Oct. 29 (Bloomberg) -- Michigan Governor Rick Snyder defended Detroit’s record municipal bankruptcy filing as a necessary last resort, telling a federal judge that he spent two and a half years trying to resolve the city’s fiscal crisis.
Snyder, 55, took the witness stand in Detroit yesterday as part of a trial to decide whether the $18 billion case should be thrown out. City unions demanded that Snyder testify, making him the first governor to take the witness stand in a municipal bankruptcy, according to lawyers who specialize in government insolvency cases.
“I worked very hard to avoid this process in good faith,” said Snyder. “People are suffering, the 700,000 citizens of Detroit.”
Attorneys for retired city employees and municipal unions want U.S. Bankruptcy Judge Steven Rhodes to dismiss Detroit from bankruptcy, where it’s protected from lawsuits and other actions that may threaten restructuring efforts.
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 argue that the emergency manager named by Snyder, Kevyn Orr, never tried to negotiate with them and that the governor violated the Michigan constitution by authorizing a bankruptcy that could cut payments to the city’s pension system.
Orr, a former corporate litigator and Democratic political appointee, agreed to run the city at the request of Snyder, a Republican. In June, Orr released a plan that proposed addressing the city’s financial woes in part by cutting payments to the system that funds retiree pensions.
Both men testified yesterday. Orr returned to the stand today, and Rhodes at least twice formally rebuked him for not giving simple yes-or-no answers to questions from union and retiree lawyers.
Rhodes interrupted questioning by Peter D. DeChiara, a lawyer for the United Auto Workers, to tell Orr “we’re going to be here a really, really long time if you insist on going on and on.”
Later, just before the trial broke for lunch, Orr apologized.
“I will accept your apology if you will accept my advice,” Rhodes said.
Yesterday, the governor declined to answer some questions, citing his right to not reveal information he received in meetings during which legal strategy may have been discussed. Rhodes has ruled that such meetings are covered by the attorney-client privilege.
Orr and Snyder have both invoked the privilege to avoid providing details of what they may have discussed related to cutting pensions, the decision to file bankruptcy or changes to the emergency manager law made last year.
William A. Wertheimer, an attorney representing retired city workers, and DeChiara both asked in several different ways whether Snyder talked to Orr about how much payments to the city’s pension system would have to be cut.
“That may be subject to attorney-client privilege,” Snyder said. In one six-minute period, the governor invoked the privilege four times.
The Michigan assistant attorney general representing Snyder, Matthew Schneider, twice referred to the governor as “your honor,” drawing laughter from the courtroom. An attorney for the objectors made the same mistake.
Before Snyder took the stand about 1 p.m. yesterday, protesters marched and chanted in front of the courthouse, armed with signs that showed his face with horns and bright red eyes.
Ashley Vance, 27, a hairdresser in Brighton, about 40 miles (64 kilometers) north of Detroit, said the law creating the emergency financial manager “stripped away peoples’ rights.”
“This is not the way the government should be run,” she said.
Objectors have claimed state officials worked with Jones Day, the law firm that Orr, 55, hired to file the bankruptcy, to create a new emergency financial manager law and use it to file for bankruptcy, giving Detroit leverage over unions and retirees. Orr was a partner at Jones Day before taking the Detroit job.
Under questioning by Wertheimer, Snyder said he has been focused on Detroit since he took office in 2011. He said he has spoken with Orr about the city either by phone or in person weekly since appointing him in March.
“I describe it as the largest issue in our country,” Snyder said. “This has been a large issue for 60 years.”
Snyder said he hasn’t offered Detroit any state money to avoid cuts to pension obligations.
Orr testified that before he put Detroit into bankruptcy, he fought a “running gun battle” with Syncora Guarantee Inc. to protect its best source of cash from the bond insurer.
That dispute, other court fights and tough negotiations with unions and additional creditors persuaded Orr to choose bankruptcy, he testified yesterday.
“The situation seemed to be growing more and more precarious and somewhat out of control,” Orr told Rhodes.
James Spiotto, a bankruptcy lawyer who has studied the history of Chapter 9 of the U.S. Bankruptcy Code, which covers municipalities, said Snyder’s testimony “may be unique to Michigan and Detroit.”
“In virtually all other situations, the governor is not part of the approval process for filing,” Spiotto said in an interview. “So his testimony evolves from his appointment of the EFM and his required approval of the Chapter 9 filing.”
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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