 Judge Steven Rhodes will declare whether Detroit is eligible to
stay in court, more than four months after filing for Chapter 9
protection. It's the most critical decision so far because it
could give local officials a green light to scrub the balance
sheet and slowly improve the quality of life in a city that has
lost more than 1 million residents since 1950. Rhodes
postponed his decision by an hour to give the public more time
to get through courthouse security.
"Eligibility means working down a specific checklist and
making sure the city has done what it needed to do to be in
court. If the city gets its ticket punched, it's game on," said
Michael Sweet, a bankruptcy expert who has advised struggling
local governments in California.
Rhodes' task at this stage is limited to deciding if Detroit
has met certain conditions to be in bankruptcy. A local
government must do more than claim it's broke. There must be
evidence that Detroit tried to negotiate in "good faith" with
creditors or that such talks were simply impossible because of
the number of parties and other factors.
During a nine-day trial, unions and pension funds with much
to lose in bankruptcy vigorously fought the city on the
good-faith requirement, saying a month was not enough time to
make deals and avoid the historic filing last summer. Detroit
emergency manager Kevyn Orr offered just pennies on every dollar
owed to creditors.
If Rhodes finds Detroit isn't eligible for bankruptcy, it
likely means the city would have to sit down again with
creditors and try to reach an agreement outside of court. If
that fails, the city could return and file again for Chapter 9.
But Orr is predicting an "Armageddon-like scenario" if the
Chapter 9 petition is rejected Tuesday. He said creditors who
have been owed money since July will clog the courts with
lawsuits to get anything they can while the city attempts to
stay afloat.
"The issue at this point is very narrow. ... I think Detroit
will be ruled eligible," Sweet said. "I think the judge will
find, given the factors the city and the emergency manager had
to deal with, they did the best they could with what they had."
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Detroit's largest creditors include two pension funds that are
underfunded by $3.5 billion, according to Orr. The Michigan
Constitution protects public pensions, but Orr believes bankruptcy
law trumps that provision. If the city is found eligible for
bankruptcy, pension cuts for 23,000 retirees are possible in the
final plan. Most get less than $20,000 a year.
The city's art trove at the Detroit Institute of Arts also could
be vulnerable. New York auction house Christie's is working on an
appraisal of works that could be worth billions. Orr hasn't signaled
a strategy yet, but even creditors are demanding a role in
determining whether art could be used to raise money.
Jacqueline Esters, 66, said she's willing to take a hit to her
$1,006 monthly pension if it means the city can turn itself around.
She retired in 1998 after 30 years with the health department but
found another job as a community college teacher.
Esters is concerned about her street. She believes her house
might fetch just $30,000 if she put it up for sale, compared to
$80,000 a decade ago. Someone broke a window on a vacant home just
two doors away, meaning vandals are lurking.
"My idea of bankruptcy is you can start all over again," Esters
said. "I don't know how much will happen in the neighborhoods. Until
people are held accountable, the city is going to look like a dump."
Orr was appointed emergency manager in March under a Michigan law
that allows a governor to send a manager to distressed cities,
townships or school districts. A manager has extraordinary powers to
reshape local finances without interference from elected officials.
But by July, Orr and Gov. Rick Snyder decided bankruptcy was
Detroit's best option.
[Associated
Press; ED WHITE]
Follow Ed White at
http://twitter.com/edwhiteap.
Copyright 2013 The Associated
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