CHICAGO — Detroit is in a downward spiral and approval of its controversial bankruptcy exit plan is a matter of survival, the city's attorneys argued Tuesday in the first day of the trial that will determine if the plan is confirmed.
"Detroit won't recover or survive if this isn't done," the city's lead attorney, Jones Day's Bruce Bennett, told U.S. Bankruptcy Judge Steven Rhodes in opening statements Tuesday afternoon.
"The city believes the investment will be sufficient to address the city's most pressing needs," said Bennett, according to local reports. "The city believes the planned investment will be sufficient to rehabilitate the city."
Bennett's statements were part of the first day of the historic trial to decide the fate of the city's plan of confirmation to exit the largest municipal bankruptcy filing in the U.S. Rhodes will decide whether the proposal, which reduces the city's debt by roughly $7 billion and invests $1.5 billion in the city over the next 10 years, is feasible and fair to creditors.
Bennett was expected to continue his opening statement Wednesday. Creditors who support the plan, including United Auto Workers and the American Federation of State, County and Municipal Employees will also make opening statements Wednesday.
Syncora Guarantee Inc. and Financial Guaranty Insurance Co., the two major creditors who have yet to settle with the city, will also deliver opening remarks outlining their legal strategies challenging the plan.
Earlier Tuesday, Rhodes denied a pair of motions by Syncora and FGIC tied to what evidence could be introduced during the trial. FGIC wanted to block Detroit from introducing evidence tied to the city's lawsuit to repudiate $1.5 billion of certificates of participation.
The two insurers hold or wrap those pension COPs and are fighting the city's effort to repudiate them.
The judge also rejected a motion that would have prevented the city from introducing evidence tied to the mediation process that lead to the crafting of the so-called "grand bargain" that anchors the confirmation plan. Rhodes also ruled that he would not allow testimony from the city's investment banker, Ken Buckfire of Miller Buckfire.
The city has proposed repaying less than 10 cents on the dollar for the pension COPs. If the insurers and the city do not reach a settlement, the trial could continue through mid-October or longer.
A Detroit attorney said Tuesday the city may take until the first week of October to present its defense of the confirmation plan.
Bennett told Rhodes that the city has progressed over the last year by winning settlements from most of its creditors, telling the judge that "it's really easy to lose sight of how broadly consensual the plan truly is."
The attorney focused his legal arguments on the grand bargain, which would raise roughly $800 million for the city's pensioners in exchange for the city owned art collection being transferred to an independent trust and protected from the city's fiscal problems. The art housed in the Detroit Institute of Arts museum is one of the city's most valuable assets, along with its the water and sewer department.
Syncora and FGIC have argued that Detroit cannot privatize the asset without sharing the cash with all creditors, not just pensioners. Bennett argued that the creditors do not have the power to force the city to fund all recoveries.
"Syncora is never going to be in a position to realize value from the DIA assets," Bennett said. "An unsecured creditor doesn't have a general claim against all property of a Michigan municipality," the attorney said. "So what is about Chapter 9, if anything, that expands the right of an unsecured creditor in a bankruptcy?
the answer: nothing."
He later added in reference to the bond insurers: "I'm not sure their views matter at all."
Bennett also sought to undermine FGIC's arguments that the city has undervalued the art collection — the insurer has gotten bids from one firm that offered up to $4 billion loan with the art as collateral — by arguing that the city would be unable to pay back that loan.
"There has been no alternative that has surfaced that would give the city a comparable amount of money while the collection stays where it is in the city of Detroit and the DIA continues to operate as it has operated," said Bennett.
"The DIA is one of the relatively few institutions that Detroit has that might draw residents back," he added.
