Detroit Bankruptcy-Eligibility Trial Spills Into November

The judge overseeing Detroit’s bankruptcy trial extended the case into the first week of November after pressing the city’s emergency financial manager to speed up his testimony.

“We’re going to be here a really, really long time if you insist on going on and on,” U.S. Bankruptcy Judge Steven Rhodes told Kevyn Orr, the emergency manager, yesterday. Orr has spent about eight hours on the witness stand over three days, interrupted by Monday’s testimony from Governor Rick Snyder, who recommended his appointment in March.

Attorneys for retired city employees and unions spent more than six hours questioning Orr about what he did before his appointment and in the weeks leading to the city’s $18 billion bankruptcy filing in July. The workers and retirees want Rhodes to dismiss Detroit from bankruptcy, where it’s protected from lawsuits and other actions that may threaten a restructuring.

The trial will continue Nov. 4, when Orr, 55, is expected to finish testifying and the unions and retiree groups begin calling their witnesses. Before the trial started, the objectors said they should have about 15 witnesses.

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

Borrowed Court

When the trial began Oct. 23, Rhodes had scheduled it to end yesterday. Rhodes yesterday told the objectors that when they return to court next week, he wants an estimate of how long they will need to present their witnesses. He said if they go beyond Nov. 7, he will have to find a new courtroom, because he’s borrowing space in the U.S. District Courthouse in Detroit.

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 state constitution by authorizing a bankruptcy that could cut payments to the city’s pension system.

Orr was questioned repeatedly yesterday about whether he asked Snyder for money from the state to help fund the city’s pension system. Orr said that in meetings with state officials, including Snyder, it was clear that no state money would be used to solve the city’s problems.

Before breaking for lunch yesterday, Rhodes asked Greg Shumaker, an attorney for the city, to tell Orr to answer yes-or-no questions without elaborating, or to say he couldn’t answer. Orr apologized to the judge.

‘My Advice’

“I will accept your apology if you will accept my advice,” Rhodes said.

When Orr returned to the witness stand, he kept his answers shorter. More than 50 times in two and half hours following lunch, he responded by saying either that he could not recall or that he didn’t know the answer to a question.

Snyder on Monday defended Detroit’s filing as a necessary last resort, telling Rhodes that he spent two and a half years trying to resolve the city’s fiscal crisis.

City unions demanded that Snyder, 55, testify, making him the first governor to take the witness stand in a municipal bankruptcy, according to lawyers who specialize in government insolvency cases.

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

Privilege Invoked

Orr and Snyder, a Republican, have both invoked the privilege to avoid providing details of what they may have discussed related to cutting pensions, the decision to file for bankruptcy or changes to the emergency manager law made last year.

William A. Wertheimer, an attorney representing retired city workers, and Peter DeChiara, an attorney for the United Auto Workers, both asked in several different ways whether Snyder talked to Orr about how much payments to the 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 case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

Before it's here, it's on the Bloomberg Terminal.