Rod Meloni: Detroit's eligibility ruling

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DETROIT - Local 4's Rod Meloni is blogging from inside the hearing Tuesday morning where a judge will declare whether Detroit is eligible to file for bankruptcy.

The hearing is at 10 a.m. and the decision will come sometime after that.

10 a.m.

The courthouse doors opened at 7 a.m., the line quickly formed thereafter.

There are three overflow rooms to accommodate the large crowd in the courthouse today. Security is tight, the bomb sniffing dog checked any and all public areas in, around and even near the courtroom. Judge Steven Rhodes is very prompt so we expect him to take the bench at any minute. We will have full details of his words from the bench in the moments to come.

10:03 a.m.

Rhodes has started and told everyone to settle in. The written opinion is more than 140 pages! The judge feels his summary is more accessible.

10:05 a.m.

The judge feels it is vitally important for all who

The city of Detroit was once a proud city, rightfully the birthplace of the automotive industry. In the early 1950s it was building half of the world's cars. But since them the city has been in decline. Mounting crime rates, the city no longer has the resources to provide residents with basic services for basic health and safety.

To reverse this decline and to revitalize and reinvigorate itself the city needs help. The city estimates its debt at $18 billion, $11.9 in unsecured debt. It has more than 100,000 creditors. It includes $5.9 billion in OPEB, "other benefits."

The judge is listing the city's financial ills.

10:11 a.m.

Judge Rhodes the court is satisfied the city has given proper accounting of its financial troubles for the purposes of these proceedings.

The judge further stated he believes the pension assumptions the city is making are proper.

Judge Rhodes is now addressing the deal or "swap" former Mayor Kwame Kilpatrick entered into to prop up its pensions. He is detailing the losses "catastrophic losses" the city suffered under this "bet."

He is detailing over a billion dollars in losses the city incurred in this deal. The city estimates 38% of tax revenues go to debts and without changes it will increase to 65% in five years at the same time that tax and state revenue sharing is going down.

10:17 a.m.

The judge pointed out the city is carrying a $237 million budget deficit. That is the good news. Had the city not borrowed considerable sums, the city would have a $700 million dollar budget deficit.

He points out the city did not pay $120 million in pension obligations. By 2017, the city estimates its accumulated deficits will exceed one billion dollars. Without deferring pension payments the city would have run out of cash by June 30th, 2013. The city filed for Bankruptcy 18 days later. The judge stressed this point twice!

The judge is now talking about population loss and the below investment grade bond ratings.

He is talking about violent crime clearances, substantially below national large cities and surrounding communities. 40% of 88,000 street lights not working. 78,000 abandoned and blighted buildings, 30% considered dangerous. In 2012, the average priority response time was a half hour and the national average is 11 minutes. He is discussing the shabby condition of the police department and its outdated technology. He points out the ill equipped Detroit Fire Department is in similarly poor condition.

The city has reduced 2,700 employees over the past couple of years, now has just under 10,000 employees with 40 different bargaining units.

Judge Rhodes is now discussing the events that led up to Public Act 436 became effective and gives the history of the emergency management process proceeded.

He believes this kind of detailed accounting of his decision is more accessible to citizens.

10:29 a.m.

Judge Rhodes is now discussing the June presentation Kevyn Orr gave to creditors in June at Metro airport laying out his turnaround plan.

Read: City of Detroit Proposal for Creditors

He is now getting into the court battle that led to the bankruptcy filing, the three Ingham County suits seeking an injunction that would have prevented a bankruptcy filing. He is citing the wrangling that went on prior to the bankruptcy filing

The city bears the burden to prove its eligibility.

As the court said the individuals presentations were moving, thoughtful and compelling at the eligibility trial.

The judge cited the concern and anger at the appointment of an emergency manager and the fundamental right to self-governance. The court's job is to evaluate whether this situation but his only role is to decide eligibility only.

He is now discussion the objections to Detroit's bankruptcy and the constitutionality of PA 436.

10:36 a.m.

Judge Rhodes concludes Chapter 9 satisfies uniformity clause. He is getting into the legal arcana of the claims that state law regarding the constitutionality of Chapter 9 and the issue of pension rights.

The court must first address preliminary issues: standing and rightness.

The court concludes the objecting parties do have standing.

The court finds now that the "issue is ripe" regarding pensions. The ultimate issue is whether the city is eligible to enter chapter 9.

This dispute is not an abstract disagreement, as a matter of judicial prudence taking it on now moves this case along.

The court concludes the objecting party's challenge as applied is ripe for determination at this time.

The court concludes the us supreme court has already ruled on the 10th amendment issue.

It is well settled that this court is bound by the supreme court's prior rulings.

Judge Rhodes continues reading from his opinion discussing the intricacies of Chapter 9 and the 10th amendment and the "Bekins" case. Chapter 9 is not facially unconstitutional under the 10th Amendment.

10:40 a.m.

Judge Rhodes continues: The state of Michigan itself cannot itself legally provide for the debts of the city, therefore the pension obligations.

These prohibitions do not apply in the federal bankruptcy court. It has long been understood that.

Nothing distinguished pension debt from any other debt.

Under the Michigan constitution, objectors say, that the Michigan pension clause prevents impairing pension benefits. The judge says pensions are not entitled to any extraordinary treatment.

10:48 a.m.

Judge Rhodes is now discussing the fine line between the words diminish and impair, saying they are in essence the same. He continues driving home the point that pension benefits or "pension rights" are "merely contractual obligations."

When the new Michigan constitution was proposed and ratified in 1963 it gave pensions the status of contractual obligations. The constitution at that time could have done a number of things, including guaranteeing pension benefits. It did not.

Municipal pension rights are contract rights under the Michigan Constitution, and as such they are subject to impairment in a Chapter 9. Chapter 9 is constitutional.

Nevertheless the court is compelled to comment no one should hold that this court necessarily will confirm any plan of adjustment without considering pensions.

Before the court confirm any plan, together these provisions demand the court's consideration of all of its creditors and all of its retirees as well as the laws of the state of Michigan.

10:50 a.m.

He is now discussing the arguments around the validity of the Chapter 9 filing. He is going over Public Acts 4, 72 and 436. It is argued 436 is unconstitutional because it is in reaction to PA 4, the city and state say there are differences and therefore not the same law. The referendum rejection of PA 4 did not prevent 436 from being enacted though it addressed the same issues with few changes.

The challenge on this ground must be rejected.

There was credible evidence that PA 436 had appropriations attached as a way to shield if from referendum. He does not hold it unconstitutional on these grounds.

10:55 a.m.

The court concludes PA 436 is not unconstitutional because of the appropriation applied.

He now is discussing the "home Rule" provision of PA 436. This argument fails.

PA 436 does not violate the "home rule" provisions of the Michigan constitution. The failure of PA 436 not protecting pension rights is not an issue.

PA 436 allows the governor to pose contingencies on the city in Chapter 9 authorization. Any such contingency would have been invalid. This objection is overruled.

The governor's authorization of the Detroit bankruptcy filing was constitutional.

Judge Rhodes is now discussing the lawsuits leading up to the bankruptcy filing, citing the Ingham county court's ruling [post bankruptcy filing] that the city could do no more in the Chapter 9 filing.
Several objectors claim this ruling is improper. The court is not required to honor the "Webster ruling." The state court no longer had jurisdiction after the Chapter 9 filing.

The main point to the Webster case was about pension protection. The suit was clearly an act to maintain control over the city's property.

The judgment in Webster is void and the objections rejected.

11 a.m.

Judge Rhodes is now discussing the meaning if "insolvency." He has found that the city was insolvent under all definitions of the term.

The city was generally not paying its debts as they came do. The city deferred payments on $54 million in pension payments, delayed year in fiscal payments, was spending more than it was receiving and stayed afloat because of "catastrophic borrowings."

Police Chief James Craig's testimony was particularly compelling to the judge: "Everything is broken, crime is extremely high, the absence of leadership."

The judge called this service delivery insolvency.

Now he's talking DIA art. The city's witnesses properly testified the sale of DIA art would not sufficiently have addressed the city's problems. One-time infusions do not deal with the overarching problem. When considering selling an asset the city must look to see if the asset is truly disposable and not useful.

The court concludes the city clearly desires to create a plan of adjustment and Kevyn Orr gave creditors a plan of adjustment. It was evidence of the city's desire to effectuate a plan. The objectors claim the plan the EM stated he intends to propose because it is not confirmable because it will defy the Michigan Constitution.

Certainly the evidence shows the city intends to impair pensions. The objector's arguments is rejected.

11:08 a.m.

Judge Rhodes is now discussing eligibility … the issue of "good faith" negotiations or whether those negotaitions are "impracticable."

The June 14 proposal to creditors does not rise to the level of good faith negotiations.

Charitably stated, the proposal is summary in nature.

The plan was a "placeholder" from testimony.

The city's data room did not provide proper information in it's "data room" and creditors could not be faulted for not coming in with counter proposals with so little information available. Judge Rhodes is now hitting Kevyn Orr for not providing enough time to come up with counter proposals. The calendar was "very tight" and the timing given 30 days, that amount of time is far too short for creditors to digest the information.

The city DID NOT negotiate in good faith.

11:11 a.m.

The sheer size of the debt and the number of individual creditors made the negotiations impracticable however.

Many unions did not say they were representing retirees.

It is impracticable to negotiate with a stone wall.

The court finds the prefiling negotiations were impracticable.

11:15 a.m.

The city's alleged bad faith was a central issue of the case. The city did not file its petition in good faith and dismiss was the objector's arguments. The court finds the totality of conditions. The city found the city filed in good faith. [though he read bad faith and corrected himself.]

11:23 a.m.

Judge Stephen Rhodes is now discussing the objecting parties narrative that the city of Detroit's bankruptcy was a consequence of a longer term bankruptcy plan. He cites the Jones Day involvement, Kevyn Orr's former law firm, lining the professional pockets at the expense of the people of the city of Detroit. There even may be a racial element to the plan, so goes the narrative. The long buildup of PA436, minor appropriations allowing to prevent referendum, appointing a bankruptcy attorney without the skills required by PA436, expensive professionals were brought in, giving misleading pension liability information, a necessary part of the plan engage with creditors only when necessary and then say it attempted to negotiate in good faith, "check a box" was the phrase used by creditors. The bankruptcy filing itself was part of the conspiracy "in the dark of the night" describing the timing of the filing. The oft repeated phrase was a "foregone conclusion" perhaps as early as 2012.

Rhodes says was a summarized is a viewpoint of objecting parties and NOT the court's findings.

His evaluation is as follows: many people hold to this narrative, state and city officials vehemently deny all of those motives, they say the filing was made to have a plan of adjustment. The court finds in some particulars are true. It is not supported enough to find the filing in bad faith.

Mr. Orr did mislead the public regarding pensions in bankruptcy.

Was this a foregone conclusion? Judge Rhodes said "Of Course it was!"

11:26 a.m.

It was a foregone conclusion. Waiting too long does not demonstrate good faith. It is after all not bad faith to file Chapter 9 when it is needed.

The court finds the case was filed in good faith and should not be dismissed.

11:30 a.m.

Jude Stephen Rhodes continues reading the summary of his ruling: discharging debt is the motivating factor in chapter 9.

The court finds though the city did not negotiate in good faith but did try to find some savings. No objectors have given alternatives to Chapter 9. All of the measures the city attempted did not resolve its insolvency.

The residents of the city of Detroit will be severely prejudiced if this case is dismissed. This is of paramount importance. The city's debt is causing its residents to suffer hardship. The city is city service delivery insolvent. Without Chapter 9 it would continue to follow the path it was on, continuing to borrow money. This solution has proven unworkable and dangerous for residents.

The court concludes the petition is filed in good faith

Detroit has been declared BANKRUPTCY ELIGIBLE!
the judge is now telling the city and its creditors to negotiate a plan. The court implores with all urgency everyone to focus greater attention on the human need that will arise from this chapter 9 filind

the city does not have enough money to care for its residents.

The city now has the opportunity for a fresh start. 

David Hyman of Jones Day says the city is working on its plan of adjustment and may not have it by year's end, reserving the right to be able to file by next spring as the Judge instructed.

Court is adjourned.

Special section: Detroit bankruptcy

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