Detroit bankruptcy trial opens with city attorney saying survival depends on debt plan



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The confirmation trial for the largest municipal bankruptcy in U.S. history is scheduled to start today. The federal proceeding is designed to determine whether bankrupt Detroit's restructuring plan will be approved. (Sept. 2)

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In this July 16, 2013 aerial file photo, the downtown of the city of Detroit is shown. Detroit Emergency Manager Kevyn Orr raised more than a few eyebrows a year ago when he took the city into bankruptcy and predicted it would be out by the time his term expired in fall 2014. Because it is by far the largest city to file for municipal bankruptcy and the issues were so complex many experts predicted it would take years to resolve. But the city will take a major step toward that goal with a trial in federal bankruptcy court that starts Tuesday, Sept 2, 2014. (AP Photo/Paul Sancya, File)


DETROIT — The plan to restructure billions of dollars in debt is the vehicle the Motor City needs to free up funds to provide services to residents and allow the city to survive, one of Detroit's attorneys told the federal judge at the helm of the historic bankruptcy trial, which started Tuesday.

Bruce Bennett said during his opening statement before federal Judge Steven Rhodes that Detroit has operated in distressed conditions for so long that it requires vast amounts of investment.

"Detroit won't survive or recover until this is done," said Bennett, an attorney with the Jones Day law firm that was hired to help the city through the largest municipal bankruptcy in U.S. history.

Tuesday was the first in what's likely to be a number of days in which lawyers from the city and other creditors will debate the city's debt, the rights of its creditors and what is allowable under bankruptcy law. Dozens of witnesses are expected to be called.

Detroit wants to cut $12 billion in unsecured debt to about $5 billion through its plan of adjustment that has to be approved by Rhodes. The plan's architect, state-appointed emergency manager Kevyn Orr, guided Chrysler through its bankruptcy.

Most creditors, including more than 30,000 retirees and city employees, have endorsed the plan of adjustment. The strongest opposition is coming from New York-based Syncora Guarantee, who has said its claims with the city are about $400 million.

Syncora and some other creditors have pushed for the city to look into the sale of assets, including city-owned pieces in the Detroit Institute of Arts.

But Bennett said under state law, city assets cannot be sold to satisfy creditor demands.

That should have been a "powerful warning to every potential lender and insurer not to lend money to a Michigan municipality based on the expectation that a creditor can compel the sale of an asset," he said.

The threat to artwork also prompted the creation of the so-called Grand Bargain — commitments from the state, major corporations, foundations and others to donate more than $800 million over 20 years meant to soften cuts to city pensions while placing pieces in the DIA into a trust and out of the reach of debtor demands.

Pensioners this summer voted in favor of Orr's plan, which calls for general retirees to take a 4.5 percent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose only a portion of their annual cost-of-living raise.

No alternatives to that deal have been offered "that would give the city a comparable amount of money while the collection stays in Detroit," Bennett said.

"The DIA is one of the relatively few institutions Detroit has that might draw residents back," he said. "It would be most assuredly a reasonable decision to keep it in Detroit."

Detroit's population has been declining for decades. About 1.8 million people called the city home in the 1950s; today, fewer than 700,000 are believed to live in Detroit.

Bennett will continue his opening statement Wednesday morning. Groups supporting Orr's plan of adjustment also are expected to give statements, followed by Syncora and other creditors who oppose the plan.

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