By Jenny WhalenNov. 10, 2014
"There is nothing quite as interesting as bankruptcy."
And Matthew Schneider would know. A 2000 University of Michigan Law School graduate, Schneider is the lead trial counsel representing the governor, the state, and Michigan's executive branch departments in the City of Detroit's federal bankruptcy—a case that reached its conclusion Nov. 7.
Speaking at Michigan Law Nov. 5, Schneider accurately predicted that U.S. Bankruptcy Judge Steven Rhodes, '73, would confirm the city's debt adjustment plan, but cautioned students to remember that the close of the case would not mark the end of the story.
"Closing on a bankruptcy is like closing on a house," said Schneider, who is also Chief Legal Counsel for the Michigan Attorney General. "Even after you close you still have paperwork to do and plans to see through." He added that while Chapter 9 has allowed Detroit to take strides toward improving its city services, managing its pension investments, and, of course, ending its downward spiral of debt, a bankruptcy filing can't bring people back into the city or end the recession.
"The solutions are in front of us," Schneider said, gesturing to the audience. "I think a lot of Detroit's future depends on the people in this room. We need people like Michigan Law graduates to live and work in Detroit."
The city also needs a growing economy. The debt readjustment plan, as Schneider explained, includes $1.7 billion worth of rebuilding initiatives as well as daily operation costs. The ability to cover these costs depends on a 6.75 percent return on pension investment.
If the economy suffers and the return on investment is lower, the numbers won't add up. "We do not want a Chapter 18 filing," Schneider said. "A Chapter 18 is two 9s. We have to avoid that."
Asked whether other financially distressed cities should use Detroit as a model and file their own bankruptcies, Schneider cautioned students to remember that Detroit's case would not have proceeded as it has without Judge Rhodes ruling that pensions of city retirees could legally be cut in the bankruptcy.
"Pensions are wildcards," added John Pottow, Michigan's John Philip Dawson Collegiate Professor of Law. "In my opinion, one of the biggest hang-ups in this case was the issue of federalism in the Michigan Constitution. By the Attorney General's reading, there could be no concessions on pensions in bankruptcy. According to the Governor, concessions could be allowed if the federal bankruptcy court authorized them."
It was Judge Rhodes' ruling, and the subsequent "grand bargain," which allows the city to accept millions from external donors to help reduce pension cuts, that has moved the case forward, Schneider said.
"Cities should be conscious and cognizant of what can happen in regard to pensions," he added. "I think the Detroit bankruptcy should inspire other cities not to go down this path."
Schneider's talk was sponsored by the Federalist Society, and co-sponsored by JDs in the D and the Bankruptcy Law Society.
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