Union lawyers build case against Detroit early in bankruptcy trial

By Joseph Lichterman DETROIT (Reuters) - Attorneys for Detroit unions and retirees sought to build a case on Thursday that Emergency Manager Kevyn Orr did not negotiate in good faith before Detroit filed for bankruptcy so they could block the city from getting court protection. Detroit filed for bankruptcy protection on July 18, and it says more than half of its liabilities come from retirement benefits, but the unions and retirees object to the city's figures. In the second day of the trial, Gaurav Malhotra, a financial analyst who has advised the city since 2011, testified that Detroit could improve its cash flow only by restructuring its pension and health benefits. Attorney Jack Sherwood, representing the American Federation of State, County and Municipal Employees, pressed Malhotra over whether the city held off potentially selling any of its assets, like the works in the Detroit Institute of Arts, so as not to improve its cash flow and reduce its chances of being found eligible for bankruptcy protection. Geoffrey Stewart, a lawyer who represents the city, asked Malhotra what affect assets sales would have on the city's structural cash flow issues. "None," Malhotra said. Detroit's lawyers must convince Judge Steven Rhodes that Detroit meets the legal requirements of municipal bankruptcy by showing, among others, that it is financially insolvent, negotiated in good faith with its creditors or had so many creditors that such negotiations were not feasible. An attorney for the city questioned one of Detroit's restructuring advisers to highlight the poor quality of city services, one factor the city may use in arguing Detroit does not have the resources to provide basic services. The city's lawyers also called Charles Moore, a restructuring adviser from the firm of Conway Mackenzie, who described the derelict status of Detroit's city departments and public services. He called the departments "severely broken" and said they cannot provide basic services to city residents, saying the city would need to spend $1.25 billion over 10 years to improve them. Moore also estimated that the city will need to spend $500 million over six years to remove blighted and abandoned residential properties in the city. The city also must establish that it requires bankruptcy protection in order to deal with $18 billion in debt and other liabilities. The city expects to wrap up its case on Friday. Michigan Governor Rick Snyder, who appointed emergency manager Orr, is expected to testify on Monday. The trial could wrap up as early as next Tuesday. Rhodes is not expected to make a ruling on eligibility until at least mid November. (Reporting by Joseph Lichterman; Editing by Kenneth Barry)