Detroit Argues Creditors Can’t Use Art to Pay Claims

Creditors can’t force Detroit to sell its art collection to cover their claims, the city said on the first day of a trial over its proposal to eliminate more than $7 billion in debt in the biggest U.S. municipal bankruptcy.

“Unsecured creditors have no rights” to be paid with art proceeds or any other city asset, Bruce Bennett, a lawyer for Detroit, said yesterday, attacking the main complaint by bond insurers who may be forced to make up investor losses imposed by the plan.

Municipal debt investors should have known when they lent the city money that the only way to force Detroit to pay them was to sue and win a court order raising property taxes, said Bennett, a partner at the Jones Day law firm. That couldn’t be done without driving landowners away, he said.

U.S. Bankruptcy Judge Steven Rhodes has set aside seven weeks to hear arguments and evidence for and against the plan before he decides whether it’s feasible and fair. The case will test an unusual partnership among the city, wealthy donors and Michigan lawmakers, who devised a “grand bargain” to shore up Detroit’s public pension system. In exchange, the city agreed not to use its collection of masterpieces to pay creditors.

Related: Detroit Brings Bankruptcy Plan to Court With Billionaires

Detroit filed for bankruptcy more than a year ago, saying decades of decline left it unable to provide basic services to its almost 700,000 residents.

Imposing Cuts

Imposing cuts on bondholders, retired city workers and other creditors is the only way to stabilize finances and raise money to revive decaying neighborhoods, Bennett told Rhodes.

“I’ve already said that the city is done making bad deals,” Rhodes said before opening arguments began yesterday. The judge immediately said he regretted sounding like an advocate and joked that his comments should be ignored. “I can see the headlines.”

The start of the trial was subdued compared with the opening days of the case last year, when protesters, including many city workers and retirees, chanted and waved signs condemning Michigan Governor Rick Snyder, a Republican, and Kevyn Orr, the emergency manager he appointed to run the city.

Since then, almost all the city’s unions have signed onto a deal that gives them most of their monthly pension checks and funds a new program to replace their retiree health-care benefits.

Bond Investors

Some bond investors who hold tax-backed debt have also settled with the city, along with investors that hold water and sewer debt.

As many members of the media came to watch the opening of the trial as did members of the public. Reporters crowded into two media rooms in the federal courthouse to follow the proceedings through a video link. The main courtroom was filled with lawyers for the city, creditors, the unions and the state.

Current and former city employees, as well as investors, will be forced to take less than the $10.4 billion they are owed if Rhodes approves the plan, while some bondholders will recover as little as 11 percent of their claims. Bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Co. oppose the proposal, saying it doesn’t put similar claims on an equal footing.

Bennett is scheduled to finish his opening arguments today. Syncora, Financial Guaranty Insurance and other plan opponents will follow before the city calls the first of its more than 25 witnesses.

The city may finish presenting its case by early October, one of its attorneys, Greg Shumaker, told Rhodes.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Steven Church in Detroit federal court at schurch3@bloomberg.net

To contact the editors responsible for this story: Andrew Dunn at adunn8@bloomberg.net Charles Carter

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