton. Funds raised will benefit the Wounded Warrior Project, Veterans Legal Institute and the Public Law Center. For more information or to attend, please click here.

ABI MEMBERS INVITED TO ATTEND RETIREMENT DINNER FOR BANKRUPTCY JUDGE PETER J. WALSH ON NOV. 19

ABI members are invited to a special retirement dinner on Nov. 19 honoring the Hon. Peter J. Walsh's 50 years of dedicated service to the bench and bar. The event will be held at the Chase Center on the Riverfront in Wilmington, Del., and is being hosted by the Bankruptcy Section of the Delaware State Bar Association and the Delaware Chapter of the Federal Bar Association. Questions should be directed to Karen B. Owens at 302-654-1888. To attend, please go to https://sites-pepperhamilton.vuturevx.com/107/772/uploads/judge-walsh-retirement-dinner-form.pdf

ABI MEMBERS WELCOME TO ATTEND TRIBUTE DINNER ON DEC. 11 TO HONOR BANKRUPTCY JUDGE STEVEN W. RHODES

ABI members are invited to attend a tribute dinner honoring the 29 years of service of Bankruptcy Judge Steven W. Rhodes of the United States Bankruptcy Court for the Eastern District of Michigan for his commitment to the bench, bar and community. The Tribute Dinner will be held at the Roostertail on the Detroit River and is being hosted by the Bankruptcy Community to honor and celebrate Judge Rhodes' service and career. Please contact David Lerner at (248) 901-4010 for more information. To attend, please go to http://www.cbadetroit.com/events/Judge-Rhodes-USBC-Invite-and-Form.pdf

NEW CASE SUMMARY ON VOLO: SUSQUEHANNA BANK V. USA/IRS (IN RE RESTIVO AUTO BODY; 4TH CIR.)

Summarized by Ann Brogan of Crowley, Liberatore, Ryan & Brogan, P.C.

The Fourth Circuit affirmed the judgment of the U.S. District Court for the District of Baltimore affirming an appeal from the bankruptcy court but reversed the lower court, finding that Maryland's relation back statute applied. Instead, the Fourth Circuit upheld the alternative holding of the district court that the Maryland doctrine of equitable conversion gave the bank deed-of-trust priority over the IRS lien.

There are more than 1,500 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: CRAMDOWN HURDLES, AND HOW TO PLAY THE CLASSIFICATION GAME (OR NOT)

A recent blog post takes a look at what happens when an amended reorganization plan creates separate classes of unsecured creditors, and whether it is always reasonable to do so.

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

ABI Quick Poll

A single set of mandatory, uniform federal bankruptcy exemptions should be adopted.

Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 43 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

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  CALENDAR OF EVENTS
 

2014

November
- abiLIVE Webinar
    Nov. 20, 2014

December
- Winter Leadership Conference
    Dec. 4-6, 2014 | Palm Springs, Calif.
- 40-Hour Mediation Training Program
   Dec. 7-11, 2014 | New York

January
- New Orleans Consumer Bankruptcy Conference
    Jan. 19, 2015 | New Orleans
- Rocky Mountain Bankruptcy Conference
    Jan. 22-23, 2015 | Denver

  

 

February
- Caribbean Insolvency Symposium
    Feb. 5-7, 2015 | Grand Cayman, Cayman Islands
- VALCON 2015
    Feb. 25-27, 2015 | Las Vegas

March
- Bankruptcy Battleground West
    March 24, 2015 | Los Angeles, Calif.

 

 

 
 
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