19 August 2014

The Trial Before The Trial in Detroit

Although the hearing on confirmation of Detroit's plan of adjustment is not officially scheduled to begin until August 29, a crucial witness testified and was cross-examined yesterday. Apparently economist Robert Cline would have unable to appear during the scheduled hearing and was permitted by the court go go out of turn, so to speak. This is not entirely a surprise since Judge Rhodes had originally scheduled the trial to begin on August 18 and pushed it back only because of a decision by the Sixth Circuit Court of Appeals. (Read about that decision and the one-week delay here.)

In any event, witness Cline testified on one-half of the requirement that a plan be feasible. Feasibility comes in two pieces: Will the city have enough income? And does it propose to pay enough for required municipal services? For a thorough discussion of the first half of the test read  Who Bears the Cost? The Necessity of Taxpayer Participation in Chapter 9 (download here). For the initial piece of my analysis of the second part of feasibility, read Who Bears the Burden? The Place for Participation of Municipal Residents in Chapter 9 (download here).

The principal objector, Syncora, attacked Cline's conclusion that the city would raise enough tax revenue because he failed to consider how Detroit might in fact be able to generate more tax revenue. In other words, Syncora believes Detroit is trying to low-ball its creditors. This argument does not actually go to a plan's feasibility. Instead, it pertains to yet another requirement of confirmation, that a plan be in the best interests of creditors. If you want to know about best interests (and more) read the first in my trifecta of municipal bankruptcy articles, Municipal Bankruptcy: When Doing Less Is Doing Best (download here).

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