Court to decide if Detroit really is broke

Court to decide if Detroit really is broke
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DETROIT - In a federal court building in downtown Detroit, beginning on Wednesday morning, the largest municipal bankruptcy filing in US history comes down to a single question: Is Detroit bankrupt?

Federal bankruptcy judge Steven Rhodes will begin hearing arguments on the crucial issue of whether Detroit is eligible to restructure its debts and liabilities under Chapter 9 of the US Bankruptcy Code that applies to municipalities.

The hearings will pit retirees, pension funds and unions trying to preserve retirement payments to city workers against Detroit's state-appointed emergency manager, charged with righting the city's finances.

Detroit clearly is struggling. More than one-third of its residents live below the government poverty line. There are some 78,000 abandoned structures and just 40 per cent of the street lights work. Detroit's population has shrunk to less than 700,000, from a peak of 1.8 million in 1950, and only 53 per cent of property owners paid their 2011 property taxes.

But such troubles do not necessarily amount to bankruptcy under federal law. And in the multi-day hearing that opens at the Theodore Levin US Courthouse, Detroit's attorneys will need to prove that Detroit meets the legal requirements for Chapter 9 bankruptcy protection.

City lawyers are expected to tick off arguments meant to meet that standard: Detroit had proper authorisation to file the case, it is financially insolvent, it negotiated in good faith with its creditors or had so many creditors that such negotiations were not feasible, and it requires bankruptcy protection in order to deal with US$18 billion (S$22.2 billion) in debt and other liabilities.

Many bankruptcy experts say Rhodes is likely to find Detroit eligible, though his ultimate ruling is hardly a foregone conclusion. "Chapter 9 is never routine," said Juliet M. Moringiello, a law professor at Widener Law School in Harrisburg, Pennsylvania, who has followed proceedings in the Detroit case.

The city filed the case on July 18, and it said about half of its liabilities stem from retirement benefits, including US$5.7 billion for healthcare and other obligations, and US$3.5 billion involving pensions. How the city restructures its debt may set precedents for other struggling municipalities, bankruptcy experts said.

"We'll see other Chapter 9s," said Kenneth Klee of Klee, Tuchin, Bogdanoff & Stern in Los Angeles, who is representing Jefferson County, Alabama in its Chapter 9 case. "The pension problem is one that will require resolution, and with the labour relations being strained in parts of the country and some politicians not able to say no to employees and retirees, I expect there will be other chapter 9s to be filed."

On Monday, attorneys wrapped up a three-day hearing on legal authority issues surrounding the bankruptcy as objectors argued that Chapter 9 is unconstitutional and that Michigan's constitution protects pensions from being slashed.

"It's one of those moments that I think that we will look back on and say 'This is where Chapter 9 changed,'" attorney Barbette Ceccoti told the court on Monday on behalf of the United Auto Workers union, which represents some city workers.

Moringiello said parties tend to object to bankruptcy filings because they think they can do better under state law, and she said if Rhodes does not grant eligibility the creditors likely will try to get a state court to force the city to pay its debts.

"Those are not terribly effective remedies," she said. "You don't have the same remedies you have against a private debtor."

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