September 2, 2014 at 1:00 am

Detroit paints dire picture in bankruptcy trial

Detroit won’t survive if debts are not slashed and money freed up to invest in public safety and other services, the city’s bankruptcy lawyer said during opening statements Tuesday.

The dire prediction marked the start of a trial that will determine whether Detroit can shed more than $7 billion in debt, invest $1.4 billion in city services and emerge from the biggest municipal bankruptcy in U.S. history.

“Detroit won’t recover or survive if this isn’t done,” Detroit bankruptcy lawyer Bruce Bennett told U.S. Bankruptcy Judge Steven Rhodes. “Detroit’s debts must be adjusted and adjusted significantly.”

The trial marks a pivotal moment in Detroit’s nearly 14-month-long odyssey through bankruptcy court, which has been bookmarked by unprecedented efforts of private foundations, corporations and the state of Michigan to bail out the city’s pension funds and shield a municipal art collection from a fire sale to satisfy creditors.

Bennett’s opening statement underscored the importance of the “grand bargain,” a deal that is the linchpin of Detroit’s debt-cutting plan. The deal would contribute $816 million from the state, foundations and Detroit Institute of Arts patrons to soften pension cuts and shield art from creditors, but it has been attacked by some who claim the deal unfairly discriminates against them.

Bennett quoted one of the judge’s own orders that cited the city’s dwindling population, jobs and revenues that precipitated the bankruptcy filing in July 2013 after Detroit buckled under the weight of $18 billion in debt.

The city’s lawyer spent more than an hour defending the deal in hopes of convincing Rhodes that the grand bargain is legal. At one point, Bennett stopped himself before referring to the city’s precarious financial position.

“I don’t like the term ‘death spiral,’ ” Bennett said. “Detroit is in a downward spiral.”

The grand bargain, Bennett noted, has broad support from retirees, bondholders, the DIA’s legal team and other creditors who have settled disputes with the city rather than fight over untouchable assets.

The trial continues Wednesday, is expected to last a month or longer and feature objections from financial creditors who allege the city’s plan to preserve art and shield 32,000 pensioners from deep cuts in their monthly checks is unfair and not feasible.

Bennett repeatedly insisted Tuesday that the debt-cutting plan is in the best interest of creditors.

The lawyer also tried to undercut one alternative to the grand bargain.

New York-based lender Art Capital Group has offered to loan Detroit as much as $4 billion if the city put up the art collection as collateral.

“I don’t think that’s the kind of financing we’re supposed to be encouraging,” Bennett told the judge.

The city wouldn’t be able to repay the money and the deal would end badly, he said.

“While the loan is advertised as a means of keeping the art in the city, it will do that temporarily,” Bennett said, “not permanently.”

No creditors are impacted by the city’s plan for Detroit’s art, he said.

“They have no rights to these assets anyways,” Bennett said.

Now, the city’s legal team needs help to “save the city of Detroit.”

The city won’t be saved by raising taxes to pay off debts, Bennett said. Detroit’s tax rate is maxed out, is among the highest in the state and the city provides the “worst services,” he added.

“Raising taxes now is not compatible with the goal of saving the city,” he said.

Two of the city’s biggest adversaries, bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co., have pushed for an art sale and said the grand bargain unfairly favors pensioners.

Syncora and FGIC, which face a near wipeout under Detroit’s plan, have assembled a battery of legal arguments in an attempt to blow holes in the city’s plan to shield 32,000 pensioners from deep cuts in their monthly checks.

Bennett attempted to beat back Syncora and FGIC’s arguments that the city has not done enough to value and leverage money from its assets to repay creditors.

“There’s no foundation in Michigan law ... that the DIA assets or other assets of the city ... can be reached by creditors,” Bennett argued.

On the obligation to sell assets, Bennett later added: “There is no obligation to do those things at all. They’re not part of the equation.”

Syncora and FGIC contend the grand bargain’s $816 million, 20-year payout is actually worth about $450 million in today’s dollars, and that more money can be extracted from the DIA assets through an open market sale. An art appraiser hired by FGIC pegged the value at $8 billion for the entire collection.

“We will prove that a reasonable evaluation of the DIA’s assets is not $8 billion, that it’s considerably less,” Bennett said Tuesday.

The start of the trial was delayed as Rhodes had to sort out disputes between the city and its holdout creditors over what evidence and witness testimony will be allowed during the proceedings.

The judge dealt the city a setback earlier Tuesday, ruling Detroit’s investment banker, Kenneth Buckfire, cannot testify about creditor recoveries if Rhodes dismisses the bankruptcy case.

Rhodes faulted Buckfire for failing to analyze creditor recoveries outside bankruptcy court.

Rhodes ruled in the city’s favor on a series of other objections from two financial creditors, but left open the possibility he’ll consider case-by-case disputes over what evidence and testimony is admissible.

“How that gets worked out in our trial has to be worked out on a question-by-question basis,” Rhodes said Tuesday afternoon.
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Boxes are brought into the federal courthouse ahead of Detroit's bankruptcy trial on Tuesday. / David Coates / The Detroit News
Lawyers prepare for the start of Detroit's bankruptcy trial on Tuesday. (David Coates / The Detroit News)
Bruce Fealk, 60, of Rochester Hills and a supporter at the rally Tuesday ... (Charles V. Tines / The Detroit News)
Bill Davis, 57, right, a retired water department worker, speaks Tuesday ... (Charles V. Tines / The Detroit News)