Michigan’s Snyder Calls Detroit Bankruptcy Largest Issue

Michigan Governor Rick Snyder told a federal judge that he considers Detroit’s bankruptcy the “largest issue” facing the U.S., while declining to answer some questions about how the case may affect retired workers.

Snyder, 55, took the witness stand in Detroit today to defend his actions in authorizing the city to file the biggest U.S. municipal bankruptcy. Snyder, a Republican, appointed the emergency financial manager who filed the July bankruptcy petition, which listed $18 billion in debt.

The governor repeatedly declined to answer some questions, citing his right to not reveal information he received in meetings at which legal strategy may have been discussed. U.S. Bankruptcy Judge Steven Rhodes has ruled that such meetings are covered by the attorney-client privilege.

Peter D. DeChiara, an attorney for the United Auto Workers, which opposes the bankruptcy, asked in several different ways whether Snyder tried to find out from Kevyn Orr, the emergency financial manager, 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.

Michigan Constitution

Critics of the bankruptcy claim that a proposal to cut pensions violates the Michigan constitution and therefore the bankruptcy should be dismissed. They have also said Orr didn’t negotiate in good faith before filing.

Attorneys for retired city employees and municipal unions claim that state officials conspired with Jones Day, the law firm that Orr hired to file the bankruptcy, to create a new emergency 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 William A. Wertheimer, an attorney representing retired city workers, 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.”

Cutting Payments

Orr testified last week and earlier today before Rhodes, who must decide whether Detroit is entitled to court protection. Orr has proposed addressing the city’s financial woes in part by cutting payments to the system that funds retiree pensions.

Snyder said he hasn’t offered Detroit any state money to avoid any cuts to pension obligations.

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.”

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.

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

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