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Kresge Foundation

Attorney: 'Detroit won't recover' without grand bargain

Nathan Bomey and Matt Helms
Detroit Free Press
Aerial view of downtown Detroit, The Renaissance Center and the Detroit River on June 14, 2012.


DETROIT — The grand bargain to help resolve Detroit's bankruptcy offers a fair and lucrative resolution of the city-owned Detroit Institute of Arts, the city's top bankruptcy lawyer argued Tuesday.

Jones Day bankruptcy lawyer Bruce Bennett — offering opening statements in Detroit's historic bankruptcy trial — said the lowest "range of reasonableness" for prospective sale of the DIA is "zero or a number close to zero" because it's not clear the art can be sold.

"The purpose is no less than to save the city of Detroit," Bennett said. "Detroit won't recover or survive if this isn't done."

The grand bargain would allow Detroit to accept the equivalent of $816 million over 20 years from non-profit foundations, the state of Michigan and Detroit Institute of Arts donors — including the Detroit Three automakers — to help reduce pension cuts and transfer the DIA to a charitable trust. The deal, dubbed the grand bargain, includes $366 million in pledges from non-profits such as the Kresge Foundation and the Ford Foundation.

But bond insurers Syncora and Financial Guaranty Insurance Co. are expected to argue during the trial that the grand bargain amounts to unfair discrimination against financial creditors. They say the DIA is worth billions.

"I'm not sure their views matter at all," Bennett said.

His remarks opened a trial that will determine the fate of Detroit's financial future, which rests on emergency manager Kevyn Orr's sweeping plan to slash more than $7 billion in liabilities and reinvest $1.4 billion over 10 years in services.

Bennett's opening arguments are expected to continue Wednesday, when creditors will get a chance to respond.

Bennett, the city's chief bankruptcy lawyer, argued Judge Steven Rhodes should approve the plan of adjustment because it's critical to help improve the lives of ordinary Detroiters.

Following the trial, which could extend as late as Oct. 17, Rhodes will decide whether the plan of adjustment is fair and feasible and can be implemented.

Bennett argued that the lack of clarity over whether the DIA's property can be sold — the museum has argued vigorously that it cannot — makes the grand bargain a reasonable settlement to the issue.

Attorney Bruce Bennett, partner at Jones Day, made the opening arguments Tuesday during the trial that will determine if Detroit is eligible for bankruptcy.

FGIC advisers last week procured an offer from New York-based Art Capital Group to lend the city $4 billion to help facilitate the city's exit from bankruptcy, with the DIA pledged as collateral on the loan.

But Bennett dismissed the prospect of the Art Capital loan, in part because, he said, the loan is so expensive it would require the city to sell art to pay the bill.

The DIA's future is tied directly to pensioners through a proposed settlement negotiated by Detroit bankruptcy mediators Gerald Rosen and Eugene Driker. After months of fighting over potential cuts, several Detroit retiree groups agreed to support the DIA's spinoff in exchange for smaller cuts to their pensions.

General pensioners voted to accept 4.5% cuts to their checks, a reduction in annual cost-of-living-adjustment (COLA) increases and a claw back in excessive annuity bonuses, while police and fire pensioners agreed to accept a reduction in COLA.

Although the city argued in court filings that pensioners had to be protected from severe cuts, Rhodes reiterated today that he would not consider evidence illustrating how Detroit's bankruptcy plan will affect the personal finances of retirees.

Rhodes also said he would not allow details of secret mediation talks to be divulged as evidence during the trial, though he said he would address objections on information disclosures on a case-by-case basis.

In several unrelated motions, Syncora and FGIC sought to block the city from introducing various pieces of evidence to support the city's restructuring plan.

In a win for the insurers, Rhodes said he would not admit New York-based investment banker Ken Buckfire's expert report as evidence during the trial.

Buckfire relied on no "discernible methodology" to conduct his analysis of Detroit's bankruptcy plan, Syncora attorney Stephen Hackney argued. Instead, Buckfire, who was hired by the city, made inappropriate assumptions that creditors would not be better off if the bankruptcy was dismissed, Hackney argued.

"How is that judgment helpful to the court?" Rhodes asked the city's attorneys.

Rhodes concluded that Buckfire's judgments regarding what would happen if Detroit's bankruptcy were dismissed were "not particularly helpful." He said Buckfire "should have done an analysis on a more careful basis regarding the consequences to the city and the city's tax collections."

The city and creditors have listed several hundred exhibits and nearly 80 potential witnesses for the trial, which could last as late well in to mid-October.

Among other disputes resolved Tuesday: FGIC attorney Ed Soto argued that Detroit should not be allowed to justify the grand bargain using evidence that was previously hidden in mediation.

Jones Day bankruptcy lawyer Greg Shumaker told Rhodes that Detroit emergency manager Kevyn Orr would not justify the grand bargain on the basis that foundations were unwilling to give cash to financial creditors to resolve the bankruptcy.

Rhodes said he would not allow mediation details to be submitted as evidence during the trial.

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