Detroit Emergency Manager Denies Taking Job to Force Bankruptcy

Kevyn Orr told a federal judge he didn’t agree to become Detroit’s emergency manager as part of a plan to force the city into bankruptcy, denying one prong of an attack by union and retired city workers at a trial this week.

Orr, a former corporate litigator and Democratic political appointee, agreed to run the city at the request of Michigan’s Republican Governor Rick Snyder, who is scheduled to testify Oct. 28 when the trial resumes in U.S. Bankruptcy Court in Detroit.

Orr told U.S. Bankruptcy Judge Steven Rhodes yesterday that agreed to take the job after his wife and a senior partner at his law firm told him it was a “call to action.”

Lawyers for city unions and retired workers said at the start of the trial on Oct. 23 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 for retirees. 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 remain under court protection, where the city will be shielded from lawsuits and other actions that might disrupt the restructuring effort, it must meet tests laid out in Chapter 9 of the U.S. Bankruptcy Code.

Those include requirements that the city show 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.

Clinton Appointee

Orr began his testimony describing his career history as a bankruptcy lawyer and as a political appointee during President Bill Clinton’s administration, where he served with the Justice Department and the Resolution Trust Corp.

Orr was a senior member of the Jones Day firm when he was asked by state officials to be the city’s emergency manager. Orr said he initially resisted the idea.

His former law firm was later hired as the city’s bankruptcy counsel. He said there was no connection between his hiring and the selection of Jones Day.

Orr is scheduled to continue his testimony Oct. 28, when he may face hostile questioning from lawyers for unions and retirees before Snyder testifies. Responding yesterday to a question from Jones Day attorney Greg Shumaker, Orr said he wasn’t appointed with an understanding that he was required to file the biggest municipal bankruptcy.

Before Orr took the stand, the city’s lead financial adviser, investment banker Kenneth Buckfire, told the judge that Detroit’s proposal to cut payments to bondholders and pensioners by the same amount differs from previous attempts by distressed cities to restructure.

Same Treatment

Buckfire was the third of five witnesses the city said it will call during the trial.

“It was fair because it treated our unsecured creditors exactly the same,” Buckfire said. He was responding to a question from an attorney for retirees challenging a proposal to subject pensioners to the same cuts as unsecured bondholders.

Other cities “have tended to treat one group of creditors more favorably than others,” Buckfire said. “We decided the city should be impartial in terms of how we would treat creditors.”

The city called Buckfire and two other financial consultants as witnesses to help prove that it belongs in bankruptcy.

After Buckfire testified, Police Chief James Craig told Rhodes that the city solves about 11 percent of homicide cases. The city had about 384 homicides in 2012, making it the second-most violent city in the U.S., according to FBI statistics.

‘Deplorable Conditions’

In describing the department, Craig cited a consultant’s report that concluded: “Everything is broken. Deplorable conditions. Crime is extremely high. Morale is low. Absence of leadership.”

Craig, who receives a pension after retiring from his job as Los Angeles police officer, said he was concerned that cutting pensions in Detroit would make it hard to retain police officers.

Buckfire, the co-president of Stifel Financial Corp.’s Miller Buckfire & Co., said Oct. 24 that a 2009 deal with swaps investors threatened the city’s best source of cash in the months before it filed the biggest municipal bankruptcy.

That deal gave the swaps investors power to lock up much of the $180 million a year that Detroit gets from taxes on its casinos, Buckfire testified. That put added pressure on the city, which had only a $7 million cushion on a budget of more than $1 billion, he said.

Bondholders’ Assumption

Buckfire also testified that bondholders demanded full repayment during negotiations designed to avert a bankruptcy, relying on an assumption that general obligation bonds were safe because any municipality that issued them was required to raise taxes to repay the debt.

In its June proposal to creditors, the city didn’t accept the claims by either pension creditors or general obligation bondholders that each had a special status under Michigan law and should be paid in full, Buckfire said in court.

Under that restructuring proposal, made before the city filed bankruptcy in July, Orr said he would pay all unsecured debt holders, including retirees and general obligation bondholders, pennies on the dollar.

Buckfire was questioned by lawyers for unions and retirees trying to get the bankruptcy case thrown out. Buckfire, who grew up in the suburbs of Detroit, said he has led the city’s financial restructuring team since January.

He said he has followed Detroit’s financial troubles since it was downgraded by bond-rating firms in 2009. Last year, the state hired him to do a 60-day review of Detroit’s finances. The city later agreed to hire Miller Buckfire after the state required local officials to bring on a financial adviser as a requirement to get more aid.

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

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