Both Detroit Emergency Manager Kevyn Orr and Governor Snyder testified this week in the trial that will decide whether Detroit is eligible for Chapter 9 bankruptcy protection.
Facing hours of pointed questions from lawyers for city unions, retirees, and pension funds, both Snyder and Orr said that bankruptcy wasn’t a foregone conclusion for Detroit.
But both also insisted the city was clearly insolvent, creditor talks had broken down into multiple lawsuits, and Orr had to move quickly.
“It was somewhat shocking how dire it was,” Orr testified.
Governor Snyder called authorizing Detroit’s bankruptcy filing “tremendously difficult” and “a last resort.”
Attorneys for city creditors including retirees, unions, and pension funds, tried to prove otherwise.
They maintained that a bankruptcy filing had been planned along — specifically as a way to cut public pensions, which are protected by the Michigan state constitution. And they suggested that Orr never negotiated with creditors in good faith, a pre-requisite for Chapter 9.
There were no real bombshells dropped in court, but some interesting bits of information did emerge from Orr’s and Snyder’s testimony. Some highlights:
· Was bankruptcy a foregone conclusion? Creditors’ lawyers think so, because Orr’s June 14 proposal contained remedies only permitted in bankruptcy, most notably pension cuts. Orr said “it’s fair to say we had come to the conclusion” that pension cuts were necessary by mid-May,” but insisted that good-faith negotiations continued beyond that point.
· Pitch book suggested Chapter 9. Lawyers cited a “pitch book” from Orr’s former law firm, Jones Day, when they went looking for city business late last year. In it, the firm suggested that Chapter 9 — or the threat of it — could be used to “further cut back or compromise accrued financial benefits” protected by the Michigan constitution.
· State help for pensioners? A union attorney asked Governor Snyder whether the state has offered Detroit any money to offset possible pension cuts. The governor tried to assert attorney-client privilege, but eventually responded “no.” Later, Orr was asked whether he had inquired about that possibility. After trying to assert attorney-client privilege, Orr said he was told that “the city has to solve its own problems.”
· There was a way for state to protect pensions, but officials didn’t take it. It was revealed that the governor’s own legal counsel suggested filing for bankruptcy with legal “contingencies” to protect pensions. But the July 18 filing had no such contingencies. Snyder said he didn’t want to do that because it could have added more “delays” to an “already complex process.”
· Skeptical Judge Rhodes. Both Orr and Snyder repeatedly cited attorney-client privilege or said “I don’t recall” in response to some questions about their discussions prior to Detroit’s bankruptcy filing. Bankruptcy court Judge Steven Rhodes — who makes the ultimate decision about bankruptcy eligibility — grew frustrated, and it came out when Orr testified Tuesday.
When a union attorney asked Orr whether he’d asked about the state covering some of Detroit’s pension costs, Orr said “I don’t recall.” Rhodes then interrupted: “You don’t remember asking the Governor to write a check for $3.5 billion?” (Orr’s estimate of Detroit’s unfunded pension liabilities).
Later, Rhodes tersely asked Orr’s lawyer to instruct his clients to give more direct and concise answers to questions.
The eligibility trial resumes with Orr back on the stand next Monday.