Detroit Faces Crucial Trial in Bankruptcy Case

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  • DETROIT (AP) — Thousands of Detroit streetlights are dark. Many more residents have fled. Donors are replacing ambulances that limped around for 200,000 miles. Millions in debt payments have been skipped.

    Is there really any doubt the city is broke?

    A judge starts exploring that question Wednesday in an unusual trial to determine whether Detroit indeed is eligible to scrub its books in the largest public bankruptcy in U.S. history. Unions and pension funds are claiming the city failed to negotiate in good faith before filing for Chapter 9 protection in July.

    A city isn’t eligible for a makeover unless a judge finds that key steps have been met, especially good-faith talks with creditors earlier this year. It’s a critical decision: If Detroit clears the hurdle, the case would quickly turn to how to solve at least $18 billion in debt and get city government out of intensive care.

    “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, another 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. Another lawyer, Sharon Levine, representing AFSCME, said the city spent months “mapping out its path to Chapter 9,” not looking for compromises that could keep Detroit out of bankruptcy.

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