Detroit’s Bankruptcy Judge Challenges Major Creditors

This March 22, 2012, photo shows U.S. Bankruptcy Court Judge Steven Rhodes in Detroit.

Associated Press

Detroit’s historic bankruptcy trial began this week, and now everyone’s trying to read the mind of the bankruptcy judge who can approve or deny the city’s plan to eliminate $7 billion in debt.

For most of the opening statements from Detroit’s lawyers, U.S. Bankruptcy Judge Steven Rhodes was an observer. But the second day brought two tense moments as Judge Rhodes questioned Wall Street creditors who are fighting the plan with the argument that it treats the city’s retirees more favorably than other creditors.

At one point, Judge Rhodes insisted that Syncora Guarantee Inc. lawyer Marc Kieselstein disclose how much the bond insurer would actually accept as repayment. After Mr. Kieselstein responded that his client would accept repayment of 75% of its claim, Judge Rhodes then pressed him on how the city could afford to repay that. “Where would the city get 75 cents on the dollar to pay your client?” he asked.

Listen to their exchange here:

Later, Judge Rhodes asked Alfredo Perez, a lawyer for bond insurer Financial Guaranty Insurance Corp., to explain when it’s appropriate for the city to sell property so that it can repay its debts. Some Wall Street creditors have urged the city to sell artwork displayed at the city-owned Detroit Institute of Arts, a scenario the city’s debt-restructuring plan currently avoids.

“If the city owned the schools that its children were educated in or if the city owned the libraries and [their books], would you want those sold or monetized too?” Judge Rhodes asked.

Mr. Perez said “no” because a city gets to keep assets for the health, welfare and safety, but Judge Rhodes expanded his hypothetical scenario.

Listen here:

The trial over the restructuring plan’s legality could stretch into October. With roughly $18 billion in debt, Detroit became the largest city in U.S. history to file for Chapter 9 municipal bankruptcy protection on July 18, 2013. The city’s tax revenue fell after the real-estate crash and followed years of population decline.

-Matthew Dolan contributed to this blog post.

Write to Katy Stech at katy.stech@wsj.com. Follow her on Twitter at @KatyStech.

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