The trial to determine if a Detroit bankruptcy can proceed started Wednesday. The city says unions were ‘insensitive’ to the problems facing the city, while the opposition is disputing data.
An attorney for the City of Detroit told a federal judge Wednesday that the city received “a lot of no” when it tried to negotiate with creditors and the city’s labor organizations in the weeks leading up to its decision to file for Chapter 9 bankruptcy protection.
That issue – whether the city tried in good faith to establish an alternative to a bankruptcy filing – was central to the arguments made on both sides during the opening day of a week-long trial that will determine Detroit’s eligibility for bankruptcy protection. In court filings, Detroit says it has been weighed under by $18 billion in debt and long-term liabilities, but the opposition says the city’s data are incorrect. The opposition also says the city had little interest in negotiating but was instead determined to plunge the city into bankruptcy.
US bankruptcy judge Steven Rhodes, who is presiding over the trial, heard opening statements by both sides Wednesday. City attorney Bruce Bennett characterized the labor organizations as “insensitive to the overall problems the city faced,” refusing to discuss potential cuts to liabilities that emergency manager Kevyn Orr outlined in a June proposal and failing to submit counterproposals. It was impractical, Mr. Bennett said, to engage in continued discussion with the unions because of what the city saw as an uncooperative stance.
To determine Detroit’s eligibility for bankruptcy protection, Judge Rhodes will also be deciding if the city is, indeed, insolvent. There, Bennett described a “mountain of evidence,” including a legacy of interrupted services and failed financial deals. He promised witnesses who will testify to the city’s limited cash flow, which he said would have dwindled to nothing if it did not decide to stop paying its debts, including $44 million in pension obligations.
To emphasize the depth of financial mismanagement, the city called Ernst & Young financial consultant Gaurav Malhotra to testify in the late afternoon. Mr. Malhotra reviewed the city’s financial records and said that if Detroit continued to pay its pension obligations, its budget shortfall would balloon to $254 million.