Bankruptcy was unavoidable, Detroit lawyer tells court

DETROIT Fri Nov 8, 2013 1:47pm EST

The skyline of Detroit is seen looking south from the midtown area in Detroit, Michigan October 23, 2013. REUTERS/Rebecca Cook

The skyline of Detroit is seen looking south from the midtown area in Detroit, Michigan October 23, 2013.

Credit: Reuters/Rebecca Cook

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DETROIT (Reuters) - Detroit tried in good faith to negotiate an out-of-court settlement with creditors before declaring bankruptcy on July 18, even though it suspected that default was unavoidable, a lawyer for the city told a court on Friday.

"I think what the city did was they said: 'This is extremely difficult to achieve, but we're going to try anyway,'" city attorney Bruce Bennett, of Jones Day, said at a trial to determine if the city is eligible for bankruptcy.

"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."

The start of closing arguments marked the ninth day of the trial that has stretched across three weeks and included rare testimony from a sitting governor, Michigan Governor Rick Snyder; Detroit Emergency Manager Kevyn Orr; and a parade of other city and state officials, consultants, retirees and union leaders.

Lawyers for the city and the state of Michigan gave closing arguments in the morning in favor of Detroit's eligibility for bankruptcy. The unions, retirees and pension funds objecting to Detroit's bankruptcy were expected to present their closing arguments on Friday afternoon.

Bennett's remarks about Detroit's decision to forego further negotiations came in response to a question from U.S. Bankruptcy Judge Steven Rhodes, who questioned whether the city's arguments were internally inconsistent.

"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.

Detroit's unions, retirees and two pension funds are trying to keep the city out of bankruptcy and the city 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.

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 presented its financial liabilities on June 14 in a report that offered unsecured creditors, including retirees, only pennies on the dollar to settle their claims. But Bennett said it would be harder to get a deal done out of court as the city's financial situation deteriorated.

In his argument, Bennett invoked testimony from earlier in the trial, when one of the city's top financial advisers testified Detroit was operating on a "razor's edge" and at risk of running out of cash prior to the bankruptcy filing. He stated that it did not have enough time for additional negotiations, especially when creditors were not putting forward what the city considered sufficient counter proposals.

"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.

Matthew Schneider, who represents the State of Michigan in the case, made his closing statement on Friday morning, arguing that a "tremendous storm" was headed toward the city.

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

He noted there are some 78,000 abandoned buildings in the city, about 40 percent of the street lights do not work and the average police response time is 58 minutes.

Rhodes could make a decision on whether Detroit invoke bankruptcy protection as early as this month. The city has indicated that, if it is found eligible, it would like to submit a plan of adjustment to the court by the end of the year.

(Reporting by Joseph Lichterman. Editing by Andre Grenon)

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Comments (8)
Overcast451 wrote:
*Michigan Governor Rick Snyder; Detroit Emergency Manager Kevyn Orr; and a parade of other city and state officials, consultants, retirees and union leaders.*

Perhaps the ‘parade’ of paid officials/consultants – is why they can’t pay their other bills?

But it’s a victory for UAW… right? lol

Nov 08, 2013 1:50pm EST  --  Report as abuse
morbas wrote:
The courts should decide that all municipalities are in debtors…
Byzantine hammer of State and Local budgets is unfair revenue burdening of the lower 4/5th quintile ‘per capita’ incomes. Taxation at State and Local levels is less progressive than federal, which burdens the lowest income levels with the highest effective rate; and the upper 2 percent with the lowest effective rate. And State trends for greater Local budgets aggravates burdening of the poor. Municipalities borrow more in a recession, as the lower quintile’ wages are more diminished. Revenue burden falls on the true employment engines the entrepreneurial small business, and thus all consumers.
Our National Bank Currency system (undermined by a regressive tax burdening) is causal to prolonging economic depression. The present income revenue disbursement needs to be evenly shared between 1/3rd Federal, 1/3rd State and 1/3rd Municipality powers. Political power needs re-balance close to the people.

To: Office of Senator ____________________
United States Senate Washington,
D.C. 20510

To: Office of Representative_________________________
U.S. House of Representatives
Washington, DC 20515

We the people of this United States do proclaim this federal government ‘of, by and for the people’. That, in order to fairly distribute revenue burden, to satisfy ‘net income’ progressive taxation, to balance all governments budgets, and to not tax poverty;
The people mandate:
Income National Tax code that shall use margin graduated income tax principle: Margin $30k 0% single, $60K 0% joint, income above this a linear increasing rate {Income-[$30k or $60k])*(Income/$800k)*90%; 90% limit} . Exemptions shall be prohibited. The Federal Reserve shall amend the (90%) $800K margin, and control currency printing mandated to maintaining currency availability and value. The Federal Reserve shall set the Margin rate value well (>2x) above highest of all State Poverty Level(s). Revenue shall be proportioned 1/3rd federal,1/3rd state proportioned per cast ballot and 1/3rd municipality proportioned per cast ballot.
This National Tax is a peoples tax, no other citizen taxation shall be permitted. Business shall not be taxed. The Federal Reserve shall control taxation. The people will by simple majority approve or reject all margin and rate changes at every Congressional House Representative election year ballot.


Nov 08, 2013 1:52pm EST  --  Report as abuse
ScaryWoody wrote:
Just goes to show when you build a house of cards it eventually collapses.

Nov 08, 2013 1:55pm EST  --  Report as abuse
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