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Crucial Trial Begins In Detroit Bankruptcy Case

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DETROIT (WWJ/AP) – Detroit’s bankruptcy case is now on trial, and the result will determine whether the city can reshape itself in the largest public bankruptcy filing in U.S. history.

Detroit filed for Chapter 9 protection in July, flattened by at least $18 billion in debt. But nothing can happen until a judge finds the city actually is eligible to be in bankruptcy court.

Unions and pension funds claim Detroit flunks the test because it failed to hold “good-faith” negotiations earlier this year, a key point in bankruptcy law. The city denies it and says it has met its burden.

The trial, that got underway Wednesday morning in U.S. District Court in Detroit, is expected to last several days; with testimony from emergency manager Kevyn Orr, Detroit Police Chief James Craig, and financial consultants.

Wednesday morning, the state agreed that Gov. Rick Snyder will also testify, likely Monday afternoon.

Attorneys for the United Auto Workers argued Wednesday that the state should hand over memos involving the Jones Day law firm, The UAW claims Gov.  Snyder had weekly talks with Orr well before the July bankruptcy filing.

[Streets Shut Down As Protesters Gather Outside Detroit Bankruptcy Trial]

WWJ Legal Analyst Charlie Langton says Judge Steven Rhodes will focus on two key questions: “One: Is Detroit broke? I think they’re gonna win that one; that’s a no-brainer.

“Number two: Did Kevyn Orr bargain in good faith with those creditors before going bankrupt? Did Kevyn Orr do everything he could have done and should have done before filing for bankruptcy,” Langton said. “That’s the test, and that’s what the judge is going to have to determine.”

Jim Spiotto, a 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 Orr, who acquired nearly unfettered control over city finances following his appointment by Gov. 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. Lawyer Sharon Levine, who’s representing the American Federation of State, County and Municipal Employees, said the city spent months “mapping out its path to Chapter 9,” not looking for compromises that could keep Detroit out of bankruptcy.

In response, however, attorneys for the city said a June 14 meeting and subsequent sessions with creditors were well-intended but fruitless. A bankruptcy filing was being prepared, they acknowledged, but “never set in stone.”

The trial in front of Rhodes is expected to last several days. The schedule calls for the trial to run from 9 a.m. to 5 p.m, Wednesday through Friday, Oct. 23-25. Court spokesman Rod Hansen says time also has been set aside on Monday and Tuesday of next week should it be needed.

It will be an autopsy on what Snyder has called decades of ruinous financial decisions in Detroit combined with an exodus of people – the population has dropped to 700,000 from 1.8 million – and other social and economic factors.

“The city’s restructuring must provide a foundation for the city to begin to provide basic, essential services to its residents in a reliable fashion,” Orr said in July when he took Detroit into bankruptcy. “Without this, the city’s death spiral … will continue.”

Langton says the nation will be paying attention.

“I think the eyes of the country are going to be looking at Detroit to see what really are the requirements for a city to go bankrupt,” said Langton.

“Does a city have to exhaust and sell every single asset?  Does the city have to negotiate with every single creditor? Does the city have to sell certain assets like the DIA, for example; is that what eligibility means for bankruptcy?

“We’re going to find out a lot during this hearing.” Langton said.

Stay with WWJ Newsradio 950 and CBSDetrot.com for the latest.

[Detroit Bankruptcy: Complete Coverage]

(TM and © Copyright 2013 CBS Radio Inc. and its relevant subsidiaries. CBS RADIO and EYE Logo TM and Copyright 2013 CBS Broadcasting Inc. Used under license. All Rights Reserved. This material may not be published, broadcast, rewritten, or redistributed. The Associated Press contributed to this report.)

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