Bankruptcy was unavoidable, Detroit lawyer tells court

Detroit: Detroit on Friday wrapped up its effort to prove that it is eligible for the largest municipal bankruptcy in US history, clashing with unions, retirees and pension funds over whether good faith negotiations were feasible before the city filed for court protection on July 18.

During closing arguments of the nine-day eligibility trial, US Bankruptcy Judge Steven Rhodes pressed city attorneys to show Detroit gave a good-faith effort to reach an out-of-court settlement with creditors. Rhodes also pushed lawyers for those opposing Detroit's bankruptcy to show they presented a viable alternative to bankruptcy.

Detroit's unions, government retirees and two pension funds are trying to keep the city out of bankruptcy and Detroit must prove to Rhodes that it meets the criteria for eligibility.

To declare Detroit eligible, Rhodes will need to decide that the city proved it is insolvent, and that it acted in good faith when it decided negotiations with creditors were impractical.

Rhodes asked attorneys on both sides to file papers by Wednesday regarding the definition of good-faith negotiations. He will rule sometime after receiving those briefs.

The closing arguments capped a trial that has stretched across three weeks and included rare testimony from a sitting governor, Michigan's Rick Snyder. Detroit Emergency Manager Kevyn Orr and a parade of other city and state officials, consultants, retirees and union leaders also testified.

City attorney Bruce Bennett argued on Friday that Detroit did negotiate in good faith even as it recognized that it was unlikely to reach an out-of-court agreement with creditors.

"I think what the city did was they said: 'This is extremely difficult to achieve, but we're going to try anyway,'" Bennett said in his closing argument.

"You absolutely can believe in your head that this is never going to work, but try anyway. And I think that is the situation in this case."

His remarks about Detroit's decision to forego further negotiations came in response to a question from Rhodes, who questioned whether the city's arguments were logically consistent.

"It strikes me as factually impossible for it to be impracticable for that party to negotiate with other parties in any circumstance, and to negotiate with them in good faith," Rhodes said.

Rhodes also pressed Bennett on whether Orr misled retirees during a June 10 public meeting by making statements that pensions were "sacrosanct" and that there was only a "50-50 chance" that the city would file for bankruptcy.

"Assuming both were misleading, what impact should that have on the court's analysis of good faith here?" Rhodes asked.

Bennett replied that Orr made a "mistake" and his comments should not impact the case, because the record was clarified only days later when the city released a report on June 14 that said pensions may be cut.

'There simply was not time'

Jennifer Green, who represents the city's two pension funds, said discussions about Detroit's possibly filing for bankruptcy dated as far back as March 2012. The city failed to make use of the time it had to offer alternatives to bankruptcy, she said.

"The city could have been negotiating since 2012, when it knew there was a financial crisis," Green said. "To argue it was impracticable when all along they had this time, was not good faith."

Detroit has $18.5 billion in debt and liabilities, about half of which come from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions, the city says.

The city outlined its financial liabilities in the June 14 report, which offered unsecured creditors, including retirees, only pennies on the dollar to settle their claims.

Robert Gordon, another lawyer representing pension funds, said the city did not indicate that it
wanted to cut pensions until June 14. "There simply was not time for good faith negotiations," he said.

In his argument, Bennett invoked testimony from earlier in the trial, when one of the city's top financial advisers testified that Detroit was operating on a "razor's edge" prior to the bankruptcy filing and ran the risk of running out of cash.

Detroit had little time for additional negotiations, and in any event creditors were not putting forward proposals that the city considered as viable alternatives to bankruptcy, he said.

"What would more time have led to? There was no evidence or any other indication that the city could have looked at and said there was a path to a deal," Bennett said.

Gordon said there were alternatives aside from slashing pensions, which are protected by Michigan's constitution.

But Rhodes interjected and asked what those other options were. "You did not submit any evidence that there was a viable alternative plan," he said.

Gordon responded that the city did not provide enough information on which the pension funds could have based a proposal.

"It is not clear that there needs to be an impairment or diminishment of the accrued pension benefits in order to restructure here," Gordon said. "We can't go farther than that because we don't have all the information here."

Matthew Schneider, who represents the state of Michigan in the case, argued during a closing statement on Friday morning that a "tremendous storm" was headed toward the city, and a bankruptcy was necessary to preserve order.

"The evidence shows the health, safety and welfare of the people of Detroit are at risk," he said.

Michigan Governor Snyder, who authorized Orr, the emergency manager, to file for bankruptcy, said in an interview with Reuters on Friday, that he expects the city to emerge from bankruptcy by September 2014, when Orr's term is scheduled to end.

"We are on a path to get it done within that time frame," Snyder said.