By Joseph Lichterman
DETROIT Nov 8 Detroit on Friday wrapped up its
effort to prove that it is eligible for the largest municipal
bankruptcy in U.S. 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,
U.S. 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
"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 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
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
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
"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
"We are on a path to get it done within that time frame,"