Detroit raced toward this week's bankruptcy trial

August 31, 2014 - 10:04 AM
Detroit Bankruptcy

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 (AP) — It took decades of mismanagement, malfeasance and meltdowns in its bread-and-butter manufacturing sector for Detroit to hit fiscal rock bottom. The path to exit bankruptcy could take less than a year and a half.

After some delays, the confirmation trial for the largest municipal bankruptcy in U.S. history is scheduled to start Tuesday.

Massive debt, thousands of creditors and complex union and pension issues had many experts thinking Detroit's bankruptcy would take years to resolve, considering two California cities — Stockton and San Bernardino — filed a year before Detroit did and still haven't settled on plans.

Detroit expects to cut $12 billion in unsecured debt to about $5 billion, which is "more manageable," according to Bill Nowling, a spokesman for emergency manager Kevyn Orr.

"None of it will get wiped out until the plan is confirmed and the judge issues an effective date," Nowling told The Associated Press. "And it happens really fast after that."

Orr's contract expires at the end of September. His restructuring team set an aggressive timetable and bankruptcy Judge Steven Rhodes also quickly named mediators to work out deals with creditors, added Nowling.

"I think — with the exception of a few remaining holdouts — all of our creditors recognized we could not let the city languish in endless bankruptcy proceedings," Nowling said.

Bankruptcy expert Anthony Sabino called Detroit's pace since the July 2013 bankruptcy filing "amazingly quick." San Bernardino has yet to reach the confirmation phase, and Stockton's bankruptcy trial started in May.

"You have to tip your hat to Kevyn Orr to do this in record time and to get these constituents together," said Sabino, who teaches law at St. John's University.

Detroit still had to navigate through claims by creditors — including 30,000 city retirees and workers — and the potential sale of masterpieces from the Detroit Institute of Arts.

Detroit's debt includes $3.5 billion in unfunded pension liabilities. To reduce cuts to pensions and keep artwork off the auction block, the city will get a hand from the state, major corporations, foundations and others through donations of more than $800 million over 20 years.

In return, pensioners had to endorse Orr's restructuring plans. Their vote was completed in July.

Pension officials worked long hours in mediation to reach that settlement, said Bruce Babiarz, Police and Fire Retirement System spokesman.

"No one may be happy with the plan of adjustment, but it should bring this insolvency to an end," Babiarz said. "Many are looking forward to getting on with their lives knowing that their pensions are secured and there is optimism for the future of what was once among the greatest cities in the world."

Quick may not best, salon owner Larry Swygert says. He has run the shop for 25 years along Livernois Avenue, a once-thriving business district known as the "Avenue of Fashion."

"There's a lot of things on the table and I think they're just brushing over them ... trying to get it all done," said Swygert, 59. "But they're not looking at what is going to end up impacting the city at the end."

He pointed to the money that pensioners will lose out on, adding, "They are not going to be able to come and get their hair done and they're not going to be able to shop on the Avenue of Fashion."

The loudest grumbling has come from some creditors which stand to lose big money if Rhodes approves the bankruptcy plan. Bond insurer Syncora Guarantee has said its claim is about $400 million and that Detroit has unfairly discriminated against financial creditors.

"It has been a very fast-track bankruptcy, which Syncora has no issue with," company attorney James Sprayregen said. "Syncora's issue is the lack of transparency of the process and the unfair treatment of its claims."

Rhodes has scheduled additional hearing dates, if needed, into October. But in the end, Sabino expects Rhodes to approve Detroit's bankruptcy — followed by appeals from creditors.

"You can't unscramble the eggs," said Sabino. "Once the confirmation plan is approved and it starts to roll, you can't undo it. In a matter of months ... there will be anti-climactic legal wrangling and Detroit will be on its way to prosperity."