A judge for the US Bankruptcy Court for the Eastern District of Michigan [official website] on Thursday rejected a proposed $165 million settlement agreement for the now-bankrupt city of Detroit to pay off UBS and Bank of America [corporate websites]. Referring to the agreement as financially imprudent [WSJ report], Judge Steven Rhodes put a halt to what has been the only completed deal in efforts to cut down the city's $18 billion long-term debt obligation. However, the court did approve of the city borrowing $120 million [Detroit Free Press report] for blight removal as well as improvements to city services. Currently, the city pays UBS and Bank of America $50 million each year, 5 percent of Detroit's annual budget, to reduce its debt.
Detroit's bankruptcy matter has been working its way through the court system since the city filed for Chapter 9 bankruptcy in July of last year. In December 2013 Rhodes ordered the city to renegotiate its bankruptcy-related financing with UBS and Bank of America, serving as the impetus for this week's proposed settlement between the parties. Earlier in December Rhodes ruled that Detroit is eligible and authorized to file for bankruptcy [JURIST report], declaring the city insolvent because it owes approximately $18 billion to more than 100,000 creditors, which is harming the city's residents and making it essentially impossible for the city to negotiate with creditors. In July Rhodes allowed [JURIST report] Detroit's bankruptcy filing to continue, declaring that his federal bankruptcy court had exclusive jurisdiction over the matter. This action placed a stay on a Michigan circuit court ruling that had been announced three days earlier, which declared the filing unconstitutional [JURIST report] because it threatened public pension benefits and those benefits are protected by the Michigan Constitution [text, PDF]. Earlier this fall JURIST guest columnists Patrick Brady and Igor Shleypak discussed how Detroit's pension plan holders have been fighting for their rights in this case and explored the broader consequences [JURIST op-eds] that Detroit's actions may have on other cities that consider filing for protection under Chapter 9.