Detroit bankruptcy on trial: 8 things to watch for

Nathan Bomey, Detroit Free Press12:34 p.m. EDT October 23, 2013

Detroit aims to dramatically reduce its estimated $18 billion in debt and liabilities.


(Photo: Andre J. Jackson, Detroit Free Press)

STORY HIGHLIGHTS
Lawyers for the city will make the case for bankruptcy before Judge Steven Rhodes

  • After the trial, Rhodes will decide whether to authorize the largest municipal bankruptcy filing in U.S. history
  • The trial is expected to last at least five business days


DETROIT — Wednesday marks a pivotal juncture in the city's quest to relieve itself of years of financial despair when its team of lawyers go before a judge in hopes of convincing him that the city is indeed eligible to enter Chapter 9 bankruptcy.

Expect dramatic confrontations, legal grandstanding and fresh insight into the city of Detroit's future during a highly contentious Chapter 9 bankruptcy eligibility trial that starts today.

STORY: Citizen objectors get day in court
STORY: Why did Detroit declare bankruptcy?

Judge Steven Rhodes will hear witness testimony, the presentation of evidence and oral arguments in a session so rare that even the attorneys involved in the case aren't exactly sure how the process will play out.

Upon the trial's conclusion, Rhodes is to decide whether to authorize the largest municipal bankruptcy filing in U.S. history, positioning the city to dramatically reduce its estimated $18 billion in debt and long-term liabilities."You have to see what questions are asked and how often Steve Rhodes is rolling his eyes and nodding his head," University of Michigan bankruptcy law professor John Pottow said.

"That's the stuff you look for."

The central question is: Does the city of Detroit meet the specific legal criteria to file for Chapter 9 bankruptcy?

To qualify, the city must show it's insolvent; has the state's permission to file for bankruptcy, and prove it negotiated "in good faith" with creditors or can no longer do so, among several other factors.

Several major labor groups and more than 100 individual residents filed objections to the bankruptcy petition that was filed by emergency manager Kevyn Orr.

"I would suspect that getting past the insolvency question is not going to be their challenge," said Keith Mason, a bankruptcy attorney for McKenna Long, which is not involved in the case.

"The challenge will be on the good faith because it's a lot more discretionary," Mason said.

The trial is expected to last at least five business days, with the city presenting its case from Wednesday through Friday and creditors expected to pitch their case Monday and Tuesday.

But it could last even longer, with possible overflow dates of Nov. 4-8.

Here are eight key questions to monitor:

Not far to the north of Detroit's downtown lies an empty field, a sign of the city's severe decline.(Photo: Carlos Osorio, AP)


1. Will Gov. Rick Snyder be called to testify?
The UAW, which represents a small group of city employees, is trying to force the governor to testify in person after completing a three-hour deposition on his role in authorizing the city's bankruptcy.
The union issued subpoenas to Snyder, Michigan Treasurer Andy Dillon and Snyder aide Richard Baird.
Even if Snyder testifies — extraordinarily rare for a sitting governor — he's unlikely to deviate from his previous statements that he tried all available options to rejuvenate the city before authorizing the bankruptcy.
"He's a lawyer himself, he's not a dummy," Pottow said. "I would be surprised if he says, 'Yes I always knew we were going to file for bankruptcy and that's why we filed for bankruptcy.' I will eat my hat if that occurs."

2. Will Kevyn Orr acknowledge plans to pursue pension cuts?
Orr has said pension cuts will be necessary, but the city hasn't officially proposed cuts in bankruptcy court. So Orr may dodge questions on pensions to avoid jeopardizing the city's case.
Lawyers for Michigan Council 25 of the American Federation of of State, County and Municipal Employees, the city's largest employee union, and other creditors are expected to grill Orr on this issue. They say Rhodes should block the bankruptcy filing because of Orr's plan to cut public pensions, which are protected by the Michigan Constitution.

3. Will Judge Steven Rhodes allow evaluations of the city's pension funds to be admitted?
A committee representing Detroit's retirees filed a motion asking Rhodes to prevent a city pension expert from discussing the city's$3.5-billion pension shortfall estimate. Unions and the city's two pension funds have argued the number is grossly inflated.
But if Rhodes allows the assertion to be discussed during the trial, that could boost the city's argument that it is broke.

4. What will Police Chief James Craig say?
In a surprise, Detroit lawyers disclosed Monday that they plan to call Craig to testify during the eligibility trial. He is likely to discuss the city's argument that it is so broke that it can't afford to do basic things like keep the city safe and turn the lights on.

5. Will challenges to the constitutionality of Michigan's emergency manager law gain any traction?
The AFSCME, the UAW and other creditors are trying to convince Rhodes to rule that Orr's appointment was unconstitutional, which would derail the bankruptcy filing.
"I think he's going to have to decide the whole constitutionality of the emergency manager law," Pottow said.

6. What witnesses will the creditors call?
The city is expected to call Orr, Craig, Gaurav Malhotra of accounting firm Ernst & Young, Charles Moore of restructuring firm Conway MacKenzie and Miller Buckfire's Ken Buckfire to the witness stand.
The list of witnesses for the objectors has not been released. One objector disclosed that it would call police union official Mark Diaz and fire union official Dan McNamara to testify on the unions' labor negotiations with the city. Lawyers will be allowed to cross-examine each witness.

7. Will any financial creditors make an appearance?
No banks, bondholders or businesses objected to the city's Chapter 9 bankruptcy filing, although several have objected to the city's proposed pension debt interest-rate deal settlement.

8. What happens after the trial?
Rhodes is to issue a ruling on whether the city's case can proceed. If he says yes, the city is expected to propose a reorganization plan by the end of the year. If he says no, the case would be dismissed and the city would revert to trying to negotiate concessions outside of court and would likely be flooded by lawsuits.

http://www.usatoday.com/story/news/n...hings/3168729/