Historic Detroit bankruptcy case draws to a close

Robert Snell
The Detroit News

Following closing arguments, U.S. Bankruptcy Judge Steven Rhodes will announce whether he will approve the plan next week.

Detroit — The city's historic bankruptcy trial wrapped up Monday after lawyers made their final case for approval of a debt-cutting plan they say will be a blueprint for Detroit's revitalization.

U.S. Bankruptcy Judge Steven Rhodes said he will deliver his decision on whether to approve or reject the city's plan in court on Nov. 7.

Closing arguments gave the city and lawyers for supporting creditors one last chance to convince Rhodes to approve the plan that would shed more than $7 billion in debt and free up money for improved city services.

Rhodes took a final opportunity to press lawyers about the feasibility of the plan, asking city lawyer Bruce Bennett to identify the top risks that could prevent Detroit from implementing the debt-cutting plan. Bennett admitted the strategy could fall apart if Detroit leaders deviate from a plan to invest $1.7 billion or waste the money though there are numerous protections and levels of oversight.

"The worst thing that could happen is if the $1.7 billion is misused or perceived to be misused," Bennett told the judge. "Either would be an enormous problem."

Bennett also looked ahead, admitting that he hopes Detroit can start implementing its debt-cutting plan before Thanksgiving.

There were pockets of individual objectors Monday.

City retiree John Quinn argued he should be in a special class of creditors because of steep pension and benefit cuts. He called the city's plan unfair and legally defective.

The city's General pension fund "doesn't send me money every month for generosity," he said. "I get the money because they owe me. They have a fiduciary obligation to pay me my pension."

"Some people's reduction is less than yours," the judge said. "So, their pension payment is more than yours. Should they be in a separate class too? Where's the line?"

A second objector, Mike Karwoski, told Rhodes that he would be supportive of the plan if it didn't include a controversial plan to recoup excess interest paid into the optional annuity savings fund accounts of general city workers.

Karwoski argued the recoupment is "illegal and unjust."

Bennett spent about four hours recapping the bankruptcy case, a 15-month saga that featured bitter fights with creditors, fears of pension cuts and hard-fought settlements reached under the watchful glare of financially struggling municipalities nationwide. The settlements are woven into a deal that is fair and equitable, Bennett argued Monday, and will let Detroit finally provide adequate services that worsened as the city amassed $18 billion in debt..

"This is exactly the relief Detroit needed," Bennett said before vowing that the city will not file Chapter 9 bankruptcy again. "We're not coming back for Chapter 18."

Getting Detroit out of bankruptcy court quickly and removing the stigma of a broke city is essential, Bennett said.

"(Bankruptcy) doesn't do much to attract residents and businesses to the city," he said. "This just isn't good."

Closing arguments featured a chorus of creditors' lawyers voicing support for a debt-cutting plan they initially opposed before striking deals that avoided deeper cuts.

Under the deal, past and present city workers have accepted 4.5 percent base pension cuts and the elimination of annual cost-of-living increases. Police and firefighter pensioners would see their 2.25 percent annual COLA reduced to about 1 percent.

The pension deal is "a fair and appropriate one" that strikes the proper balance, said lawyer Robert Gordon, who represents the city's two pension funds.

The judge's approval could help soothe fears among retirees who have worried about the fate of their pensions for more than a year, said attorney Ryan Plecha, who represents several retiree groups.

Approval would let retirees "regain a sense of certainty and begin to heal," Plecha told the judge.

Some general workers also have agreed to relinquish excess interest paid into annuity savings fund accounts.

"There have been a lot of painful decisions made…not more than by the pensioners," said Steven Howell, a special assistant state attorney general.

But after a 15-month legal battle, Howell said there is "a feeling of hope."

"We cannot let the city revert back into a downward spiral," Howell said.

Bennett's speech was at times defensive and reflective as he marked the trial's final phase by noting the debt-cutting plan has won widespread support from creditors.

Early on, Bennett defended a pillar of Detroit's bankruptcy plan, the so-called "grand bargain" that shields the Detroit Institute of Arts collection from creditors and softens pension cuts to thousands of retirees.

The city legally cannot sell its art, creditors can't force a DIA fire sale and it is a bad idea to weaken a cultural institution that can play a role in Detroit's revitalization, Bennett said.

"It is a reasonable decision for the city to want to keep a world-class art museum in the city as a potential contributor to its future," Bennett said.

Rhodes interrupted Bennett while the lawyer was defending the grand bargain, a deal that includes $195 million from Michigan taxpayers and $466 million in contributions over 20 years from private foundations and corporate donors to the DIA.

The judge wanted to know what he would say to city retirees, who face pension cuts, while the art collection goes untouched.

There is no law forcing a city to liquidate its assets so it can pay creditors, Bennett said.

He plans to return to a post-bankrupt Detroit and visit the DIA.

"I'm not in a rush," Bennett told the judge. " I understand the DIA will be here a long time."


(313) 222-2028