Oct. 28 (Bloomberg) -- Before Detroit filed its record-setting bankruptcy, it fought a “running gun battle” with Syncora Guarantee Inc. to protect its best source of cash from the bond insurer, Kevyn Orr, the city’s emergency manager, said.
That dispute, other court fights and tough negotiations with unions and additional creditors persuaded Orr to choose a bankruptcy filing, he testified today at a trial in Detroit to determine whether the city can remain under court protection.
“The situation seemed to be growing more and more precarious and somewhat out of control,” Orr told U.S. Bankruptcy Judge Steven Rhodes, who will decide whether the city qualifies to remain in court.
Under bankruptcy protection, Detroit’s assets can’t be seized by creditors and the city is shielded from lawsuits that may disrupt its restructuring effort.
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.
Lawyers for city unions and retired workers said at the start of the trial last week that Orr’s former law firm, Jones Day, plotted with state officials to put the city into bankruptcy as a way to cut pension and health-care benefits. They portrayed the filing as a foregone conclusion, claiming that as early as March 2012, Jones Day and state officials discussed putting the city into bankruptcy.
To try to get an advantage related to pension bonds it had insured, Syncora was threatening the city’s casino-tax revenue, Orr testified today.
Michael Corbally, a spokesman for Syncora parent Syncora Holdings Ltd., didn’t immediately respond to a request for comment on Orr’s testimony.
Creditors claim that the bankruptcy filing violates Michigan law because Orr has proposed cutting pensions.
An attorney for retired city workers questioned Orr’s June proposal to reduce payments to the pension system. The attorney, Anthony Ullman, repeatedly asked Orr today to say why his proposal didn’t explain that pensions are protected from cuts by the Michigan constitution. Ullman also asked Orr about his oath of office, in which he vowed to uphold the Michigan constitution.
Orr responded that in interviews around the time of the proposal, he said federal law would trump Michigan constitutional protections.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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