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October 23, 2013

Detroit faces a crucial trial

DETROIT — Thousands of Detroit streetlights are dark. Many more residents have fled. Donors are replacing ambulances that limped around for 200,000 miles. Millions in debt payments have been skipped.

Is there really any doubt the city is broke?

A judge starts exploring that question today in an unusual trial to determine whether Detroit indeed is eligible to scrub its books in the largest public bankruptcy in U.S. history. Unions and pension funds are claiming the city failed to negotiate in good faith before filing for Chapter 9 protection in July.

A city isn’t eligible for a makeover unless a judge finds that key steps have been met, especially good-faith talks with creditors earlier this year. It’s a critical decision: If Detroit clears the hurdle, the case would quickly turn to how to solve at least $18 billion in debt and get city government out of intensive care.

“It’s a crucial point in the case,” said lawyer Chuck Tatelbaum, a bankruptcy expert in Fort Lauderdale, Fla. “There will be others, but this is the go or no-go. ... If there was ever a poster child for what Congress decided when they enacted Chapter 9, it’s for a city like this.”

Jim Spiotto, another bankruptcy expert in Chicago, said it’s “virtually impossible” to argue that Detroit is solvent.

“They’re not paying their debts,” he said. “Look at their blighted areas. Look at their services.”

Nonetheless, unions and pension funds are challenging Detroit on the eligibility question. They claim emergency manager Kevyn Orr, who acquired nearly unfettered control over city finances following his appointment by Michigan Gov. Rick Snyder, was not genuinely interested in negotiating when they met with his team in June and July. Orr insists pension funds are short $3.5 billion and health coverage also needs to be overhauled.

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