Detroit's historic bankruptcy trial has its first day in court

The five-week trial will determine the fate of a "grand bargain" to protect both retirees' pensions and the Detroit Institute of Art's collection.

|
Paul Sancya/AP/File
Detroit, seen here July 16, 2013, is by far the largest city to file for municipal bankruptcy.

Detroit’s bankruptcy finally entered the courtroom Tuesday, beginning the final phase of a trial to determine if the city can emerge from under the weight of $18 billion in debt.

It has taken Detroit 14 months of mediation, legal wrangling, and behind-closed-door negotiations with creditors and pension groups to bring the city to the courtroom of U.S. Bankruptcy Judge Steven Rhodes.

The five-week trial will, in the words of Judge Rhodes, “determine the future of the city of Detroit.”

The legal battle is not a slam dunk for the city. Not only is Detroit’s Chapter 9 bankruptcy the largest-ever for a U.S. municipality, many aspects of its proposed plan are unprecedented.That includes a so-called “grand bargain” to preserve retiree pensions and protect the city’s art collection, outlined in the city’s plan of adjustment, which cannot proceed without Rhodes’ approval.

Watchers of the unfolding saga say the bargain involves a unique collaboration between nonprofit foundations, the state, and big labor. If approved, it could create a blueprint for other cities facing similar crises, they say. But not everyone is looking on in admiration: Two creditors plan to challenge the plan in court on grounds of fairness.

“This has never been done before,” says Douglas Bernstein, a bankruptcy attorney in Bloomfield Hills, a Detroit suburb. “Every city circumstance is different in how they propose getting funding, but to get funding from an unexpected force like a charitable foundation – that is very unique.”

Under the plan, the city would raise $816 million earmarked for pension benefits over 20 years through the Detroit Institute of Art (DIA) collection. The plan involves spinning off the collection into an independent trust made possible through $366 million pledged by a dozen philanthropic groups such as the Ford Foundation and the Andrew W. Mellon Foundation, $100 million raised by the DIA, and $350 million made available by the state.

The proposal has drawn fire from Syncora Guarantee Inc. and Financial Guaranty Insurance Co., two creditors who are owed $1.4 billion from the city. They say the agreement is designed to benefit city pensioners and therefore violates key tenets of Chapter 9 bankruptcy law, which requires bankrupt municipalities to negotiate in good faith and to treat all parties fairly.

According to the city’s calculations, the pensioners would get six times more money than the bond insurers.

In a pre-trial hearing Tuesday, attorneys for both companies argued that the city has not proven that pensioners are under severe hardship, which would have justified what the attorneys described as more preferential treatment under the plan.

But in his opening statement, city attorney Bruce Bennett defended the plan, saying that it “provides creditors with all the city can provide them [and] that creditors are permitted to reach.”

For his part, Rhodes suggested that finding a legal precedent may not prove a simple matter.

“There’s probably not any case law on this one way or another,” he said.

Despite the unprecedented debt load of this bankruptcy, legal experts say that the 14-month time period it took for the city to make it to trial is far shorter than other municipalities in similar circumstances. For example, the city of San Bernardino, Calif., filed for Chapter 9 bankruptcy in July 2012 and has yet to reach the trial phase.

Complicating matters further, state-appointed emergency financial manager Kevyn Orr’s term ends Sept. 27 – before the expected October end date of the trial.

His reinstatement would need approval from the city council and Mayor Mike Duggan. If Mr. Orr leaves before the trial is over, it could bring the proceedings to a halt, Bernstein says.

Bernstein says that, for that reason, it is likely that Rhodes will try to persuade the city to allow Orr to remain until the trial reaches a conclusion.

“Bringing someone up to speed would be time consuming and would likely affect continuity,” Bernstein says. “I think everybody realizes that it would be awkward and problematic if it happened before the trial was completed.”

You've read  of  free articles. Subscribe to continue.
Real news can be honest, hopeful, credible, constructive.
What is the Monitor difference? Tackling the tough headlines – with humanity. Listening to sources – with respect. Seeing the story that others are missing by reporting what so often gets overlooked: the values that connect us. That’s Monitor reporting – news that changes how you see the world.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Detroit's historic bankruptcy trial has its first day in court
Read this article in
https://www.csmonitor.com/USA/2014/0902/Detroit-s-historic-bankruptcy-trial-has-its-first-day-in-court
QR Code to Subscription page
Start your subscription today
https://www.csmonitor.com/subscribe