Detroit Awaits Ruling on Bankruptcy Eligibility

Detroit’s bankruptcy trial ended yesterday without a ruling from the judge on whether the city can remain under court protection, where creditors are limited in what they can do to challenge the city’s restructuring process.

Following more than eight hours of arguments by nine lawyers in federal court in Detroit, U.S. Bankruptcy Judge Steven Rhodes said he will issue a ruling after the city and its opponents file legal briefs next week about how labor law may affect his decision.

The day ended with Rhodes asking lawyers for the city and the state to respond to allegations that Governor Rick Snyder and the emergency manager he appointed, Kevyn Orr, acted in bad faith in the months before the case was filed.

On June 10, in a meeting with residents, Orr told a retired city worker that pensions were “sacrosanct” under Michigan law. Four days later, he proposed a plan to cut payments to the city’s retirement systems.

“This may not be the moment where he used the best words,” Bruce Bennett, an attorney for the city, said of Orr’s statement. “If your honor believes this statement was misleading,” Orr corrected himself when the June 14 cuts were proposed.

Lawyers for city unions and retired employee groups argued that Snyder and other state officials wanted to push the city into federal bankruptcy court because that was the only way to get around a ban on pension cuts in Michigan’s constitution.

Union Argument

Union and retiree lawyers made their closing arguments after lunch yesterday, beginning with Sharon Levine of Lowenstein Sandler PC, who represents the American Federation of State, County and Municipal Employees.

Levine said it was “absurd” that state officials spent more time hiring consultants to prepare for a bankruptcy than Orr spent negotiating with creditors to avoid a filing. Orr made his first debt-cutting proposal on June 14 and filed for bankruptcy on July 18.

Snyder did nothing to solve the city’s problems except prepare for bankruptcy from the time he took office in 2011, Levine said. She called Detroit’s cash crunch in 2013, when the city was projected to have only $7 million in cash out of a $1 billion budget, a “self-created emergency.”

Objectors put on witnesses who said the city didn’t try to negotiate with them. They presented e-mail that showed Jones Day, Orr’s former law firm, was offering advice to state officials about Detroit more than a year before the bankruptcy was filed.

Negotiations Impractical

A July 8 communications plan put together by the city shows that Orr wasn’t serious about negotiating, said Jennifer K. Green, an attorney for a city pension system that’s fighting the case. That plan emphasized that negotiations were impractical even though Orr hadn’t held any negotiating sessions with creditors, Green said.

Matthew Schneider, an attorney for Snyder, attacked those claims. Any planning Snyder or state officials did for a bankruptcy was designed to help the city, he said.

“Their theory is, ‘Don’t go speaking to weather experts because that must mean you want the storm to come,’” Schneider told Rhodes yesterday. “Isn’t this what you expect out of your government? You expect planning. It would be irresponsible to fail to prepare.”

Vulnerable City

Ending the bankruptcy would leave Detroit vulnerable to lawsuits and other actions that could disrupt its turnaround effort. The $18 billion bankruptcy is the biggest ever filed by a U.S. municipality and the trial featured unprecedented testimony from a sitting governor, who has made revitalizing Detroit a central goal of his administration.

Under Chapter 9 of the U.S. Bankruptcy Code, Rhodes must find that the city either tried to reach a deal before it filed its case on July 18, or that talks were impractical.

When the trial opened on Oct. 23, Bennett, of Jones Day, said a “mountain of evidence” showed Detroit is entitled to court protection. That evidence included hundreds of documents and testimony from Orr, Snyder and investment banker Kenneth Buckfire, a financial adviser to the city.

Yesterday Bennett summarized some of that evidence, focusing on two questions Rhodes will consider: Did the city make a good-faith effort to negotiate with unions and the groups representing retired city workers? And was negotiating a deal with those groups and other creditors impractical?

Counterproposals Sought

The city presented creditors with Orr’s June proposal for cutting debt and held meetings that month and in July to discuss the plan and seek counterproposals. Union and retiree groups attended and asked questions, but didn’t offer a counterproposal, Bennett said.

An association of retired police officers, city unions and the city’s two retirement funds all told Detroit they could talk and even come up with recommendations for cost savings, but couldn’t sign an agreement that would be binding on the retirees, Bennett said. That meant even if talks yielded a deal, the city would still have to get each retiree to approve, Bennett said.

One union, the United Auto Workers, said it would never agree to any cuts to pension benefits, according to Bennett. Delaying the bankruptcy to talk more would have made the fiscal emergency worse, he said.

Deal Path

“What would more time have led to?” Bennett asked. Bankruptcy opponents have not presented anything “that the city could have looked at and said: ‘There was a path to a deal.’”

While Bennett was presenting his argument, two bond insurers filed a lawsuit in bankruptcy court seeking to force Detroit to set aside tax money to pay bonds that voters had approved beginning in 1999.

National Public Finance Guarantee Corp. and Assured Guaranty Municipal Corp. insured about $233.2 million of the bond debt. When the city defaulted on a $9.4 million bond payment in October, the two companies were forced to pay bondholders, according to their complaint.

Also yesterday, the city announced that it will postpone until Feb. 28 imposing a new health insurance plan for retirees, which was to take effect Jan. 1. The city will continue negotiating with a retirees, who agreed to withdraw their lawsuit challenging the changes.

Monthly Stipend

Orr’s plan was to replace city-paid benefits by shifting those who are eligible to Medicare, or paying a $125 monthly stipend to buy health insurance to comply with the federal Affordable Care Act. Orr had said the changes would save the city $120 million a year.

Buckfire and Orr testified that they never received counterproposals from the unions or retiree groups.

About a month before the July 18 filing, Orr proposed canceling the unfunded liability owed to the city’s two pension funds and the unsecured pension bonds held by investors.

Snyder, a Republican, who nominated Orr, a corporate lawyer and former Democratic political appointee, both testified that the proposal was necessary because the city doesn’t have enough money to cover the debt. The unions and retirees said Snyder violated Michigan’s constitutional ban on cutting pensions when he authorized the bankruptcy.

Andy Dillon, a Democrat appointed treasurer by Snyder, testified that Michigan lawmakers wouldn’t be willing to provide any money to cover the cost of Detroit’s pension system or retiree health care. Dillon is a former speaker of the Michigan House of Representatives.

To remain in bankruptcy, the city must convince Rhodes 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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