10.30.13

Detroit on the Razor’s Edge: Day V. In the fifth day of municipal bankruptcy hearings before U.S. Bankruptcy Judge Rhodes on the Motor city’s eligibility for chapter 9 municipal bankruptcy, creditors cross-examined Detroit Emergency Manager Kevyn Orr, who warned, “Detroit will spiral into a free-fall crisis if creditors succeed in kicking the city out of bankruptcy court.” Yesterday’s session focused on the key questions of whether the city negotiated in good faith with its creditors—an essential showing it must demonstrate to be eligible for municipal bankruptcy, and what Detroit might do as part of its plan of recovery were Judge Rhodes to find the city eligible.

Pensions & Good Faith Negotiations. Under questioning came from UAW attorney Peter DeChiara and Anthony Ullman, an attorney representing the official committee of city retirees, who grilled the Emergency Manager for most of the morning, the two focused on pension benefits as Detroit’s unions, retirees, and pension funds objecting to the bankruptcy contend Michigan’s constitution protects public worker pensions from being slashed. Emergency Manager Kevyn Orr testified he was unaware of any legal precedent for an emergency manager or city to use Chapter 9 bankruptcy to trump state constitutional protections of vested pensions.  “I generally was aware…that federal law takes over state law…I was not aware of any specific case involving an emergency manager authorizing Chapter 9 to trump state filings. I don’t think there are any specific cases…but I was aware of federal preemption.”  Mr. DeChiara produced an email as evidence for his argument that there was a scheme hatched to slash pensions months before Detroit filed Chapter 9 bankruptcy, producing a Feb. 2 email sent to Emergency Manager Kevyn Orr by Richard Baird, a top aide to Gov. Rick Snyder. At the time, Orr was still a partner at the Jones Day firm and was considering whether or not to accept an appointment from the Governor to become Detroit’s emergency manager. “This shows the intimate relationship between the state and Jones Day,” Mr. DeChiara told U.S. Bankruptcy Judge Steven  Rhodes. In the email, Messieurs Baird and Orr are discussing the potential working relationship Mr. Orr might have with Mayor Dave Bing. “I told him that there were certain things I would not think we could agree to without your review, assessment and determination (such as keeping the executive team in its entirety),” Baird wrote. Mayor Bing’s executive team has lost several members since Orr accepted the emergency manager job in March.  Mr. DeChiara asked Mr. Orr: “Have you ever spoken to the governor about having the state assume some or all of the city’s pension liabilities?” In response, Mr. Orr testified: “I don’t recall.” Under further questioning, the Emergency Manager confirmed his earlier public statements that he believes federal law would trump state law, but added that he’s unaware of Chapter 9 precedents for the action by an emergency manager. He testified that while he “generally was aware” that federal law takes precedence over state law, he said he “was not aware of any specific case involving an emergency manager authorizing Chapter 9 to trump state filings.” Seeking to determine whether Mr. Orr had sought to carry out good faith negotiations, one of which, Mr. Orr has testified, is because labor unions refused to represent retirees in debt negotiations this summer; the attorneys questioned Mr. Orr about what effort he made to reach out to more than 20,000 retirees about his plans to reduce pensions and health insurance before filing for bankruptcy on July 18th. When Detroit pension fund attorney Jennifer Green, during cross-examination, whether the city mailed retirees information about this proposed pension cuts, Mr. Orr replied: “I don’t know.” Ms. Green then asked if the city attempted to divide up retirees in subgroups to negotiate concessions. After a long pause, Mr. Orr again replied: “I don’t know.” He provided few details on the city’s efforts to negotiate with its 23,500 city retirees. Detroit has argued that it was impracticable to negotiate with so many creditors. However, earlier yesterday, Mr. testified he was “probably not” willing to accept an agreement to restructure the city’s debt without including cuts to pension benefits before the city filed for bankruptcy in July.

Judge Rhodes had to admonish Kevyn Orr a number of times yesterday to respond to questions with a simple “yes” or “no,” and not provide extraneous information. He even instructed Mr. Orr’s attorneys to counsel their client on shortening his answers during the 90-minute lunch break: “We’re going to be here a really long time if you insist on going on and on.” Before breaking for lunch, Judge Rhodes addressed his concerns to Mr. Orr’s lawyer, Greg Shumaker. “I have obviously been ineffective with having the witness answer questions…Please counsel with your client over the lunch break the absolute criticality of just answering the question.”

U.S. Bankruptcy Judge Steven Rhodes interrupted an exchange between Orr and UAW lawyer Peter DeChiara, who asked about discussions the emergency manager had with Gov. Rick Snyder. “Have you ever spoken to the governor about having the state assume some or all of the city’s pension liabilities?” DeChiara asked. Orr has estimated the city’s pension funds have a $3.5 billion shortfall. “I don’t recall,” Orr said. “You don’t recall having done that?” the lawyer asked. “I don’t,” Orr responded. “So you may have, but don’t recall?” DeChiara asked.

“Yes,” Orr said.

At that point, Judge Rhodes interrupted.

“You do not remember asking the Governor to write a check for $3.5 billion?” the judge asked.

“This is the problem with a yes or no,” answer, Mr. Orr replied. “The number may not have been $3.5 billion but the question might have been for some assistance. I don’t remember it in that context.”

If All Else Fails. Mr. Orr was asked—if Judge Rhodes were to find Detroit eligible for municipal bankruptcy—if he would carry out a “cram down” of creditors during the debt-cutting plan of adjustment process. The Emergency Manager responded he could force a legally binding settlement on the city’s creditors if they were unwilling to accept a proposed restructuring plan in bankruptcy court. (The so-called “cram down” provision of federal bankruptcy law allows a U.S. Bankruptcy judge to approve a plan of restructuring over the objections of creditors, as long as at least one impaired class of creditors votes to confirm it.) Mr. Orr testified that if the city were unable to reach an agreement with its creditors, similar to the one proposed by the city in its June 14 plan that would float $2 billion to pay off $11.5 billion of unsecured debt, “[W]e will address that situation and certainly a cram down is an opportunity available to us… We hope to reach a negotiated solution even now.”

The Art of Municipal Bankruptcy. During his testimony yesterday, Kevyn Orr stated that proceeds from the sale of city-owned art could be used to help pay retiree pensions. Under cross-examination by a retiree attorney, Mr. Orr was queried about the city’s efforts to put a price tag on the masterpieces at the Detroit Institute of Arts. New York-based international auction house Christie’s is currently valuing a portion of the 60,000-piece collection. Anthony Ullman, an attorney for the retiree committee, asked the emergency manager whether the proceeds of a sale could be used to pay Detroit’s 23,500 pensioners, who are owed as much as $3.5 billion. “It might,” Mr. Orr replied; however, earlier, Mr. Orr had attempted to downplay the significance of the assets in terms of satisfying the city’s debts: “It is valuable,” he had testified, but “I don’t know if it’s a large source of cash for the city.”

 10-3-13 blog

Figure 1Van Gogh’s “Postman Roulin,” 1888.

Emergency Manager Orr is Detroit’s fifth and final witness. He will return to the stand for his fourth day when the trial resumes on Monday. Opponents of the city’s eligibility for municipal bankruptcy will begin their case next week. The trial is expected to last several more days, with union leaders likely to testify that they had little opportunity to negotiate with Mr. Orr before the bankruptcy filing. Creditors’ attorneys will then begin to call their witnesses, who will include outgoing Michigan treasurer Andy Dillon and top aide to Governor Rick Snyder, Richard Baird, who hired Emergency Manager Orr. Bond insurers and bondholders have not challenged the city’s eligibility to enter into Chapter 9, and so they are not part of the trial. Judge Rhodes is not expected to make a decision on Detroit’s eligibility until at least mid-November.

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