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Detroit bankruptcy preference definition

detroit bankruptcy preference definition

A creditor with a security interest in a floating mass, such as inventory or accounts receivable, is subject to preference attack to the extent he improves his position during the day period before bankruptcy. The test is a two-point test, and requires determination of the secured creditor’s position 90 days before the petition and on the date of the petition. The city of Detroit, Michigan, filed for Chapter 9 bankruptcy on July 18, It is the largest municipal bankruptcy filing in U.S. history by debt, estimated at $18–20 billion, exceeding Jefferson County, Alabama's $4-billion filing in Detroit is also the largest city by population in the U.S. history to file for Chapter 9 bankruptcy, more than twice as large as Stockton, California. Detroit is not the same place it was five years ago, when officials accepted financial defeat and filed for Chapter 9 bankruptcy on July 18, It was the largest municipal bankruptcy in U.S. detroit bankruptcy preference definition

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The trustee may avoid a transfer of a lien under this section even if the lien has been enforced by sale before the commencement of the case,. Subsection b 2 of this section in effect exempts from the preference rules payments by the debtor of tax liabilities, regardless of their priority status.

If a creditor can qualify under any one of the exceptions, then he is protected to that extent. If he can qualify under several, he is protected by each to the extent that he can qualify under each. The first exception is for a transfer that was intended by all parties to be a contemporaneous exchange for new value , and was in fact substantially contemporaneous. Normally, a check is a credit transaction. The second exception protects transfers in the ordinary course of business or of financial affairs, where a business is not involved transfers.

If the debt on account of which the transfer was made was incurred in the ordinary course of both the debtor and the transferee, if the transfer was made not later than 45 days after the debt was incurred, if the transfer itself was made in the ordinary course of both the debtor and the transferee, and if the transfer was made according to ordinary business terms, then the transfer is protected.

The third exception is for enabling loans in connection with which the debtor acquires the property that the loan enabled him to purchase after the loan is actually made. The fourth exception codifies the net result rule in section 60c of current law [section 96 c of former title 11]. If the creditor and the debtor have more than one exchange during the day period, the exchanges are netted out according to the formula in paragraph 4.

Any new value that the creditor advances must be unsecured in order for it to qualify under this exception. Paragraph 5 codifies the improvement in position test, and thereby overrules such cases as DuBay v. Williams, F. Union Bank and Savings Co. A creditor with a security interest in a floating mass, such as inventory or accounts receivable, is subject to preference attack to the extent he improves his position during the day period before bankruptcy.

If new value was first given after 90 days before the case, the date on which it was first given substitutes for the day point. Paragraph 6 excepts statutory liens validated under section from preference attack. It also protects transfers in satisfaction of such liens, and the fixing of a lien under section j , which protects a vendee whose contract to purchase real property from the debtor is rejected.

Subsection d , derived from section 67a of the Bankruptcy Act [section a of former title 11], permits the trustee to avoid a transfer to reimburse a surety that posts a bond to dissolve a judicial lien that would have been avoidable under this section. The second sentence protects the surety from double liability. Subsection e determines when a transfer is made for the purposes of the preference section.

Paragraph 1 defines when a transfer is perfected. For real property, a transfer is perfected when it is valid against a bona fide purchaser. For personal property and fixtures, a transfer is perfected when it is valid against a creditor on a simple contract that obtains a judicial lien after the transfer is perfected.

Paragraph 2 specifies that a transfer is made when it takes effect between the transferor and the transferee if it is perfected at or within 10 days after that time. Otherwise, it is made when the transfer is perfected. If it is not perfected before the commencement of the case, it is made immediately before the commencement of the case.

Paragraph 3 specifies that a transfer is not made until the debtor has acquired rights in the property transferred. This provision, more than any other in the section, overrules DuBay and Grain Merchants, and in combination with subsection b 2 , overrules In re King-Porter Co.

Subsection e is designed to reach the different results under the version of Article 9 of the U. Subsection f creates a presumption of insolvency for the 90 days preceding the bankruptcy case. The presumption is as defined in Rule of the Federal Rules of Evidence, made applicable in bankruptcy cases by sections and of the bill. The presumption requires the party against whom the presumption exists to come forward with some evidence to rebut the presumption, but the burden of proof remains on the party in whose favor the presumption exists.

Prior to amendment, par. B generally. Prior to amendment, subpar. C and D as B and C , respectively. Amendment by Pub. The dollar amounts specified in this section were adjusted by notices of the Judicial Conference of the United States pursuant to section of this title as follows:. By notice dated Feb. See notice of the Judicial Conference of the United States set out as a note under section of this title.

Please help us improve our site! No thank you. LII U. Code Title Code Notes prev next. B between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and.

B the transfer had not been made; and. Detroit union leaders called Orr's move to declare bankruptcy premature due to ongoing financial negotiations with creditors, unions, and pension boards, [24] but also stated that employees will continue to work in a typical fashion. We believe, however, that today also can mark a clean start for the city. Politicians have commented on the bankruptcy. Bing said that the people of Detroit "have to make the best of it".

It's about accountable government. Three have so far had to postpone new bond offerings or face higher interest rates. Recent history from California "has shown that the fallout from a bankruptcy can dissipate quickly" in the bond market. Contributing to this is the fact that Moody's has fewer than 40 of the 7, local governments that it rates listed as below investment grade.

Repayment of the bonds would be split between taxpayers and developers of the arena. Both Snyder and Orr acknowledged concerns raised about the expense, but stated that continuing the project makes good economic sense even with the context of Detroit's bankruptcy. With the arena, and additional retail, office, residential and hotel space the developer has committed to build as part of the overall project, it is expected to create about 8, construction jobs, with work due to start in On July 19, , Ingham County Circuit Court Judge Rosemarie Aquilina ruled, using a typed statement with hand-written notes attached, that the bankruptcy filing by Detroit violated the Michigan constitution by impairing pension payments and ordered Snyder to withdraw the filing: Snyder has appealed the motion, and Aquilina indicated she was sending a copy of her ruling to President Obama.

On July 22, Aquilina delayed to July 29 her hearing on retiree funds request for an order directing Orr and Snyder to withdraw the bankruptcy filing and desist from any effort to reduce vested pension benefits in the face of their protected status under the Michigan Constitution. This legal move allowed the bankruptcy court to weigh in. Rhodes indicated that the bankruptcy court , not the state court , has the authority to resolve the dispute between the city and the retiree funds over the city's authorization to file the bankruptcy case.

On July 23, a three-judge panel of the Michigan Court of Appeals ruled unanimously to stay the proceedings in the state court actions, pending a resolution of the state's appeal of Aquilina's rulings directing withdrawal of the bankruptcy filing. District Court for the Eastern District of Michigan. On July 24, the bankruptcy court held a two-hour hearing on the city's request for a stay of the pending state court proceedings against Snyder and Orr.

Rhodes then granted the federal stay and ruled that Orr is a validly authorized officer to act for the city in the bankruptcy. Rhodes ordered that three suits filed by city employees, retirees and pension funds in State Court be halted. He made it clear that all legal battles will be fought in the Federal Bankruptcy Court [7] Rhodes emphasized that he was not on July 24 deciding whether the city met the statutory criteria for eligibility for a Chapter 9 filing, nor the effect on the bankruptcy case of Michigan's constitutional protection of vested public pension benefits.

On July 27, Michigan Attorney General Bill Schuette announced that he would enter an appearance in the bankruptcy case for the purpose of defending Michigan's constitutional protection of vested public pension benefits. Schuette said that in doing so he would be acting in his role as "the people's attorney. Schuette's spokesperson said that his office would continue to represent the governor and other state agencies in the bankruptcy; different sets of attorneys in the attorney general's office will represent these divergent positions.

This is an important issue that will be decided, appropriately, by a federal bankruptcy judge. On August 2, the bankruptcy court held a status conference, set an initial schedule for the case, and made several initial rulings.

The court set August 19 as the deadline for any party to file objections to the city's eligibility for Chapter 9 bankruptcy, and October 23 as the hearing date for trial on such objections. The court set March 1, , as the deadline for the city to file a plan of adjustment for its debts. Trustee to appoint an official committee to represent retired employees of the city, with the U. Trustee to select the members to serve on this Retiree Committee. The professional expenses of the Retiree Committee will be paid by the city, which consented to do so.

When a fee examiner is appointed, the professional expenses of the Retiree Committee will also be subject to the examiner's review. Another attorney who has served as an expert witness in fee matters commented that, while the fees will no doubt be large, legal fees are always a small percentage of what is at stake in a bankruptcy of this magnitude.

On August 13, Judge Rhodes, after receiving input from various parties in the bankruptcy, confirmed his appointment of Judge Rosen of the District Court to serve as a mediator in the Chapter 9 case process. The mediator may bring parties together for "facilitative mediation" on any issues that Rhodes chooses to refer to mediation. Any mediation proceedings held will be confidential, except for the terms of any settlement that may be reached and presented to the bankruptcy court for approval.

As Rosen said, mediation in this case will amount to a monumental task, involving "thousands of claims and issues. Bankruptcy Judge Elizabeth Perris of the District of Oregon, who has served almost 30 years as judge and has been a judicial mediator in the Chapter 9 bankruptcies of Vallejo, Stockton and Mammoth Lakes, Calif.

Bankruptcy and U. District Judge David Coar , who has also served as a private mediator in large bankruptcy cases, including the Mammoth Lakes, Calif. On August 19, the deadline set by the bankruptcy court, objections were filed to Detroit's eligibility for Chapter 9.

Frank Schafroth, director of the Center for State and Local Leadership at George Mason University , commented that the choice not to object on eligibility reflected lessons learned in the Stockton, California, Chapter 9 case. There, bondholders and bond insurers did wage a months-long litigation effort to have Stockton declared ineligible. But this expensive and time-consuming effort proved unsuccessful. An attorney for some of the bondholders in Detroit's case commented that they felt it was better to have the bankruptcy judge as a referee rather than to deal only with Orr on the terms of his severe pre-bankruptcy proposal to the bond groups.

Judge Rhodes ordered that initial argument on the purely legal issues of Detroit's eligibility for Chapter 9 be held on October 15—16, rather than the October 23 date of the full trial on eligibility. Rhodes declared early consideration of the purely legal issues, such as Detroit's authorization under state law for the bankruptcy filing, would expedite determination of eligibility under the Bankruptcy Code. At the same time, Rhodes reserved issues requiring factual determinations, such as whether Detroit negotiated in good faith with its creditors before filing the bankruptcy case, for the October 23 trial.

On December 3, Judge Rhodes ruled Detroit eligible for bankruptcy protection. The judge declined to find that the city had negotiated in good faith with creditors pre-bankruptcy, based on the testimony at the eligibility trial; he noted that the meetings the city held with creditors leading up to the bankruptcy filing did not meet the statutory good-faith requirement. However, he found the city eligible for Chapter 9 [70] on the statutory alternative ground of impracticability of negotiating with so many creditors.

The judge also found that the city could potentially impair the pensions of city retirees through a plan under federal bankruptcy law, despite the Michigan state constitutional provision protecting such pensions from impairment. Judge Rhodes followed the announcement of his ruling in open court with a page written memorandum opinion providing the bases for the ruling. The memorandum discusses in detail the financial status of the city. It reviews the statutory criteria for eligibility and indicates those the city satisfied, and finds that the city met the minimum criteria for eligibility.

The memorandum discusses in depth the major objections raised by various parties to the city's eligibility, and finds that the objections are either unfounded in law or insufficient factually to deny the city eligibility for Chapter 9.

The judge concluded the memorandum with a reminder to all interested parties that eligibility is only a preliminary step in a Chapter 9 case, and that the "ultimate objective is confirmation of a plan of adjustment Judge Rhodes declined to stay the effect of his eligibility ruling while any potential appeals are decided. He also indicated that he would consider permission for an appeal to proceed directly to the U. Court of Appeals for the Sixth Circuit, rather than the regular route of an appeal first to the federal district court, in a separate motion.

It is expected that the independently managed pension funds for city workers will join in the appeal. The permission includes the ruling on eligibility for Chapter 9, and the ruling that the city can impair vested public pension benefits through a Chapter 9 plan.

Disclosed fees included: [78]. Judge Rhodes, whose judicial salary is set by Congress, had up to 14 days to determine whether the agreed-upon fees are reasonable.

After the Chapter 9 eligibility ruling, emergency manager Kevyn Orr said the city will seek to file a plan for adjustment of its debts under bankruptcy law by early January. Orr said that negotiations with unions for the city's workers on the terms of a possible plan were continuing. One of the biggest issues facing litigators of Detroit's bankruptcy was which assets belong to the city outright and those that were available to creditors in order to satisfy liabilities.

Nowhere did this question loom larger than the fate of the Detroit Institute of Arts. The DIA holds 66, valuable pieces; however, only five percent of this collection was bought with city money. In particular interest, was whether the art collection would be needed to satisfy the pension claims of its retirees.

Chief Judge for the Eastern District Michigan Gerald Rosen , who had taken on the role of chief mediator, and Rhodes sought a quick end to the bankruptcy fearing a process that could take years to resolve.

On November 5, Rosen convened a meeting at the federal courthouse in Detroit with the leaders of some of the largest foundations in the country. It was here that Rosen laid out his plan that would become known as the Grand Bargain. This would save the DIA from selling its art; the DIA would then become a private organization, releasing it from city ownership and protecting its collection forever.

When asked why they donated, Darren Walker, president of the Ford Foundation said "If you don't have great cities, you won't have great nations," he said. It is a hothouse for new innovation, for ingenuity and risk taking. That doesn't happen in a lot of American cities. We need to be in Detroit because of that.

Rhodes would later stun those following the proceedings, in what would be known as the Christmas Eve Massacre, when he rejected the settlement three weeks later, saying that it was "just too high a price to pay".

If pensioners accepted the deal, they would not be able to sue the state over pension reductions; this was seen as a critical step toward getting support from the Republican-majority legislature. Some Republicans, such as Speaker of the House Jase Bolger, wanted unions to make contributions to help in the Detroit settlement. Another condition sought was that of a financial review commission modeled after the New York State Financial Control Board that oversaw New York City's troubled finances during the s and 80s.

After unions agreed to contribute money towards the settlement, the Michigan House passed legislation with major bipartisan support on May Upon passage, the Detroit News called the final legislative package a "grand piece of work," and the Detroit Free Press opined that the deal showed lawmakers "get it.

However, with the grand bargain those cuts were reduced to a 4. Over the spring and summer of more than two-thirds of Detroit retirees voted in favor of the deal. On September 10, Detroit reached a deal with three Michigan counties over regional water and sewer services that could eliminate one roadblock to federal court approval of the city's plan to adjust its debt and exit bankruptcy.

The deal with Oakland, Wayne and Macomb counties created the Great Lakes Water Authority , a new regional water and sewer authority, but allowed Detroit to maintain control of its local system. Detroit would reach deals with more of its creditors throughout the fall. Under the deal, the city and state would pay for the demolition of the city-owned Joe Louis Arena once the Red Wings move into the new arena.

After demolition, FGIC would receive the arena site and an adjacent parking lot, giving the company nearly 9 acres 3. On November 7, Judge Rhodes accepted the city's plan of adjustment, 17 months after the city had filed bankruptcy—a far shorter time frame that had been predicted based on other municipal bankruptcies.

At the hearing Rhodes remarked, "We have used the phrase 'the Grand Bargain' to describe the group of agreements that will fix the city's pension problem. That description is entirely fitting. In our nation, we join together in the promise and in the ideal of a much grander bargain.

It is the bargain by which we interact with each other and with our government, all for the common good. That grander bargain, enshrined in our Constitution, is democracy.

It is now time to restore democracy to the people of the City of Detroit". The following day Detroit exited bankruptcy protection with finances returned to the control of city, subject to three years of oversight by the Detroit Financial Review Commission. From Wikipedia, the free encyclopedia. This article needs to be updated.

Please update this article to reflect recent events or newly available information. September See also: Decline of Detroit. Michigan Governor Rick Snyder Republican. Detroit Mayor Dave Bing Democrat.

This section needs additional citations for verification. Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed.

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