Detroit on edge as judge prepares to consider bankruptcy plan

It’s crunch time for the largest municipal bankruptcy in U.S. history.

On Tuesday, Detroit enters what could be the final leg in its lengthy and strained journey through bankruptcy.

At the end of the hearings, which are expected to last about six weeks, Judge Steven Rhodes will decide whether to approve the city’s plan to emerge from bankruptcy or nix it.

“Tensions are obviously running high up there because there’s a lot at stake, and the legal issues touch on broad policy issues that people feel strongly about,” said Patrick Darby, who was the lead counsel to Jefferson County, Ala., when it went through Chapter 9.

Detroit filed for Chapter 9 in July 2013, and the process has been contentious throughout, with retirees picketing outside the courthouse — waving images of Michigan Gov. Rick Snyder with devil’s horns — and creditors filing hundreds of motions protesting the bankruptcy.

But if the last few days are any indication, this final step could be even more confrontational inside and outside the courtroom. “FIGHT BACK!” said one community group’s recent email urging residents to protest at the courthouse Tuesday.

Rhodes will consider whether the plan is fair and equitable, whether it unfairly discriminates against one group of creditors, and whether it’s feasible.

It’s the “fair and equitable” part of bankruptcy law that is causing the most tension in the Motor City.

One of the thorniest matters: the so-called Grand Bargain, a deal that raised money from foundations and the state to soften the pension cuts to current employees and retirees. It also would transfer the collection from the Detroit Institute of Arts to a public trust.

Under the plan, which retirees and employees voted on and approved, non-uniformed retirees will see a 4.5% cut to their pensions and lose cost-of-living adjustments; uniformed retirees will lose their cost-of-living adjustments.

On the other hand, other creditors, such as bond insurer Syncora, will lose much more than 4.5% of what they were expecting. They’ll get pennies on the dollar.

Syncora has been the most vocal critic of the bankruptcy proceedings, and filed an objection in August accusing the mediators who put the Grand Bargain together of colluding against financial institutions and favoring retirees.

The city and Syncora have traded barbs, at one point prompting Rhodes to ask the two sides to stop using war analogies to describe each other’s litigation strategy.

In a filing Thursday, he called Syncora’s latest accusations about the mediators “scandalous and defamatory,” and threatened sanctions against Syncora’s lawyers.

Meanwhile, another dissatisfied creditor, Financial Guaranty Insurance Co., solicited bids for the Detroit Institute of Arts collection, suspecting that it was worth more than the city thought. It found a company, Art Capital, that was willing to lend $3 billion to the city with the art as collateral. The current plan, according to a filing by FGIC’s attorneys, is giving up the rights to the artwork for $455 million.

Going with the Art Capital plan instead of the “inferior” Grand Bargain, FGIC said in a statement, would significantly increase the amount creditors could receive. It also would keep the art collection in the city.

“It is an extremely attractive option for all stakeholders and a win for all sides,” FGIC said.

But those headaches aside, Rhodes must consider a fundamental question: Can Detroit’s plan work — especially in a city that is still losing population, where streetlights don’t work and police responses can take hours?

Rhodes hired an external turnaround specialist, Martha Kopacz, to assess the city’s plan. In a report filed in July, she said it left her with many reservations.

“Even after many years of practice with dysfunctional, insolvent, operationally troubled enterprises, I was confused by the city’s projections,” she wrote.

The plan includes $1.7 billion in restructuring and reinvestment designed to make Detroit’s finances and the day-to-day operation more streamlined. That will be challenging, Kopacz wrote, given the outdated technology the city uses to conduct business and the size of its low-skilled workforce.

But, she concluded, “the city’s plan is feasible,” as required by bankruptcy law.

Rhodes will also hear challenges to the city’s widely criticized policy of shutting off water to those behind on their utility bills. The water shut-offs, which affected thousands, resumed last week after a monthlong moratorium.

In July, the judge called the deputy director of the water department in his courtroom to chastise him for the way the shut-offs had been handled.

Still, Laura Bartell, a bankruptcy attorney who teaches at Wayne State University, said she would be surprised if Rhodes didn’t confirm the city’s plan.

“The train is rolling, and Steve Rhodes wants to retire,” Bartell said. “It’s highly unlikely at this stage that he’ll decide not to confirm.”

That’s a relief for retirees like Gerald Galazka, who worked for the city for 35 years before retiring in 2005. He’s watched the proceedings with a heavy heart, even speaking in court about the unfairness of losing part of his pension while police and fire employees are treated differently.

Even so, Galazka voted for the Grand Bargain, because he was afraid of what would happen if he didn’t. The city had said retirees could lose 30% of their pensions if the Grand Bargain failed.

“It’s been a year and a half and it’s really been sort of stressful,” he said.

Now, like many in Detroit, he just wants the whole thing to be over.

alana.semuels@latimes.com