DETROIT — The city of Detroit for months has disclosed the awful 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 today, 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.
A city isn’t eligible for a bankruptcy makeover unless it shows that key steps were met, especially good-faith talks with creditors earlier this year. It’s a critical decision for Judge Steven Rhodes: If Detroit clears the hurdle, the case then would quickly turn to how to solve at least $18 billion in debt and get city government off the ropes.
“It’s a crucial point in the case,” said lawyer Chuck Tatelbaum, a bankruptcy expert in Fort Lauderdale, Fla. “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.”
Jim Spiotto, a bankruptcy expert in Chicago, said it’s “virtually impossible” to argue that 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.