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A U.S. Department of Justice attorney yesterday defended the legality of chapter 9 bankruptcy in the second day of hearings addressing legal issues surrounding Detroit's bankruptcy case, Reuters reported yesterday. Municipal bankruptcy does not infringe on states' rights because the state needs to authorize chapter 9 filing by a local government, Matthew Troy, an attorney in the Justice Department's Civil Division, told Bankruptcy Judge Steven Rhodes, who is overseeing the case. A union attorney argued on Tuesday that the bankruptcy process erodes states' accountability under their constitutions by ceding their responsibility for financial management within their borders to the federal bankruptcy court.

A lawyer representing Detroit's largest public union argued yesterday that chapter 9 municipal bankruptcy is unconstitutional because it impairs states' rights to manage their own finances, Reuters reported yesterday. "States are ceding accountability for their own financial management," attorney Sharon Levine, representing Council 25 of the American Federation of State, County and Municipal Employees, said in a hearing before Bankruptcy Judge Steven Rhodes. "By turning it over to the federal government and hiding behind the bankruptcy process, we lose that accountability which is a cornerstone of the state constitution." Levine argued that it should be left to the states to restructure municipal debt because chapter 9 unfairly requires a municipality to settle debts in federal bankruptcy court without full consent from all its creditors. Yesterday marked the start of a two-day hearing that will address the thorny legal issues surrounding Detroit's July 18 bankruptcy filing, the biggest in U.S. history.

Barclays Plc will provide cash-strapped Detroit with up to $350 million in debtor-in-possession financing in the wake of its municipal bankruptcy filing in July, Reuters reported on Friday. Detroit will use the money for infrastructure investments and to terminate interest-rate swap agreements that were not advantageous for the city, said Kevyn Orr, the city's state-appointed emergency manager. About $230 million of the financing's proceeds will be used to end swap contracts the city entered into with Bank of America Corp.'s Merrill Lynch Capital Services and UBS AG in conjunction with debt sold for Detroit's public pension funds. Bill Nowling, Orr's spokesman, said the DIP financing was needed for the city to execute the swap termination deal with Merrill Lynch and UBS that Detroit asked the bankruptcy court to approve it over the objection of bond insurers, some bondholders, the pension funds and others. He said court mediation with bond and swap insurer Syncora Guarantee Inc., the main objector, was continuing. Without the deal, terminating the swaps could cost an additional $60 million.

The U.S. Justice Department on Friday defended the constitutionality of chapter 9 bankruptcy after several Detroit creditors challenged the law in a bid to derail the city’s bankruptcy filing, the Detroit Free Press reported on Saturday. The U.S. government filed a memorandum in bankruptcy court rejecting challenges to chapter 9 from several creditors — notably including Michigan Council 25 of AFSCME, Detroit’s largest employee union. The government did not address whether the city of Detroit is eligible for bankruptcy or whether it should be allowed to enact pension cuts, which remains a key point of contention.

Michigan Governor Rick Snyder’s administration was more focused on keeping Detroit from running out of cash than addressing its long-term debt as the state’s largest city inched toward bankruptcy earlier this year, state Treasurer Andy Dillon testified last week, the Detroit News reported on Saturday. Dillon told labor union attorneys in a sworn deposition on Thursday that the Snyder administration was aware of the state constitution’s protection of pensions as a contractual commitment, but wanted to let a bankruptcy judge decide if those contracts apply under federal law. But Dillon denied there was a concerted effort to use chapter 9 bankruptcy to slash an estimated $3.5 billion in debt Detroit owes more than 23,000 retirees with vested pension rights.

Former Detroit Mayor Kwame M. Kilpatrick stood before a federal judge yesterday and apologized for putting the people of his city through a corruption scandal so vast that prosecutors say it helped accelerate Detroit’s march toward bankruptcy, the New York Times reported yesterday. “They’re hurting,” Kilpatrick said. “A great deal of that hurt I accept full responsibility for.” They were solemn words from the formerly boisterous figure, who many believed would lead Detroit out of its long economic downturn. Then, declaring an end to the bribery and thieving that marked the Kilpatrick administration, U.S. District Court Judge Nancy G. Edmunds imposed the sentence prosecutors had sought: 28 years in prison. Kilpatrick was convicted in March of two dozen counts that included charges of racketeering and extortion, adding his name to a list of at least 18 city officials who have been convicted of corruption during his tenure. For Detroiters, Kilpatrick’s meteoric fall — from potential savior of a struggling city to prison-bound symbol of financial mismanagement — may be the closest they will get to holding past leaders accountable for decades of disappointment and poor fiscal decisions. “He’s become the poster child of what went wrong with the city and why it went bankrupt,” said Adolph Mongo, a political consultant who worked for Mr. Kilpatrick’s re-election campaign. But it was unfair to pin the city’s problems on any single elected leader, he said. “It was a house of cards,” added Mongo about Detroit’s fiscal health. “Kilpatrick was the last card. He fell, and it knocked everything down.”