^ Detroit : on the move at Movement
Three weeks ago Here and Sphere published Susan Domitrz-Sapienza’s extensively researched story on the comeback of Detroit. As she noted, the economy of “Automobile City” had already reached its bottom and was — and is now — expanding along several lines newly established. The decision of the city’s state-appointed manager to file a Chapter 9 (Municipal) bankruptcy petition would seem, at first, to contradict our reporter’s finding. In fact, the Chapter 9 filing conforms our reporter’s conclusion.
To learn why, one needs to know a bit more about bankruptcy law than the common perception. Most people think of the word “bankruptcy” as the end, a kind of giving up the ghost. This perception is false. There are two kinds of bankruptcy cases. The one that most people think of is “liquidation,” in a liquidation, yes: the petitioner is in fact giving up the ghost — is ending things. There is, however, an entirely different kind of bankruptcy petition : the “reorganization.” In a reorganization filing, the petitioner seeks to restructure its affairs so that they can prosper again. All municipal, Chapter 9 filings are reorganizations.
The reorganizing petitioner seeks to — must — present a reorganization PLAN to the bankruptcy trustee appointed to the case, for approval by its creditors, the Trustee, and the Court. So,me corporate reorganizations fail, but a municipal reorganization cannot : cities have tax revenues that must be paid, and these are quantifiable. all that a city’s reorganization plan needs to is match tax revenues — and maybe also the proceeds of sales of city-owned real estate — to debts. Clearly, in such reorganization, the city’s creditors (including its pensioners) will probably be offered less than full repayment; and yes, each class of creditors must separately approve the reorganization plan. Many amended plans may be filed. But a city’s revenue can be counted on, and, as a reorganization plan may take up to five years to perform, the city’s revenues over that period are likely to offer creditors a fair return.
In addition, financing is often available to reorganization debtors after they file that was not available before ; because (1) post-filing debt is not included in the bankruptcy and thus is not subject to payment of less than full amount due and (2) the reorganization plan, as it becomes an order of court, makes the city’s post-filing credit standing easy to compute. A Detroit bondholder, for example, can readily exchange pre-filing bonds for post-filing bonds, if such are offered.
So much for the bankruptcy law as it applies to the Detroit filing.
The bigger point is that no bankruptcy petitioner files a reorganization until its finances look promising enough for it to present a feasible Plan. Such is the case with Detroit. Its finances are improving. real estate is selling fast. New businesses are starting up. Chrysler’s Jeep Cherokee plant is booming — as was reported recently in the Bew York Times. The Movement EDM Festival is bringing thousands of young visitors to the city on Memorial day weekend. Artists are setting up shop in Detroit, where rents for lofts are cheaper than cheap. Real estate tax revenues will only increase.
All of which is why Detroit’s bankruptcy filing signals the city’s recovery, not its failure.
—– Michael Freedberg / Here and Sphere