Commercial Creditors with Claims Against Detroit Must be Proactive, National Creditor’s Rights Attorneys Assert

Reportedly, U.S. Bankruptcy Judge Steven Rhodes plans to appoint District Court Chief Judge Gerald Rosen as a mediator in Detroit’s Chapter 9 case under the Federal Bankruptcy Code.  Through the appointment, Rhodes, who will rule on the appointment at a hearing on August 2nd, is sending a message that he is trying to facilitate a reorganization of the $18 billion case at an early stage. The proposed mediation order would allow Rhodes to send any matters to Rosen or another mediator of Rosen’s choosing. The mediation sessions would be confidential and protected from discovery.

Bankruptcy judges often use mediation to bring together parties in private, confidential sessions – especially when it may be difficult to reach a consensus through a more open formal in-court process. For example, a mediator helped facilitate a settlement in the bankruptcy of Residential Capital LLC, the mortgage unit of Ally Financial Inc. (formerly General Motors Acceptance Corp until the financial crisis of 2008 led to a government bailout and name change). A mediator also helped resolve a heated dispute in bankruptcy court between Frank McCourt, owner of the Los Angeles Dodgers, and Major League Baseball’s commissioner, Bud Selig.

Critics of the proposed appointment have expressed concerns that Rosen was nominated to the federal bench by President George H.W. Bush in 1989 and may not be sympathetic to Unions and pensioners – two classes of creditor’s that will most likely be subject to the mediation process. However, as David Haron, an attorney and experienced mediator with Foley & Mansfield’s Detroit office, notes, “A good mediator does not rely on his or her political leanings or legal philosophy.” Haron emphasized that Rosen, on the federal bench for more than 23 years, has proven to be such a jurist.

“Since the process is typically non-binding, and since the Unions and pensioners have, apparently, been unable to convince the Emergency Manager of the validity and strength of their positions, having a third-party ear with whom to make those arguments will make creditors more malleable to the Debtor’s prospects of a successful reorganization,” he says. “Chapter 9 is significantly different from other bankruptcy processes. Principally the debtor, the municipality which is created by and subject to legislation, cannot be liquidated. Municipal authorities do not need judicial permission to exercise ongoing governmental functions.  Also, the development of a reorganization plan is largely  at the initiative of the municipal authorities.”

But what about the many corporate entities – from vendors to landlords – that may have a claim against the city?  Bankruptcy attorneys John C. Thomas and Thomas J. Lallier of Foley & Mansfield’s national Creditor’s Rights practice agree that the outlook for the average creditor may be less than promising, but urge such entities to be proactive.

Landlords, lessors and licensors of intellectual property have significant protections if they act promptly in having the Debtor assume or reject their executory contracts, such as leases and licenses that require ongoing payments to the creditor

“Corporate creditors need to carefully document what they are owed, understand if they are subject to preference claims by the Debtor and what possible  defenses to the claims it might have. Filing a proof of claim as soon as possible is also advisable,”  said Lallier. “In addition, they need to understand that any payments a creditor received in the 90 days proceeding the bankruptcy filing are subject to recovery by the Debtor if they were paid on stale invoices.”

Thomas adds that obtaining sound legal counsel is crucial when faced with a preference claim.  In one instance, Thomas relays how a vendor, after receiving such a demand letter from the debtor, promptly sent in a check for approximately $400,000 dollars that the Debtor claimed was due. “What the vendor did not realize was that they had significant defenses that would have significantly reduced their exposure had they consulted bankruptcy counsel before they made the payment. Unfortunately, the judge would not let them revisit this debt after the fact, and they were unable to recover their funds.”

Thomas also notes that companies need to keep a close eye on any correspondence from the Bankruptcy Court in order to stay on top of key dates, relaying that such notices are all too often discarded as junk mail. “This will be a long process for everyone involved, but unless you assert your rights and claims from the outset, you may never see any or only a partial repayment of your debts, ” he added.



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