Detroit tells court why it shouldn't be prevented from getting bankruptcy protection

DETROIT – Detroit’s huge debt, lack of cash to provide residents with some basic services, and the army of creditors demanding money are among the reasons a judge should allow the Motor City’s bankruptcy to proceed, attorneys for the city argue in a court filing submitted late Friday.

The 135-page document, which was submitted in U.S. District Court in Detroit, is a response to efforts by more than 100 creditors to get Judge Steven Rhodes to dismiss the city’s pursuit of bankruptcy protection. They contend that that emergency manager Kevyn Orr and his restructuring team didn’t negotiate with creditors in good faith or seek alternatives to restructure Detroit’s finances before filing for bankruptcy on July 18.

Rhodes is scheduled to hear objections to legal issues later this month. A multi-day hearing on objections to material facts was scheduled to start Oct. 23.

“Confronting a state-declared ‘financial emergency’ that includes approximately $18 billion in debt, over 100,000 creditors, over 100 discrete bond issuances and related loans and nearly 50 union bargaining units representing the city’s employees … rendered any out of court solution impracticable,” city attorneys wrote in their filing, which was submitted on the last day Rhodes gave them to respond.

Since 1954, courts have dismissed 29 of the 62 municipal bankruptcies that have been pursued in the U.S.

The city’s biggest employee union, retirees and dozens of residents filed their own objections to the bankruptcy filing last month.

The American Federation of State County and Municipal Employees, the AFL-CIO and city retirees claimed in their objections that Michigan’s emergency manager law, which gives Orr his authority, impairs vested pension rights and violates the state constitution. They also claimed that Orr did not negotiate in good faith with city creditors and that he has not yet proved Detroit is insolvent.

“I need my pension for basic human needs,” city resident and retiree Mary Dugans wrote last month in her objection. “Additionally, I’m 80 years old with age related medical conditions. Therefore, I have to pay for medical co-pays as well as for prescribed medications. Please consider my situation as you approach this important matter. Thanks.”

A spokesman for Orr has said that larger creditors, bond holders, bond insurers and banks likely will make objections during litigation on the city’s proposed plan of adjustment, which is slated to be finished by year’s end.

Orr, who was hired in March to fix Detroit’s finances, has said there are no other options for Detroit. The city’s budget deficit has hovered near or above $300 million during the past few years. The city’s debt includes underfunded obligations of about $3.5 billion for pensions and $5.7 billion for retiree health coverage, according to Orr.

Friday’s filing states that Detroit meets tests for municipal insolvency in the U.S. Bankruptcy Code because the city wasn’t paying its debt as it came due; was cash, budget and service delivery insolvent; and “has experienced and, absent restructuring, will continue to experience negative cash flows for years.”

Detroit also can’t “meaningfully” increase revenues or make any further spending cuts, the city’s attorneys wrote.