DETROIT--The judge in Detroit's municipal bankruptcy case
approved a troublesome settlement the city reached with two banks
owed nearly $300 million.
The settlement marks a clear win for Detroit Emergency Manager
Kevyn Orr, who has resolved some of the city's debt and moved it
closer to exiting bankruptcy court.
According to the settlement, the city will pay about $85 million
to two banks, Bank of America Corp. and UBS AG, owed about $288
million in pension-related debt. The city has argued that the
settlement allows Detroit to avoid costly litigation and secure
continued access to the city's casino tax revenue, estimated at
about $170 million a year, used to back the debt.
U.S. Bankruptcy Judge Steven Rhodes ruled Friday that the
settlement using a 70% discount on the original debt was
"reasonable and quite fairly compromises" the claims in the case,
including a question over whether the city should have sued the
banks to cancel the debt over other legal issues.
"The message is now is the time to negotiate," Judge Rhodes
said, addressing many other creditors in the case who have yet to
settle. He cited the city's new ability under the approved
settlement to seek a "cramdown," which would allow the judge to
approve the city's overall debt-cutting plan even over the
objection of other creditors.
The judge also chided parties in the case, including the city,
for waging a "public relations campaign" in an effort to win the
case, rather than focusing on reaching an equitable solution
balancing the needs of creditors as well as the residents of the
cash-poor city looking to revitalize.
Judge Rhodes, who earlier indicated that the city may have a
claim against the banks arguing that the original agreement was
legally flawed, said Friday that the settlement quickly resolves a
case that could have taken years in expensive litigation.
The settlement at issue with the federal bankruptcy court in
Detroit is the third time the parties have attempted to persuade
Judge Rhodes to allow the city to resolve the pension-related debt.
Judge Rhodes rejected a previous deal in January, calling it too
favorable to the banks.
City leaders had touted the settlement as the first agreement
between Detroit and its major creditors, a key milestone in the
city's effort to push through a debt-cutting plan to restructure
$18 billion in long-term obligations. But it only represents a
fraction of that debt, leaving unresolved the billions of dollars
owed to other major bondholders and the city's pension systems.
Earlier this week, the city announced another deal with some
bondholders which still needs the judge's approval.
Some creditors in the banks case had raised questions about
whether the proposed settlement is the best deal for the city and
could unfairly leave insurers liable to pay banks for not being
able to recover the full amount owed. The judge also questioned
last week whether the original deal may have improperly used casino
tax revenue to back the original deal.
At issue was whether the city under Mr. Orr should have tried to
break the so-called swaps agreements and recover the hundreds of
millions of dollars the city has paid the bank over about the last
decade. Judge Rhodes in January indicated the city may have had a
good chance to challenge the legality of interest-rate bets that
may have helped speed the city's fall into insolvency. But on
Friday, he said that the settlement offered the right approach to
avoid further litigation.
Write to Matthew Dolan at matthew.dolan@wsj.com
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