CHICAGO — The question of whether Detroit negotiated in good faith with its creditors — or can show it was impossible to do so — emerged as the central debate in the nine-day trial over whether the city is eligible to enter Chapter 9 bankruptcy.
Attorneys for the creditors and the city made closing arguments over the course of eight hours Friday before U.S. Bankruptcy Judge Steven Rhodes.
Rhodes gave both sides until Nov. 13 to file additional arguments outlining their definition of good-faith negotiations. He's expected to make his ruling after that.
To be eligible to enter into bankruptcy, Detroit has to prove that it's insolvent and negotiated in good faith with its creditors or that such negotiations were too difficult. It also has to show that it was legally authorized to file under state law.
Attorneys for the city's unions, pension systems and retirees argued over the course of the trial that city and state officials were intent on filing for bankruptcy in the belief that only federal law would allow them to cut pensions. Good-faith negotiations were not possible in the tight time frame between June 14, when Detroit emergency manager Kevyn Orr unveiled his creditor proposal, and July 18, when he filed for bankruptcy, attorneys said.
Bruce Bennett, the Jones Day attorney representing Detroit, argued that it was impossible to negotiate with all the city's creditors.
The negotiations were going to fail because it was impracticable to expect to achieve a solution in the case, Bennett argued Friday, the final day of the eligibility trial.
"I think you can absolutely believe in your head this is never going to work — but try anyway," he said.
He added that Orr's June 14 proposal to creditors was "a monument to the city's good faith."
Later, after closing arguments, Rhodes questioned Bennett and the state's attorney on how it was possible for them to say the city negotiated in good faith while also arguing that it was impossible to negotiate.
"It strikes me as factually impossible" to make both claims, Rhodes said.
Rhodes also brought up a video presented during that trial that showed Orr assuring a retiree that pensions were "sacrosanct" just days before he unveiled the creditor proposal, which calls for deep cuts in pensions and other so-called unsecured debt.
"What impact should that have on the court's analysis of good faith here?" Rhodes asked. "That's ultimately the point."
"Your honor, it should have no impact at all," Bennett said after admitting Orr might not have used "the best words." "You have seen a mountain of evidence of a careful, deliberative process to pull together the best reorganization process anyone could put together," Bennett said.
An attorney for the city's largest union warned Rhodes that a ruling could set a "dangerous precedent" for Chapter 9 cases nationally.
"It will be a road map for governors across the country to use Chapter 9 to create a self-created emergency" in order to cut retirement costs, Sharon Levine, the attorney for Michigan Council 25 of the American Federation of State, County & Municipal Employees.
Rhodes also reportedly commented on the fact that creditors did not present an alternative plan before Orr filed for bankruptcy on July 18.
Creditor attorneys also argued that Orr's proposal lacked detail and posed unrealistically draconian terms.
"If you put something on the table that nobody can accept, where is the good faith?" Claude Montgomery, who represents a committee of retirees, asked the judge. "It was supposed to be acceptable. It couldn't be acceptable."
In related news, a German-owned firm that holds some of the city's pension certificates joined bond insurer Syncora Guarantee Inc. in challenging Detroit's effort to secure financing to upgrade its streetlighting system.
FMS Wertmanagement AoR, or FMS, on Friday filed a court brief saying it was joining Syncora's challenge. FMS was founded in 2010 by the German federal government as a so-called winding-up institution for Hypo Real Estate Holding AG. The government's aim is to unwind the group's portfolio over the next 10 years, according to information on its web site. It's being represented by Schiff Hardin LLP.
AFSCME also joined Syncora's challenge Friday.
The lighting plan sets up a new bond-issuing authority that is allowed to borrow up to $210 million of bonds to finance upgrades. Detroit's plan, filed with the bankruptcy court on Oct. 23, calls for the Michigan Finance Authority to privately place the debt with Citibank NA, and lend the proceeds to the authority.
The bonds would be backed by a pledge of the city's utility tax, which typically generate $40 million a year.
Syncora filed an objection to the plan last Wednesday, arguing that it lacks detail, takes an important revenue stream off the table for 30 years, and will end up costing the city $705 million over the life of the deal.
The insurer said the proposal should be introduced as part of a larger plan of adjustment, assuming the city is allowed to formally enter into Chapter 9.