If judge spikes Detroit bankruptcy, city on upswing could become a 'carcass' for creditors

DETROIT – Sam Walker jumps to attention when he hears noises at his Detroit home. But now he has an ally to help him see what’s happening outside: a bright streetlight that replaced one that was dim and barely effective.

A new light would draw a yawn in most cities, but it represents real progress in Detroit. The city is slowly restoring some services, improving others and paying vendors for the first time in months, even while attempting to turn itself around in a record-setting bankruptcy case that has reached a critical point.

After a nine-day trial, Judge Steven Rhodes must decide whether Detroit really qualifies for the court’s help to fix its awful long-term finances — including $18 billion debt. Although they haven’t offered specifics, officials predict a “free-fall crisis” if the city is found ineligible and warn that the improved services, such as those streetlights, could suffer.

The judge’s decision is expected any day.

“If the bankruptcy is disallowed, frankly, expect all hell to break loose,” said Anthony Sabino, a lawyer who teaches business law at St. John’s University in New York. “Detroit will be at the mercy of its creditors in individual lawsuits spread amongst federal and state courts. That chaos alone could doom the city.”

He compares it to animals in the wild — “wolves rending the carcass piece by piece.”

Emergency manager Kevyn Orr, the state appointee who now controls Detroit’s checkbook, acknowledges things will get worse if bankruptcy is rejected, but he’s not saying exactly how bad.

“The city would go back to where it was. We can’t go back,” he told a business group Tuesday.

Unions, retirees and pension funds with much to lose have led the opposition. They argued at trial that Detroit flunked critical steps necessary to remake itself under Chapter 9, especially a lack of genuine negotiations in the weeks before the July filing.

They uncovered memos and emails about bankruptcy planning and previously unpublicized doubts by the state treasurer. It is evidence, they insist, that the fix was in and Detroit really didn’t want to negotiate with creditors. Orr said four weeks were plenty.

“The governor took more time to interview the consultants to help the city with restructuring than they took to negotiate the restructuring itself. That’s absurd,” attorney Sharon Levine, representing AFSCME, told the judge.

Still, there seems no dispute that Detroit is broke. The bankruptcy filing placed a gate in front of bond holders and others who were owed money at the time. It gives the city flexibility in the short term, freeing cash for other bills.

“Everyone is getting paid: employees, vendors, health care etc.,” said Bill Nowling, Orr’s spokesman. “Right now, we are paying 98 per cent of our vendors within 30 days, and that hasn’t happened in decades.”

Anthony Davis, owner of AC Towing, said payments started popping up about two weeks ago.

“They sent like a thousand, then $800 and then another thousand,” he said.

Detroit entered bankruptcy with about 9,400 employees, a winnowing process that took years and cut the workforce by 30 per cent. Consultants testified that the checkbook was down to just $7 million last spring, pocket change in a $1 billion budget.

New Police Chief James Craig said average response time to calls for assistance has improved to 11 minutes, compared to 50 minutes or longer earlier this year. New streetlights slowly are replacing tens of thousands of broken ones in a city with more square miles of land than Boston, Manhattan and San Francisco combined.

“It’s a big difference,” said Walker, 51, who feels the new lights make his neighbourhood more secure. “People get away with things in the dark.”

Ed McNeil, special assistant to the president of the American Federation of State, County & Municipal Employees Council 25, downplays the urgency expressed by Orr’s team.

“Eighteen billion dollars — that’s down the road. You’re not talking about money due today,” McNeil said.

The history of recent public bankruptcies shows most filing for it have cleared the eligibility stage, including Jefferson County, Ala., Stockton, Calif., and San Bernardino, Calif. A handful of others were dismissed but not for reasons that are in play in Detroit.

Rhodes hasn’t signalled which way he’s leaning on Detroit’s eligibility. But he referred to possible benefits in a recent order suspending a lawsuit that challenged Orr’s status as emergency manager.

“The public … has an interest in the opportunity that this bankruptcy case may provide for the city of Detroit, not only to adjust its debt and to restore the basic services that its residents need for their health and safety but also to regenerate its economic livelihood,” the judge said.


AP reporters Jeff Karoub and Corey Williams contributed to this report.


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