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Detroit bankruptcy trial starts; city's lawyers say revenue sources for creditors 'exhausted'

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In this July 16, 2013 aerial file photo, the downtown of the city of Detroit is shown. Detroit Emergency Manager Kevyn Orr raised more than a few eyebrows a year ago when he took the city into bankruptcy and predicted it would be out by the time his term expired in fall 2014. Because it is by far the largest city to file for municipal bankruptcy and the issues were so complex many experts predicted it would take years to resolve. But the city will take a major step toward that goal with a trial in federal bankruptcy court that starts Tuesday, Sept 2, 2014. (AP Photo/Paul Sancya, File)

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In this July 16, 2013 aerial file photo, the downtown of the city of Detroit is shown. Detroit Emergency Manager Kevyn Orr raised more than a few eyebrows a year ago when he took the city into bankruptcy and predicted it would be out by the time his term expired in fall 2014. Because it is by far the largest city to file for municipal bankruptcy and the issues were so complex many experts predicted it would take years to resolve. But the city will take a major step toward that goal with a trial in federal bankruptcy court that starts Tuesday, Sept 2, 2014. (AP Photo/Paul Sancya, File)

DETROIT - Opening statements in Detroit's historic bankruptcy trial began Tuesday afternoon in federal court, where lawyers for the city will attempt to convince a judge that its plans to wipe out billions of dollars in debt should be approved.

Attorney Bruce Bennett, who is representing the city, went first during opening statements in U.S. District Court, saying though progress has been made, "the city is still in distress." He also said the plan gives creditors all of value that the city can provide.

"All the revenue sources creditors can reach and are permitted to reach are exhausted," Bennett told Judge Steven Rhodes.

The trial in U.S. District Court comes a little more than 13 months after Detroit became the largest U.S. city to file for bankruptcy. Detroit expects to cut $12 billion in unsecured debt to about $5 billion, according to Bill Nowling, a spokesman for state-appointed emergency manager Kevyn Orr, who has been in charge of the city's finances since March 2013.

Most creditors, including more than 30,000 retirees and city employees, have endorsed the plan of adjustment put together by Orr, who guided Chrysler through its bankruptcy, and his restructuring team. The strongest opposition to the plan has come from bond insurers, such as New York-based Syncora Guarantee.

The plan includes commitments from the state, major corporations, foundations and others to donate more than $800 million over 20 years to soften cuts to city pensions. In return, pieces in the city-owned Detroit Institute of Arts would be placed into a trust to keep them from being sold to satisfy creditors.

General retirees would take a 4.5 per cent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose only a portion of their annual cost-of-living raise.

Tuesday was the first in what's likely to be a number days in which the city's debt, the rights of its creditors and what is allowable under bankruptcy law will be debated. Dozens of witnesses are expected to be called by the city, Syncora and other creditors.

Bennett's opening statement quickly moved from what unsecured creditors are not allowed under both state and Chapter 9 laws to the city's so-called Grand Bargain to save the DIA pieces. No alternatives to that deal have been offered "that would give the city a comparable amount of money while the collection stays in Detroit," Bennett said.

"The DIA is one of the relatively few institutions Detroit has that might draw residents back," he said. "It would be most assuredly a reasonable decision to keep it in Detroit."

Syncora has said its claim is about $400 million and believes Detroit has unfairly discriminated against financial creditors.

"It has been a very fast-track bankruptcy, which Syncora has no issue with," company attorney James Sprayregen said. "Syncora's issue is the lack of transparency of the process and the unfair treatment of its claims."

Rhodes has scheduled additional hearing dates, if needed, into October. But in the end, bankruptcy expert Anthony Sabino expects Rhodes to approve Detroit's bankruptcy plan — followed by appeals from creditors.

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