In Detroit bankruptcy trial, ‘good faith’ bargaining at issue

October 23, 2013

A trial on Detroit’s eligibility for bankruptcy protection kicked off Wednesday with opponents claiming the city tried to bypass restrictions on cutting workers’ pensions, as experts in municipal bankruptcy around the country watched closely in a case that could set important precedents.

At issue is whether Detroit, which in July filed the largest municipal bankruptcy in U.S. history, negotiated in good faith before it sought protection from its creditors.

The city says that there is no alternative to bankruptcy, that no other solution exists to rescue Detroit from its deep financial troubles.

Attorneys for labor unions, retirees and the city’s pension fund argued that the city and the state of Michigan were so hellbent on filing for bankruptcy that Detroit’s emergency manager, Kevyn Orr, failed to meet requirements for a proper filing.

U.S. Bankruptcy Judge Steven Rhodes, who is presiding over the trial, gave Detroit and its opponents three weeks to file written arguments on what may be a key point of contention in the case: What constitutes “good faith” bargaining?

The trial, which pits retirees, pension funds and unions trying to preserve retirement benefits for workers against the city, has become a touchstone for a city that has seen corruption, poor management and a declining population base contribute to a sense of stagnation and decline.

Outside the Theodore Levin U.S. Courthouse in downtown Detroit on Wednesday morning, about 300 protesters rallied, most of them union members who face cuts to their pension benefits under Orr’s plan.

Orr, appointed by Michigan Gov. Rick Snyder (R) as the city’s emergency manager, has said he hopes to use federal bankruptcy to repair Detroit’s troubled finances.

Unions and pension funds claim that negotiations outside of bankruptcy would lead to the best outcome for a city facing $18.5 billion in debt, declining population, a high crime rate and a breakdown in urban infrastructure.

Bruce Bennett, in an opening statement, said the city needs bankruptcy for the good of its financial health and the well-being of its residents, saying that tax increases and other revenue-generating measures are not an answer.

“There’s nothing left to do here,” Bennett said, arguing that the city is insolvent. “There’s no revenue solution.”

Labor officials disagreed.

Babette Ceccotti, representing the United Auto Workers union, in her opening statement said the city had a “deliberate plan” to use bankruptcy to restructure its debts because it would allow it to preempt the state constitution, which stipulates that pensions cannot be reduced.

“We think that by connecting all the dots here, the plan was to use Chapter 9,” she said.

The trial is expected to extend at least into next week. Rhodes has scheduled 10 days of hearings over three weeks. He probably will not rule whether the city was eligible to file for bankruptcy until at least mid-November.

Rhodes will decide whether Detroit is eligible to restructure its debts and liabilities under Chapter 9 of the U.S. bankruptcy code, which gives cities wide latitude in how to deal with creditors and grants the court broad powers to resolve disputes.

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