In First Day of Trial, Lawyer Says Detroit Has 'Mountain of Evidence' for Bankruptcy

October 24, 2013

Detroit faced a “payless payday” before it filed its $18 billion bankruptcy, a financial analyst told the judge conducting a trial to determine whether the city should be stripped of court protection from creditors.

To avoid running out of money for basic services, the city moved cash around, canceled payments to its pension funds and defaulted on debt in the months before it filed for bankruptcy, Gaurav Malhotra, a partner at Ernst & Young LLP, testified yesterday in Detroit.

These actions were designed “to ensure that the city did not have a payless payday,” Malhotra told U.S. Bankruptcy Judge Steven Rhodes. Without a change, the city would build up a $3.9 billion deficit over 10 years, mainly because of the cost of providing pension and health-care benefits to retirees, he said.

Malhotra was the first of five witnesses the city said it will present at the trial. Lawyers for retired and current city workers have attacked the decision by a state-appointed emergency manager to put Detroit into bankruptcy, where creditors can’t try to seize assets or file suits that disrupt reorganization efforts.

In opening statements yesterday, lawyers for the retirees and city workers said Detroit hasn’t met the standard set out in Chapter 9 of the U.S. Bankruptcy Code to remain under court protection.

Legal Requirements

The law says the city must show that it’s insolvent, that it’s entitled under state law to file for bankruptcy, that it tried to negotiate with creditors or was unable to do so, and that it intends to file a plan to adjust its debts.

The emergency manager, Kevyn Orr, was never serious about trying to fix the city’s finances outside of bankruptcy, said Jennifer K. Green, an attorney for a city pension system fighting the Chapter 9 case.

Last year, state officials conspired with Jones Day, the law firm that Orr hired to file the bankruptcy, to create a new emergency manager law and use it to file for bankruptcy, giving Detroit leverage over unions and retirees, she said.

“It really was a foregone conclusion,” Green said.

Detroit has a “mountain of evidence” showing it’s entitled to federal bankruptcy protection, Bruce Bennett of Jones Day, a lawyer for the city, said at the beginning of the trial, which is scheduled to continue through Oct. 29. Detroit is “failing to provide basic services,” he said.

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