Detroit Emergency Manager Spars With Bankruptcy Judge

Detroit’s emergency manager ended 10 hours of testimony in a federal court by defending his decision to put the city into bankruptcy instead of trying to persuade unions to negotiate over cuts to pensions and other benefits.

Kevyn Orr denied that he was trying to “mislead anyone” at a public meeting on June 10 when he told a retiree that municipal pensions were “sacrosanct” under Michigan law. Orr has since argued that federal bankruptcy law allows him to cut pensions even though a clause in the state constitution bars such reductions.

U.S. Bankruptcy Judge Steven Rhodes asked Orr what he would tell the retiree today.

“I would say his rights are subject to the supremacy clause of the U.S. Constitution,” Orr said.

“That is a bit different from sacrosanct isn’t it?” Rhodes asked in response.

Orr said it wasn’t different because he also told people at the meeting that all creditors of the city, including employees and retirees, must be prepared to accept cuts.

The bankruptcy’s opponents, including unions and retiree groups, are trying to show that Orr and state officials, including Governor Rick Snyder, acted in bad faith in filing the case under Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities.

Rhodes must decide whether the city is eligible to remain in bankruptcy court, where it’s protected from lawsuits and other legal actions that might disrupt reorganization efforts.

Show Insolvency

To remain in bankruptcy, the city must show that it’s insolvent, that it’s entitled under state law to file for bankruptcy, that it tried to negotiate with creditors or was unable to do so, and that it intends to file a plan to adjust its debts.

Retirees and unions say Orr never tried to negotiate with them and that Snyder violated the Michigan constitution by authorizing a bankruptcy that could cut payments to the city’s pension system.

The unions and retirees began mounting their case by calling Shirley Lightsey, a former city worker who leads one of Detroit’s retiree associations.

Under questioning by a city attorney, Lightsey acknowledged that she didn’t have authority to negotiate cuts to retiree benefits that would be binding on members of her organization, the Detroit Retired City Employees Association.

“I’ve never had the authority to do binding and I’ve never asked the membership for authority,” Lightsey said.

Orr testified that the bankruptcy was necessary partly because the unions refused to negotiate with him over possible cuts to retiree pension and health insurance benefits.

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Steven Church in U.S. Bankruptcy Court in Detroit at schurch3@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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