Detroit, hoping to leave bankruptcy, warns of ‘downward spiral’

Reporting from Detroit —  Lawyers for the city of Detroit began their opening arguments Tuesday in what could be the final stage of the city’s bankruptcy trial, setting off a weeks-long hearing after which Judge Steven Rhodes will either approve or nix the city’s plan to emerge from Chapter 9.

The city began its arguments by emphasizing that alternatives to the bankruptcy plan would stall Detroit’s recovery and potentially cast it into a situation from which it could not recover.

“I don’t like the term ‘death spiral,’” Bruce Bennett, an attorney representing the city, said in court Tuesday. “But Detroit is in a downward spiral.”

Bennett argued that raising taxes in Detroit, which has the highest taxes and worst services in the region, would not stabilize the city, although doing so could potentially reap more for creditors.

He also argued against selling the artwork in the Detroit Institute of Arts museum. Instead, he supported an element of the current bankruptcy plan, which calls for transferring the artwork to a public trust. Meanwhile, a dissatisfied creditor, Financial Guaranty Insurance Co., has found a company willing to lend the city $3 billion using the artwork at the institute as collateral.

On Wednesday, the city will finish its opening arguments. Others who support the plan, including attorneys representing the United Auto Workers and the American Federation of State, County and Municipal Employees, also will deliver remarks.

Lawyers representing the most vocal objectors to the bankruptcy, Financial Guaranty and bond insurer Syncora Guarantee Inc., will also give opening remarks, as will attorneys for Macomb and Oakland counties, which are outside of Detroit. The counties object to a provision in the bankruptcy plan that would spin off the Detroit Water and Sewerage Department to an outside authority, which the counties say could raise rates on suburban customers.

Rhodes also heard arguments Tuesday on a temporary restraining order filed last week that sought to extend a moratorium on water shut-offs throughout the city.

Last week the city once more began to shut off water of customers behind on their bills after a monthlong moratorium, and attorneys argued that the moratorium should continue until the city improves its policies for informing customers that their water will be turned off. In one case cited by attorneys from the ACLU, water was cut off for a woman who needed water for her feeding tube, although the water department is supposed to allow postponement of payment for medical reasons.

“We think there’s a humanitarian aspect to it, but we also think there have been due process violations,” said Veronica Joice, an assistant counsel with the NAACP Legal Defense Fund. The water department “has policies on how it conducts water shut-offs, and those policies haven’t been followed,” she said.

A small group of protesters stood outside the courthouse Tuesday morning denouncing the water shut-offs.

Rhodes said he planned to rule on continuing the moratorium by the end of Tuesday, but adjourned court without ruling.

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