By Karen Pierog
Fri Aug 2, 2013 12:59am EDT
Aug 2 (Reuters) - A court hearing on Friday may provide a roadmap for how Detroit's historic bankruptcy filing will unfold as the judge overseeing the case could set a speedy schedule, appoint a mediator and rule on other matters.
The hearing in U.S. Bankruptcy Court is a key step toward Detroit Emergency Manager Kevyn Orr's effort to see the city emerge from the largest U.S. municipal bankruptcy filing in history by September 2014. But Detroit must first prove it qualifies to file for bankruptcy and then file a reorganization plan.
U.S. Bankruptcy Judge Steven Rhodes on Tuesday proposed Oct. 23 for the start of a trial on potential objections to Detroit's eligibility to file for Chapter 9 bankruptcy. Detroit must prove that it is insolvent and that it made a good-faith effort to negotiate with creditors owed more than $18 billion, or that there are too many creditors to make negotiating feasible.
If the court does determine the city qualifies for bankruptcy, Detroit would have until March 1, 2014 to file a reorganization plan, according to Judge Rhodes' schedule.
That timeline is more ambitious in some areas than the one proposed by Orr after he filed the city's bankruptcy petition July 18.
In a court filing on Thursday, Detroit released a list of creditors including current, former and retired workers, that filled 3,504 pages. Prominent among them are bondholders and pension funds that will have, like other creditors, only until Aug. 19 to file their objections to the city's ability to remain in bankruptcy court.
That deadline and others Rhodes has proposed will be discussed at Friday's hearing, the second of many expected over the coming months. But even if Rhodes' schedule is adopted, the deadlines may not be set in stone, according to Jim Spiotto, a municipal bankruptcy expert at law firm Chapman and Cutler in Chicago.
"If people don't agree and become contentious it takes longer," he said.
Detroit workers, retirees and pension funds have already tried to derail the bankruptcy petition on Michigan constitutional grounds in state court. But Rhodes last week suspended their lawsuits, putting his court in full control of the case.
The schedules put forward by Orr and Rhodes would have Detroit moving through bankruptcy court more quickly than Stockton, California, which took nearly a year to pass through the eligibility phase alone. Detroit's debt load dwarfs that of Stockton, which listed liabilities of around $1 billion when it filed in June 2012.
On Friday, Rhodes is expected to address the court's "limited role" in a Chapter 9 bankruptcy. Unlike corporate bankruptcies under Chapter 11, a judge overseeing a municipal bankruptcy case cannot order the liquidation of assets. Nor can a judge order fee or tax hikes to satisfy debts.
Other items on the court's agenda for Friday include the setting of a briefing and discovery schedule requested by bond insurer Syncora Guarantee Inc, which is contesting Detroit's plan to end interest rate swap agreements at a discounted rate.
Detroit entered into the swap agreements with UBS AG, SBS Financial Products Company, and Merrill Lynch Capital Services in 2006 in conjunction with the issuance of taxable debt to fund its pension funds. The city is seeking to save $70 million by terminating the contracts.
Judge Rhodes is also expected on Friday to appoint a federal judge as mediator, a claims and noticing agent, and potentially an independent fee examiner for the case.
Detroit has filed a motion to create a retired employees committee, which would be expected to negotiate pension and health care benefits with the city. The city's two pension funds and some of its unions have filed objections to the move.
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