Snyder to face questions under oath about Detroit bankruptcy filing

Gov. Rick Snyder agreed Tuesday to face questions under oath about why he authorized a Detroit bankruptcy under terms of a deal that slows the pace of the biggest Chapter 9 filing in U.S. history.

The deal was hatched on the sidelines of a bankruptcy hearing Tuesday after U.S. Bankruptcy Judge Steven Rhodes grilled a state lawyer about a last-ditch attempt to shield Snyder and members of the administration from being deposed in the case.

The forthcoming depositions mark a victory for city unions that are trying to prove the city negotiated in bad faith before filing bankruptcy July 18. Snyder must sit for a three-hour deposition on an as yet unscheduled date, under terms brokered Tuesday.

Also Tuesday, Rhodes delayed hearing arguments from creditors based on legal issues surrounding the city’s eligibility for bankruptcy relief. Scores of creditors have objected to the city’s eligibility and have asked for more time to question Snyder and obtain discovery, including emails and other documents.

Rhodes moved the hearing from Sept. 18 to Oct. 15 in a move that delays the city’s fast-track bankruptcy case.

Read all of today’s developments below:

Updates have ended

View our archived coverage of Snyder to face questions under oath about Detroit bankruptcy filing.

Gov. Rick Snyder agreed to face questions under oath about why he authorized the biggest municipal bankruptcy filing in U.S. history.

Lawyers struck a deal Tuesday that resulted in Snyder agreeing to sit for a deposition with creditors who are trying to prove the city is not eligible for bankruptcy relief.

After some tough questioning from U.S. Bankruptcy Judge Steven Rhodes, lawyers for the state Attorney General’s office and several unions hatched a deal to allow depositions of Snyder, Treasurer Andy Dillon and members of the governor’s inner circle.

The deal caps the depositions at three hours.

Rhodes also delayed hearing arguments based on legal issues surrounding the city’s eligibility for bankruptcy relief. Scores of creditors have objected to the city’s eligibility and have asked for more time to question Snyder and obtain discovery, including emails and other documents.

Rhodes moved the hearing from Sept. 18 to Oct. 15 in a move that slightly delays the city’s fast-track bankruptcy case.

The debate between U.S. Bankruptcy Judge Steven Rhodes and a state lawyer got testy Tuesday after the state tried to shield Gov. Rick Snyder from facing questions under oath about why he authorized the city’s bankruptcy case.

“The city is struggling under incomprehensible financial burden,” Rhodes said to Assistant state Attorney General Margaret Nelson. “In an attempt to create a viable, if not thriving, future for itself, it needs to do that with all deliberate speed.

“(City lawyer) Bruce Bennett said they want to file a plan of adjustment by the end of the year,” the judge said. “You heard that, right?”

“Yes,” said Nelson, who has argued unions and creditors are not entitled to question Snyder about his motives for authorizing a bankruptcy filing July 18.

“Is it really in the best interest of the city and the people of the state of Michigan for the governor to be asserting a deliberative process privilege in this case, mam?” the judge said.

“It is in the best interest that this proceeding go forward without being muddied up on side-track issues and focusing on matters that are not relevant,” Nelson said.

“I didn’t ask you about relevance,” the judge said.

Later, the judge called it “incomprehensible” that the state waited until late Monday to claim Snyder has executive privilege that would prohibit facing questions about his thought process.

The late filing robbed the city and others from challenging the claim before today’s hearing.

An assistant state Attorney General urged U.S. Bankruptcy Judge Steven Rhodes to block unions from questioning Gov. Snyder and other officials while trying to prove Detroit is ineligible for bankruptcy relief.

Gov. Rick Snyder

Gov. Rick Snyder

The deposition requests should be blocked because Snyder merely authorized the city’s historic bankruptcy petition July 18. Emergency Manager Kevyn Orr determined that the city was eligible for bankruptcy, not the state, so the deposition subpoenas are irrelevant, Assistant Attorney General Margaret Nelson said.

“What creditors want is to inquire into the governor’s motive, why he signed it, why he signed it the way he did, and why” Snyder didn’t insulate city retiree pensions from being slashed in bankruptcy court, Nelson said.

The governor’s thought process is irrelevant, she added.

Rhodes pressed her on that claim.

“The governor gave his permission for the filing, why isn’t everything he considered in granting that authorization relevant to the issue of the good faith of the filing?” Rhodes asked.

Snyder is protected from such questions, Nelson argued, and her office claims the subpoenas would subject him and other state officials, including Treasurer Andy Dillon, to “unnecessary and unduly burdensome discovery.”

Rhodes took a veiled swipe at Nelson for filing paperwork late Monday that argued Snyder has executive privilege protecting him from facing questions about his deliberative process.

“We were not clear that they were seeking his deliberative process,” Nelson said.

“I want to challenge you on that,” Rhodes said. “It is hard for me to imagine what they were going to ask the governor in a deposition other than that. What else is there to ask him about?”

Union lawyers pushed U.S. Bankruptcy Judge Steven Rhodes to let them obtain emails and question Gov. Rick Snyder and other state officials under oath in a bid to show the city negotiated in bad faith before filing bankruptcy in July.

“We just got discovery from the emergency manager and the city but not the who, what, why when and how the governor and the state made decisions that led up to the filing,” AFSCME lawyer Sharon Levine told the judge Tuesday.

The unions argue Detroit negotiated in bad faith and the bankruptcy filing violates the state constitution, which protects vested pensions earned by municipal workers.

In a flurry of motions Friday and Monday, lawyers for AFSCME, the United Auto Workers, pension funds, retiree groups and others raised concerns about time restrictions and the fast track Rhodes has set for the case over the coming weeks.The unions and retiree groups want more time to argue against Detroit’s eligibility for bankruptcy protection than the one day, Sept. 18, set by the judge.

Pension fund lawyer Robert Gordon proposed delaying the Sept. 18 hearing for two weeks to give the creditors more time to depose the governor and obtain emails and other documents.

City bankruptcy lawyer Bruce Bennett urged the judge to keep the case on a fast track in hopes of reaching a decision on the eligibility issue by late October.

“What is important to us is that this process is concluded as rapidly as possible,” Bennett said.

An Ann Arbor architect who won a $2 million verdict after a Detroit police officer ran a red light and crashed into his car pursued his payday Tuesday despite the city’s bankruptcy case.

Michael Beydoun wants relief from the automatic stay that froze all lawsuits against the city July 18, a quest first reported in The News last month.

His lawyer, Raymond Guzall, asked U.S. Bankruptcy Judge Steven Rhodes to lift the stay so his client can pursue collecting the $2 million judgment.

Guzall asked the judge to consider that the city acted in bad faith with creditors by not leasing Belle Isle, failing to sell the Detroit Institute of Arts collection and delaying payment of his client’s $2 million judgment.

The city purposely pushed itself into bankruptcy,” to avoid paying debts, Guzall told the judge.

The city opposes Guzall’s request and Rhodes has expressed concern about a flood of similar requests delaying the bankruptcy case.

Rhodes has mulled creating a committee so similar plaintiffs are represented during the bankruptcy case.

“Assume the (bankruptcy) filing was in response to the pressure of your client’s claim,” Rhodes said. “The fact is virtually every bankruptcy case ever filed is in response to creditor pressure and if it was the fact that creditor pressure resulted in a bankruptcy that was in bad faith, we wouldn’t have any bankruptcies, would we?”

“The city has been in ruins for years,” Guzall said.

“Conceding that, why should that set of facts give your client a preference over all the other creditors?” the judge asked.

City lawyer Jeffrey Ellman doesn’t want the judge to lift the automatic stay and said the timing of the bankruptcy filing was “happenstance.”

Rhodes said he would issue an order at a later date.

Robert Fishman

Robert Fishman

Robert Fishman, the watchdog appointed to scrutinize bills charged by the city’s bankruptcy lawyers, addressed U.S.  Bankruptcy Judge Steven Rhodes about the process for approving invoices.

The city and a committee representing retired workers want a chance to review bills and determine if they are reasonable.

Fishman recently said he would not allow lawyers to bill for first-class airfare, booze and hotel room movies.

The city’s law firm Jones Day wants the committee to see only redacted copies of the bills so as not to reveal legal strategy and privileged information.

Rhodes said he will file an order soon clarifying the bill review process.

A $950,000 claim against the city links the long-rumored Manoogian Mansion party, a dead stripper, ex-Mayor Kwame Kilpatrick and the city’s historic bankruptcy case.

Detroit Police Lt. Shawn Gargalino filed the claim in bankruptcy court. That’s the amount he hopes to be awarded in connection with a civil lawsuit against the city that alleges Gargalino was passed over for a promotion because he is white and that the city “perpetuates an atmosphere of racial antagonism toward whites.”

Tamara Greene

Tamara Greene

Gargalino was a fringe figure in the dismissed $150 million lawsuit filed against the city by the family of slain stripper Tamara “Strawberry” Greene. Greene allegedly danced at a rumored but never proven party at the Manoogian Mansion, the mayor’s official residence, in 2002. She was killed in an unsolved drive-by shooting in 2003.

Gargalino was identified by a police dispatcher as being the supervising officer sent to the Manoogian Mansion following several 911 calls, according to court records.

Baloney, Gargalino says.

His case, like many others, was pending when the city filed Chapter 9 bankruptcy July 18. The bankruptcy froze almost all lawsuits against the city.

Prodigious plaintiff and indicted Highland Park activist Robert Davis, who got put in a corner by the city’s bankruptcy judge, hired a new lawyer Monday to defend against allegations he stole more than $125,000 from the cash-strapped school district.

Davis hired Ann Arbor attorney Douglas Mullkoff, who once defended convicted ex-Detroit City Councilwoman Monica Conyers. Mullkoff is the third lawyer to represent Davis in the corruption case, which was put on indefinite hiatus after another defense attorney recently quit, citing a breakdown in the attorney-client relationship.

Robert Snell
Robert Snell is the Detroit News federal courts reporter. He can be reached at rsnell@detnews.com or (313) 222-2028.