Chapter 9: Trial will decide if Detroit is eligible for bankruptcy
October 24, 2013 12:46 AM | 1099 views | 0 0 comments | 43 43 recommendations | email to a friend | print
Protesters rally outside The Theodore Levin United States Courthouse in Detroit on Wednesday. The city of Detroit for months has disclosed the poor condition of its finances. Now it’s up to a judge to determine if the largest public bankruptcy in U.S. history really can go forward. An unusual trial starts Wednesday, pitting Detroit’s emergency manager and his legal team against unions and pension funds that claim the city isn’t qualified to scrub its books clean under Chapter 9 bankruptcy.
Protesters rally outside The Theodore Levin United States Courthouse in Detroit on Wednesday. The city of Detroit for months has disclosed the poor condition of its finances. Now it’s up to a judge to determine if the largest public bankruptcy in U.S. history really can go forward. An unusual trial starts Wednesday, pitting Detroit’s emergency manager and his legal team against unions and pension funds that claim the city isn’t qualified to scrub its books clean under Chapter 9 bankruptcy.
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DETROIT — The city of Detroit will present a “mountain of evidence” to show its perilous finances qualify for a turnaround in bankruptcy court, an attorney said Wednesday as a judge opened an extraordinary trial to determine if the largest public filing in U.S. history will go forward.

Detroit, with $18 billion in debt, filed for Chapter 9 protection in July, but it’s not automatic. Judge Steven Rhodes has set aside several days to hear evidence and decide whether the city met many key steps, including good-faith negotiations with creditors, before taking drastic action three months ago.

“There’s nothing left to do here. There is no revenue solution. ... Chapter 9 is more needed here than another other possible scenario you could think of,” attorney Bruce Bennett said in his opening remarks.

Witnesses “will present a mountain of evidence showing the insolvency of the city,” Bennett said. “This is one of those cases where the data speaks very clearly and persuasively on its own. It needs no gloss.”

The trial poses a critical decision for Judge Steven Rhodes: If Detroit clears the eligibility hurdle, the case then would quickly turn to how to solve the debt and get city government off the ropes.

In her opening statement, Jennifer Green, an attorney for Detroit’s pension funds, highlighted months of emails and memos from state and city officials preparing for a bankruptcy, not fruitful talks with creditors.

“It really was a forgone conclusion,” she said.

Chuck Tatelbaum, a bankruptcy expert in Fort Lauderdale, Fla.— not involved in the case — said the trial represents a crucial stage.

“There will be others, but this is the go or no-go. ... If there was ever a poster child for what Congress decided when they enacted Chapter 9, it’s for a city like this,” he said.

Jim Spiotto, a bankruptcy expert in Chicago, said it’s “virtually impossible” to argue Detroit is solvent.

“They’re not paying their debts,” he said.

“Look at their blighted areas. Look at their services.”

Nonetheless, unions and pension funds are challenging Detroit on the eligibility question.

They claim emergency manager Kevyn Orr, who acquired nearly unfettered control over city finances following his appointment by Michigan Gov. Rick Snyder, was not genuinely interested in negotiating when they met with his team in June and July.

Orr insists pension funds are short $3.5 billion and health coverage also needs to be overhauled.

Evidence will show that Orr “planned to file bankruptcy long before the purported negotiations had run their course, confirming that the ‘negotiations’ were no more than a check-the-box exercise on the way to the courthouse,” Babette Ceccotti, an attorney for the United Auto Workers, said in a court filing.

Earle Erman, attorney for Detroit’s public safety unions, said the city has cut wages and changed health care benefits without across-the-table talks. Lawyer Sharon Levine, who’s representing the American Federation of State, County and Municipal Employees, said the city spent months “mapping out its path to Chapter 9,” not looking for compromises that could keep Detroit out of bankruptcy.

In response, however, attorneys for the city said a June 14 meeting and subsequent sessions with creditors were well-intended but fruitless. A bankruptcy filing was being prepared, they acknowledged, but “never set in stone.”

Spiotto said the judge will have much discretion to determine whether the city has met its “good-faith” burden.

Evidence will show that Orr “planned to file bankruptcy long before the purported negotiations had run their course, confirming that the ‘negotiations’ were no more than a check-the-box exercise on the way to the courthouse,” Babette Ceccotti, an attorney for the United Auto Workers, said in a court filing.

Earle Erman, attorney for Detroit’s public safety unions, said the city has cut wages and changed health care benefits without across-the-table talks. Lawyer Sharon Levine, who’s representing the American Federation of State, County and Municipal Employees, said the city spent months “mapping out its path to Chapter 9,” not looking for compromises that could keep Detroit out of bankruptcy.

In response, however, attorneys for the city said a June 14 meeting and subsequent sessions with creditors were well-intended but fruitless. A bankruptcy filing was being prepared, they acknowledged, but “never set in stone.”

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