Court to decide on Detroit bankruptcy

Dizano Business – A federal judge is hearing arguments over whether Detroit city should be granted protection from its creditors.

In opening remarks, Bruce Bennett, the lead attorney for Detroit, said there was a “mountain of evidence showing the insolvency of the city”.

Protesters demonstrate against Detroit’s bankruptcy outside the federal courthouse

But representatives for the city’s unions and pension funds disagree and say the city is solvent.

With $18bn (£11bn) of liabilities, Detroit’s case is the biggest municipal bankruptcy filing in US history.

The case to determine whether or not Detroit can continue with its bankruptcy filing is expected to last anywhere from five to 10 days.

Hands off

In opening testimony, Jennifer Green, a lawyer for the Detroit pension fund boards, argued that the city and the state of Michigan had always planned to file for bankruptcy – despite earlier assurances in 2013 that newly appointed emergency manager Kevin Orr would be evaluating all options.

As part of the bankruptcy hearing, the unions and pension funds are trying to prove that the city did not negotiate with them “in good faith”.

If Steven Rhodes, the bankruptcy judge overseeing the case, agrees with them, the city would have to go back to the drawing board.

Protesters outside the court in particular singled out Mr Orr, chanting, “Down with Orr” and “Orr no more”.

The appointment of Mr Orr, who is scheduled to testify on Monday, was controversial as it was done without voter support.

Unions and pension funds won a small victory when it was ruled that Michigan governor Rick Snyder would have to testify on Friday.

Furthermore, lawyers for the city admitted that plans to sell some works from the Detroit Institute of Arts might have to be shelved unless there is a leadership change at the museum.

Current director Graham Beal has said the plan is “abhorrent” and has vowed to fight any efforts to sell the museum’s artworks, which include major works by Henri Matisse and Vincent van Gogh.

Ballooning debt

However, many experts still believe that the judge will eventually rule in Detroit’s favour.

City managers say they have negotiated in good faith and bankruptcy is the only way to manage Detroit’s debts and liabilities.

Half of the city’s liabilities result from payments to retired staff, which includes healthcare and pension obligations.

In May, Mr Orr presented a report on Detroit’s financial situation.

It said Detroit’s expenditures had exceeded revenues by an average of $100m each year from 2008 to 2012.

Detroit has seen a dramatic decline in economic activity and population, as the big car makers – once the city’s main source of employment – shifted production to cheaper locations in the US and overseas.

The city is now home to about 700,000 residents, down from the peak of 1.8 million in 1950.

There are almost 150,000 vacant and abandoned plots in the city according to the Detroit Future City report.

Good faith

According to the unions and pension funds, Detroit’s emergency manager, Kevyn Orr, did not hold formal negotiating sessions before filing for bankruptcy.

They are also likely to argue that the city is not bankrupt and has assets that can be sold, including pieces from the Detroit Institute of Arts.

City managers say they have negotiated in good faith and bankruptcy is the only way to manage Detroit’s $18bn in debts and liabilities.

Half of the city’s liabilities result from payments to retired staff, which includes healthcare and pension obligations.

“There are only so many things they can fight about,” said John Pottow, a University of Michigan professor who specialises in bankruptcy law.

“They can fight about the solvency and they can fight about the negotiating in good faith.”

Lawyers from both sides will present evidence and call witnesses before the federal bankruptcy judge, Steven Rhodes.

He has allotted 10 days for hearings over the next three weeks, although the hearings could take less time than that.

He will then decide whether Detroit merits protection from its creditors under Chapter 9 of the US bankruptcy code, which would allow the city to reorganise its debts.

In May, Mr Orr presented a report on Detroit’s financial situation.

It said Detroit’s expenditures had exceeded revenues by an average of $100m each year from 2008 to 2012.

Detroit has seen a dramatic decline in economic activity and population, as the big car makers have shifted production to cheaper locations in the US and overseas.

It is now home to about 700,000 residents, down from the peak of 1.8 million in 1950.

There are almost 150,000 vacant and abandoned plots in the city according to the Detroit Future City report.

 

Source: BBC

Source: Court to decide on Detroit bankruptcy