City, unions clash on whether Detroit is bankrupt

Alisa Priddle and Nathan Bomey | Detroit Free Press

DETROIT — Citing a "mountain of evidence" that Detroit's financial condition is an awful mess, lawyers for Michigan's largest city laid a foundation they hope will prove that the city is legally eligible for Chapter 9 bankruptcy.

Bruce Bennett, representing the city, said his team will show Detroit obtained the state's authorization for bankruptcy and negotiated in good faith with creditors.

His arguments opened a highly contentious trial that will extend into next week and perhaps into next month.

Judge Steven Rhodes of U.S. Bankruptcy Court is not expected to issue a ruling on whether Detroit's case can proceed until at least Nov. 13, a deadline he established Wednesday for lawyers to submit briefs on the definition of good faith negotiations.

Lawyer Sharon Levine for Michigan Council 25 of the American Federation of State, County and Municipal Employees, which is trying to block the city's Chapter 9 filing, said the city rushed into bankruptcy without negotiating in good faith. She contended that the city made an unreasonable offer during a brief period this summer instead of engaging in productive discussions.

"Detroit has a lot of problems," Levine told reporters during a lunch break. "It was the biggest Chapter 9 that was ever filed. If there are huge problems, perhaps we should have taken a little time to consider them."

But an Ernst & Young financial consultant, Guarav Malhotra, testified that the city's financial condition was dire. He said Detroit nearly ran out of cash, risking a "payless payday," in the weeks leading up to its July 18 bankruptcy filing.

Upon the trial's conclusion, Rhodes will decide whether the city's case can proceed. He gave few indications of his views.

If he says yes, the city is expected to propose a reorganization plan by the end of the year.

If he says no, the bankruptcy case would be dismissed and the city likely would negotiate concessions outside of court. Lawsuits from unpaid vendors who have sold goods and services to the city would be likely.

The drama will grow, especially when Michigan Gov. Rick Snyder takes the stand Monday. The governor's lawyer, Matthew Schneider, said Wednesday that Snyder agreed to testify after the United Auto Workers subpoenaed him.

For more than an hour Wednesday, Bennett argued that the city is essentially the poster child for insolvency, saying he could spend even more time outlining the city's woes.

But Jennifer Green, a lawyer for Detroit's two pension funds, said the "city's financial information was incomplete." She argued that the bankruptcy wasn't a contingency plan but instead was a foregone conclusion.

Detroit invested considerable time exploring alternatives to bankruptcy, including a series of talks with unions, Bennett said. He argued negotiations became impractical because of the sheer number of creditors and challenges facing the city.

"I think the city did act in good faith in all the negotiations it conducted," he said. "The negotiations were unsuccessful."

Bennett argued that no law prohibits a city from planning for a bankruptcy filing if negotiations with creditors fail.

Concerned members of city and state governments have been working to find a solution to Detroit's woes since at least December 2011, he said, contending the city's creditors never offered alternative solutions.

"The way you respond to a proposal you don't like is you send back a proposal you do like," he said.

But Levine said the unions "tried to engage in discussions" and instead got a lecture from Detroit emergency manager Kevyn Orr.

Orr is expected to testify Friday about his role in the city's bankruptcy. Police Chief James Craig also is expected to testify this week. The trial is expected to last at least five business days.

During his opening arguments, Bennett rejected AFSCME's argument that the city has not proved insolvency, in part because it did not consider selling Detroit Institute of Arts property before filing for bankruptcy. The city-owned museum, established in 1885, has more than 65,000 works in its collection but relies on private donations for much of its financial support.

"There are no sales possible without significant change in current management of the museum and/or litigation," Bennett said.

The creditors that objected to the city's bankruptcy have argued repeatedly that the city's plan to pursue retiree pension cuts should block the Chapter 9 filing. They say the plan violates the Michigan Constitution's protection for public pensions.

Creditors suggested Wednesday that the bankruptcy filing was explicitly designed as a tool to cut pensions.

"There's no other way to read the evidence on that," said Anthony Ullman, a lawyer for Detroit's retiree committee.

Day 2 live coverage from the federal courthouse in Detroit