Bankruptcy

Detroit faces eligibility fight in bankruptcy court

U.S. Bankruptcy Judge Steven Rhodes heard opening arguments and testimony from one witness during the first day of a trial that will determine whether Detroit is eligible for Chapter 9 bankruptcy relief.

City lawyers argued bankruptcy was the only solution to fix $18 billion in debt and a situation in which residents were deprived of basic services and bills went unpaid.

The trial continues at 9 a.m. Thursday in U.S. District Court with financial consultant Gaurav Malhotra testifying about his analysis of the city’s liquidity and budget forecasts. Creditors will have a chance to cross-examine the Ernst & Young principal.

The trial is expected to last until Tuesday, at least. Gov. Rick Snyder is expected to testify Monday.

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The city faced a $240 million budget shortfall outside of bankruptcy court if Detroit had to make pension contributions and other payments, a city financial consultant testified today.

Gaurav Malhotra portrayed the city’s dwindling resources and offered a dire forecast while Detroit’s bankruptcy lawyers tried to prove the city was insolvent and eligible for Chapter 9 bankruptcy relief.

The city had deferred making millions in contributions to the city’s pension funds. If those deferrals were paid next year, along with payments tied to pension obligation certificates, the city would have a budget shortfall of about $240 million, Malhotra testified.

In five years, pension, retiree health care costs climbed from 29.7 percent of the city’s general fund to 38.6 percent in 2012, Malhotra said.

Malhotra was asked what he told Emergency Manager Kevyn Orr about the pension cost forecast.

“That the weight of legacy expenditures would close to double based on the projections we were given,” Malhotra told city bankruptcy lawyer Geoff Stewart.

“What did Orr say?” Stewart asked.

“He was surprised in terms of the magnitude of the increase in pension and retiree health care costs over the next five years,” Malhotra said.

Detroit faced a $4 billion deficit over the next 10 years if it hadn’t filed bankruptcy, a financial consultant testified.

Gaurav Malhotra of Ernst & Young was hired to forecast the city’s finances and completed a 10-year forecast before the city filed bankruptcy July 18.

He concluded the city would have a $3 billion surplus based on revenues and expenditures over the next 10 years. But that projected surplus evaporated once he factored in $7 billion in legacy costs, including pensions and health care expenses.

Malhotra is testifying as a witness for the city, which is trying to prove Detroit was insolvent before filing bankruptcy.

The Spirit of Detroit statue outside the Coleman A. Young Municipal Center in downtown Detroit.

The Spirit of Detroit statue outside the Coleman A. Young Municipal Center in downtown Detroit.

The city commingled $92 million in cash from different departments to shore up the general fund, a budget expert testified Wednesday.

Restructuring consultant Gaurav Malhotra testified the city commingled the money from funds, including solid waste, streets and risk management, and combined it with the general fund to boost the city’s liquidity last year.

“I don’t know when it was done but, generally, the commingling happened some time ago. It is to supplement money for the general fund,” Malhotra testified under questioning from city bankruptcy lawyer Geoff Stewart of the Jones Day law firm.

“What effect did that have on the city’s liquidity position?” Stewart asked.

“At the end of 2012, if the city had to go ahead and unpool almost $92 million, that cash available to the general fund would have been significantly lower,” Malhotra said.

“Ninety two million lower?” Stewart asked

“Yes,” Malhotra said.

The first witness in the Detroit bankruptcy  eligibility trial took the stand around 3:10 p.m. to testify about his review of the city’s beleaguered finances.

Gaurav Malhotra of Ernst & Young was hired to analyze the city’s liquidity in 2011, an assignment that expanded to include compiling a 10-year forecast of cash projections and deficits.

He is expected to help the city prove that it is insolvent after racking up $18 billion in debt — one of five requirements for a city to be eligible for Chapter 9 bankruptcy relief.

Malhotra reviewed a series of documents he prepared that chronicled the city’s dwindling finances that showed the city was running out of cash.

Malhotra said for fiscal year 2013, the city’s operating receipts totaled $1.58 billion, down more than 10 percent.

In 2012, the city made almost $104 million in contributions to the city’s General pension fund.

That figure plummeted to about $30 million this fiscal year, Malhotra testified.

“Why was it so much lower?” city bankruptcy lawyer Geoff Stewart asked.

“Because the city was trying its best to preserve liquidity during this time frame when liquidity was extremely tight and it was deferring pension contributions,” Malhotra said.

A lawyer for retired Detroit workers criticized Emergency Manager Kevyn Orr for floating a fictional number for a shortfall in the city’s pension funds.

Attorney Anthony Ullman represents a committee of retired city workers fighting to preserve vested pension benefits targeted for cuts by Orr.

Today, he criticized Orr for claiming the pension funds have a $3.5 billion shortfall.

“This $3.5 billion figure is not a fact,” Ullman said. “At the time the (bankruptcy) petition was filed, the city did not know the size of the unfunded pension liability.”

Orr has not proposed specific cuts for pensions, but said he wants to lump the unfunded liability in with $11.5 billion in unsecured debts and pay those creditors a $2 billion settlement — about 17 cents for each dollar owed.

The nine-member committee, filled with union workers and an official from the United Auto Workers, hired the Dentons law firm and Salans, Fraser Milner Casgrain. The New York-based firms announced a merger last fall.

Legal bills from Ullman’s firm are being paid by the city.

Anthony Ullman

Anthony Ullman

Emergency Manager Kevyn Orr broke his oath to uphold the state constitution by deciding to slash pension benefits and, ultimately, orchestrate the biggest municipal bankruptcy filing in U.S. history, a retiree lawyer said.

Anthony Ullman outlined Orr’s background as a partner at the Jones Day law firm, which was hired to oversee the city’s restructuring and serve as bankruptcy counsel.

When Orr was appointed emergency manager in March, he swore to uphold the state constitution, which includes a clause that protects vested state pensions, Ullman said.

“Instead of adhering to the strictures of the pension clause, Mr. Orr, contrary to his sworn oath, pursued a course of action deliberately intended to thwart it by a Chapter 9 (bankruptcy) filing,” Ullman said during opening statements Wednesday.

Not only did Orr violate his oath, Ullman said, he failed to negotiate in good faith with creditors — a requirement the city must meet to be eligible for Chapter 9 bankruptcy relief.

Ullman spoke one day after the official retiree committee sued Orr and the city over the emergency manager’s “devastating” cuts to lifetime health insurance benefits.

Ullman showed the judge an internal document from Orr spokesman Bill Nowling outlining talking points that would justify the bankruptcy filing. One point was that concessions were impractical because there were so many creditors.

The talking points memo was dated July 8 — 10 days before the city filed bankruptcy.

“While they were telling the world they wanted to have more meetings (with creditors), they had already internally and secretly decided it would claim impracticability,” Ullman said.

The city did not want to negotiate concessions with unions and other creditors and is wrong to suggest concessions were impractical, a lawyer said today.

American Federation of State, County & Municipal Employees attorney Sharon Levine said the city’s one-month timeline to strike concessions “was designed not to allow out-of-court negotiations to take place,” Levine said during opening statements in Detroit’s bankruptcy eligibility trial.

The city filed bankruptcy July 18, one month and three days after offering creditors a restructuring proposal.

“It takes more months than that to negotiate out-of-court negotiations,” Levine told U.S. District Judge Steven Rhodes.

The city’s biggest union is trying to show Detroit failed to negotiate in good faith with creditors in order to get bankruptcy protection.

Levine said the Detroit case could set a troubling precedent for other municipalities and unions if Rhodes decides the city is eligible for bankruptcy protection.

“If you have legacy liabilities and you have to deal with retiree benefits, then you automatically get to say it’s impractical and that you don’t have to show good faith and I think that would be a very sad place to take Detroit,” Levine said.

The city set itself up for failure by creating a short period of time to reach concessions with unions, pensions funds and other creditors, a public safety union lawyer said.

Attorney Barbara Patek said negotiations were impractical because the city held few talks after outlining a June 14 proposal to restructure the city’s $18 billion in debt and restore city services.  The city filed bankruptcy July 18.

The city created “a record of impracticality where they set themselves up for failure,” said Patek, who represents several public safety unions.

UAW lawyer Babette Ceccotti

UAW lawyer Babette Ceccotti

The city failed to hold serious negotiations with creditors after proposing a massive restructuring of city services and finances in early June, a lawyer for the United Auto Workers said today.

Attorney Babette Ceccotti said there were only a handful of meetings with Emergency Manager Kevyn Orr’s restructuring team after the June 14 proposal and the city limited access to financial data.

“The evidence will show they wouldn’t really constitute labor negotiations,” Ceccotti said during opening statements in a trial that will determine whether Detroit is eligible for bankruptcy relief.

Unions and other creditors were forced to sign confidentiality agreements before accessing the data, she said.

“The proposal was not acceptable and we believe that has legal consequences,” Ceccotti told U.S. Bankruptcy Judge Steven Rhodes.

If Rhodes finds the city failed to negotiate in good faith, he could kick Detroit out of bankruptcy court.

There was only about a 30-day window for unions and other creditors to negotiate concessions before the city filed Chapter 9 bankruptcy on July 18, Ceccotti said.

The goal always was to find a way to slash vested Detroit retiree pensions, which are protected by the state constitution, she said.

“I think what it all adds up to is a fairly deliberate plan to use Chapter 9 to find a way to undermine the state constitution through bankruptcy,” Ceccotti said.

A trial that will determine whether Detroit is eligible for Chapter 9 bankruptcy relief resumed at 1:30 p.m. with a lawyer representing the United Auto Workers trying to prove the city is not eligible for Chapter 9 bankruptcy relief.

Attorney Babette Ceccotti has previously urged U.S. Bankruptcy Judge Steven Rhodes to uphold state constitutional protections of vested public pensions, despite the city’s goal of shedding the obligation in bankruptcy court.

A lawyer will continue her assault on the state’s emergency manager law at 1:30 p.m. in hopes of kicking Detroit out of bankruptcy court.

Lynn Brimer

Lynn Brimer

Retired Detroit Police Members Association attorney Lynn Brimer was a few minutes into her opening statement before U.S. Bankruptcy Judge Steven Rhodes broke for lunch before noon.

Brimer is arguing the state’s emergency manager law is unconstitutional. The law gave Gov. Rick Snyder power to authorize Detroit’s bankruptcy. If the law is unconstitutional, Brimer argues, the city’s Chapter 9 bankruptcy filing should be dismissed.

Her argument attacks a key requirement of Chapter 9 bankruptcy law that demands a filing be authorized “by state law or by a governmental officer or organization empowered by state law to authorize the municipality to be a debtor.”

Rhodes interrupted Brimer at one point, asking for her response to the city’s argument that emergency manager opponents should have launched a new referendum to overturn the law, instead of simply objecting to the bankruptcy.

“There is no case law that suggests the people be required to take an act, which on its face would be rejected,” Brimer said.

Jennifer Green

Jennifer Green

Emergency Manager Kevyn Orr led a never-ending march to bankruptcy court while publicly claiming to be negotiating with creditors, a Detroit pension fund lawyer said Wednesday.

Attorney Jennifer Green unearthed emails, internal documents and other records in hopes of convincing U.S. Bankruptcy Judge Steven Rhodes that the city did not negotiate in good faith as required by Chapter 9 bankruptcy law.

She called a Chapter 9 filing a “foregone conclusion.”

Green offered a tick-tock of the hours leading up to the city’s July 18 bankruptcy filing.

Internal documents obtained by the pension funds show the original plan was to file July 19.

But the state Attorney General’s Office got a tip on July 18 that the pension funds were going to ask a state court judge for a temporary restraining order that would block a bankruptcy filing.

The tip was shared with Orr, who crossed out the July 19 date on the city’s pre-drafted bankruptcy petition and wrote July 18 in his own handwriting, Green said.

One hour and one minute after getting the tip, Detroit filed bankruptcy, she said.

The city’s pension funds attacked the state emergency manager law and questioned its constitutionality in hopes of proving Detroit is not eligible for Chapter 9 bankruptcy relief.

Attorney Jennifer Green launched the funds’ bid to kick Detroit out of bankruptcy court by examining  how the emergency manager law authorizing the city to declare bankruptcy came into effect.

During earlier hearings, U.S. Bankruptcy Judge Steven Rhodes has focused in on the process and last week, grilled a state attorney about why the Legislature passed a new emergency manager law in December, a month after voters tossed the old statute, Public Act 4.

Rhodes ordered the state’s attorneys to bring forth evidence at the trial justifying why the Legislature tacked on $5.78 million to pay for emergency managers and consultants to a new emergency manager law — making it akin to an appropriations bill and immune to a voter referendum.

Green’s opening statement relied heavily on exhibits displayed on a giant screen that laid out the appropriations process and the selection of the city’s bankruptcy team.

Creditors, including city unions, have claimed Detroit did not negotiate in good faith before filing Chapter 9 bankruptcy in July. They have obtained emails and other documents that they believe shows the plan all along was to file bankruptcy and slash pensions, which are protected by the state constitution.

Green said a bankruptcy filing was a “foregone conclusion” while the city publicly claimed it was negotiating in good faith with creditors.

City lawyers, however, argue federal law trumps state law and pensions can be diminished in bankruptcy court.

The city spent most of June trying to find a way to avoid filing Chapter 9 bankruptcy but failed to secure concessions from unions, pension funds and other creditors, Detroit’s top bankruptcy lawyer said.

Attorney Bruce Bennett showed a timeline of talks that failed before the city filed Chapter 9 bankruptcy July 18.

“The residents of Detroit would be dramatically prejudiced by denying Chapter 9 relief,” Bennett said. “Many of problems are so many of the city’s tax dollars are devoted to bonds and other legacy liabilities. that’s the problem.

“The taxpayer puts up $1 and gets back…58 cents,” Bennett added. “It could someday be 35 cents. That’s an unstable situation. it’s not working now or in the future.”

Raising taxes is impossible, he added. Rates are maxed out.

“There is no other solution,” he said.

Emergency Manager Kevyn Orr shakes hands with Detroit Police and Fire pension Chairman George Orzech, left, during creditors meeting at Detroit Metropolitan Airport in June.

Emergency Manager Kevyn Orr shakes hands with Detroit Police and Fire pension Chairman George Orzech, left, during creditors meeting at Detroit Metropolitan Airport in June.

The city tried to win concessions from creditors and avoid filing the biggest municipal bankruptcy in U.S. history but a bankruptcy lawyer said during opening statements Wednesday.

“We got a lot of no,” the city’s top bankruptcy lawyer Bruce Bennett told U.S. Bankruptcy Judge Steven Rhodes.

Bennett ripped the city’s unions for being selfish and refusing to accept any cuts to pensions, which are protected by the state constitution.

“They were insensitive to the overall problems the city faced,” Bennett said. “What’s the city supposed to do? Say ‘gee, we were just kidding, we found money in the mattress?’ That’s not the right response. You can conclude negotiations have failed.”

Bennett needs to convince the judge the city negotiated in good faith with creditors in order to be eligible for Chapter 9 bankruptcy relief.

The city had too many bondholders in order to reach concessions before filing bankruptcy in July, a city lawyer said while trying to satisfy a key requirement in order to receive bankruptcy relief.

Lawyer Bruce Bennett said there was a “huge universe” of creditors and the city needed unanimous agreement on concessions from bondholders and others.

“It is an awful mess,” Bennett told U.S. Bankruptcy Judge Steven Rhodes. “This is the definition of impracticability. There are many, many, many issues ands many, many, many bondholders.”

Time, meanwhile, was ticking and the city’s financial woes continued to decline last summer as the city sough concessions, he added.

The city must convince Rhodes that negotiations were impractical and that Emergency Manager Kevyn Orr negotiated in good faith in order to be eligible for Chapter 9 bankruptcy relief.

Talks with city unions were impractical because several refused, initially, to represent retired workers or discuss cuts outlined in a June proposal given to creditors, Bennett added.

It’s unfair for the unions to turn around and then accuse the city of failing to negotiate in good faith — another key requirement of a city seeking Chapter 9 protection.

“What do you expect of the city, that having made a proposal … had lots of meetings to explain, answered every question asked at the meetings, and you’re negotiating partner says to you, in many instance in writing, ‘we can’t actually represent the people impaired by your proposal.'”

The UAW and AFSCME later relented and several union officials serve on an official committee of retirees that is going through mediation talks with the city.

The unions and others failed to submit counter-proposals to the city’s plan to shed $18 billion in debt, he added.

“We got a lot of no,” Bennett said.

The city could not sell part of the Detroit Institute of Arts collection before filing bankruptcy unless there was a change in management of the museum, a top city bankruptcy lawyer said.

Lawyer Bruce Bennett mentioned the collection early in his opening statement while arguing Detroit is eligible for bankruptcy relief. Bennett addressed a key objection from creditors, who clamored for an art sale to satisfy city debts.

Bennett referenced an opinion from last summer by state Attorney General Bill Schuette who concluded the art is held in charitable trust and cannot be sold. Litigation or a change in museum management is needed in order to sell art, Bennett said today.

Emergency Manager Kevyn Orr, however, has hired Christie’s Appraisals to value the DIA collection and possibly lease or sell some art that is owned outright by the city, rather than donated  by art patrons.

Lawyer Bruce Bennett, far right, outside federal court Wednesday.

Lawyer Bruce Bennett, far right, outside federal court Wednesday.

The city’s top bankruptcy lawyer Bruce Bennett said there is a “mountain of evidence” that the city is insolvent, a key requirement needed to show the city is eligible for Chapter 9 bankruptcy relief.

“The witnesses we will present will present a mountain of evidence about insolvency,” Bennett told U.S. Bankruptcy Judge Steven Rhodes.

The city has failed to provide basic services for residents and a series of financial deals engineered by prior city officials “didn’t work out so well,” Bennett added.

Without bankruptcy relief, there might not be a city left to reorganize, Bennett said.

The city only has some cash in its coffers because it stopped paying bills, including $44 million in pension contributions.

“If the city had kept paying its debts, cash would have run out,” Bennett said.

Among the nearly 200 people who made their way to rally around the court house was Detroit mayoral candidate Benny Napoleon, who stood alongside protesters for about 20 minutes.
Napoleon said he was not feeling well but felt it crucial to show his solidarity with the city workers, retirees, union heads and protesters on this historic day for the city.
“This is a very serious issue,” Napoleon said. “The retirees and workers have committed a lifetime to the city.”

He also called Emergency Manager Kevyn Orr’s appointment and subsequent dismantling of city trust “unconscionable.”

If elected, Napoleon vowed he would not accept working alongside Orr.

“I’ll work to get rid of him,” Napoleon said.

Gov. Rick Snyder isn’t expected at the Detroit bankruptcy eligibility trial until next week, but the next closest thing showed up outside court today.

Denise Griebler, 54, a protester from southwest Detroit, wore a paper mâché costume depicting Snyder.

“This shows the undermining of democracy, with Snyder pulling the strings of the city,” Griebler said. “The voters of Michigan voted against emergency management and what do we have? Snyder, by decree, gave us emergency management anyway.”

Wednesday was not the first time the Snyder puppet has made an appearance at a protest. It’s become a somewhat regular sight at demonstrations and was constructed by Detroiters Resisting Emergency Management.

U.S. Bankruptcy Judge Steven Rhodes denied a request to block consultant Charles Moore from mentioning an estimated $3.5 billion shortfall in the Detroit pension funds.

The figure is hotly contested by the city’s pension funds, which sought to limit Moore’s testimony. The city said Moore wouldn’t testify about the estimate anyway.

“The court must conclude that it is challenging, if not difficult, if not impossible to resolve this motion before trial,” Rhodes said today.

U.S. Bankruptcy Judge Steven Rhodes took the bench at 9 a.m. to hear a dispute over evidentiary issues and attorney-client privilege, a preliminary matter before the 10 a.m. eligibility trial.

There are more than two dozen lawyers in the courtroom and more than 50 protesters and media members outside court in downtown Detroit.

During the 9 a.m. hearing, Rhodes will hear motions from the United Auto Workers seeking to compel city and state officials to release documents generated before Kevyn Orr was appointed emergency manager.

The scene outside U.S. District Court ahead of the Detroit bankruptcy trial included two dozen media members, several satellite TV trucks, barricades along Lafayette and dozens of picketers protesting the state’s emergency manager law.

The crowd is expected to swell before the start of the 10 a.m. trial in downtown Detroit.

The protesters chanted “hands off our pensions,” “hands off Belle Isle” and other demands in a bid to voice disapproval of the state takeover and potential dismantling of pensions. Protest music by Bob Marley and Arrested Development echoed in the street.

Security gates were set up in the middle of the eastbound lanes of Lafayette, where protesters with picket signs were standing behind. Lafayette between Washington and Shelby blocked off from traffic. Protesters completely filled the street.

Donald Smith, 68, a retiree who worked for the city for 29 years, set up a small folding chair in front of the federal courthouse Wednesday morning, prepared to remain through the morning to protest in support of maintaining his pension.

“I think it’s rotten they’re trying to take away our pensions, we earned it,” said Smith, who suffers a number of health problems. “We’re not asking for anything, just give us what we earned.”

By 8:30 a.m., the crowd included an oversized paper mâché Rick Snyder puppet, with a sign around its neck, saying “sponsored by Bank of America.”

The crowd has now multiplied significantly with addition of an Occupy Wall Street contingent that’s gathered.

Inside, a few dozen lawyers crowded inside U.S. Bankruptcy Judge Steven Rhodes’ borrowed 7th floor courtroom. The judge is borrowing space because his courtroom across Fort Street is too small to accommodate the biggest municipal bankruptcy case in U.S. history.

Rhodes is used to crowds, though. He plays rhythm guitar in the rock band The Indubitable Equivalents.

Mayor Dave Bing, left, Gov. Rick Snyder and Emergency Manager Kevyn Orr.

Mayor Dave Bing, left, Gov. Rick Snyder and Emergency Manager Kevyn Orr.

Before today’s trial on Detroit’s eligibility for bankruptcy can begin, U.S. Bankruptcy Judge Steven Rhodes will have to sort out some legal spats between the city and one of its many objectors.

At 9 a.m., Rhodes will hold expedited hearings on motions from the United Auto Workers seeking to compel city and state officials to release documents generated before Kevyn Orr was appointed emergency manager.

In an effort to get Detroit deemed ineligible for Chapter 9 relief from its creditors, the UAW is trying to prove there was a concerted effort by Gov. Rick Snyder’s administration to take the city into bankruptcy, months before Orr resigned his partnership from the prestigious Jones Day law firm to become emergency manager.

The union wants city officials to release to records related to consultation they and state officials had with bankruptcy attorneys at Jones Day as far back as June 2012.

“Jones Day was not counsel to the city until March 11, 2013 at the earliest and it was never counsel to the state. The work product doctrine is thus inapplicable,” UAW attorney Babette Ceccotti wrote in an Oct. 17 filing.

Jones Day attorney Bruce Bennett, one of the city’s lead bankruptcy lawyers, acknowledged Tuesday in a court filing that his firm has been seeking to provide Detroit financial restructuring services since 2011. Bennett said the firm devoted 1,000 hours toward “studying relevant statutes, evaluating regulations and court rulings in Michigan, and developing an understanding of the city’s financial and operational circumstance.”

UAW lawyer Babette Ceccotti

UAW lawyer Babette Ceccotti

“Attorneys regularly research legal issues and create work product to advise potential clients on their legal rights,” Bennett wrote.

Ceccotti also is asking Rhodes to reconsider his Sept. 19 decision that Snyder and Orr are shielded from disclosing discussions they had about Chapter 9 bankruptcy when their attorneys were present. In their sworn depositions, Snyder and Orr repeatedly invoked their attorney-client privilege when asked questions about their deliberations over the city’s options for restructuring its debts.

The UAW attorney argues Snyder and Orr should have not be allowed to hide behind attorney-client privilege for discussions that took before Orr filed for bankruptcy July 18.

The UAW and a group of retired union members also sought an unredacted March 12 email between Snyder aide Richard Baird and Orr before his March 14 appointment. That dispute, however, may be resolved.

The Michigan Attorney General’s office said in a court response Tuesday evening that it turned over the email between Baird and Orr “in an effort to resolve this discovery dispute raised on the eve of trial.”

Gov. Rick Snyder, left, and Detroit Emergency Manager Kevyn Orr.

Gov. Rick Snyder, left, and Detroit Emergency Manager Kevyn Orr.

With Gov. Rick Snyder’s administration playing a major role in Detroit’s bankruptcy, the Attorney General’s office has beefed up its representation of the governor and other state officials with some outside counsel.

And they aren’t cheap.

As first reported by The Detroit News, the Attorney General’s office has a contract with attorneys at the law firm Dickinson Wright to serve as special assistant attorneys general in case.

Steven G. Howell, a bankruptcy attorney in Dickinson Wright’s Detroit office, has been in court lately alongside Matthew Schneider, chief legal counsel for Attorney General Bill Schuette.

Behind the scenes, attorney Peter Ellsworth in Dickinson Wright’s Lansing office also has been providing the governor, state Treasurer Andy Dillon and Snyder aide Richard Baird representation.

Howell, Ellsworth and two senior partners are billing the state Treasury Department $400 an hour for their services, while junior partners are billing $300-an-hour and associates are collecting $235 for each hour of work on the bankruptcy, according to a contract the Attorney General’s office released to The News this week.

The contract contains a $225,000 “budget ceiling” that the private attorneys are likely nearing after a busy September and October for the state’s defense of the bankruptcy filing.

As of Aug. 31, Dickinson Wright Contract had already billed the state $106,739.56, though the AG’s office was able to reduce the bill by $800 “following the standard office invoice review of charges,” said Joy Yearout, spokeswoman for the Attorney General’s office.

But just in case the bankruptcy case drags out in protracted litigation, the Treasury Department has a $3 million budget for legal services this fiscal year.

“Due to the nature of this contract and difficulty in estimating actual costs and the demand for services, the contract budget ceiling may be increased, if approved in writing by the department. An increase in the budget ceiling shall not affect the established hourly rate during the term of this contract or any amendment,” according to the contract.

The Detroit Light Brigade made its opinion of the city’s historic Chapter 9 filing known in illuminated text ahead of  Wednesday’s trial that will determine whether Detroit is eligible for bankruptcy, which could last as long as five days and feature testimony from as many as 16 witnesses.

1023Dbankruptcy2fbThe bright message “Free Detroit Fire Snyder” text glowed bright briefly on several buildings in the downtown, including the U.S. District Court.

It was the start of a morning expected to be full of protesting outside the courthouse. Detroit retirees, citizens, Michigan AFSCME Council 25 leaders, members, supporters and other labor organizations are planning a rally here at 9 a.m.

Bruce Bennett

Bruce Bennett

Jones Day attorney Bruce Bennett is one of the city’s top bankruptcy lawyers — an ‘artful dodger’ whose firm billed $13 million for work on the Los Angeles Dodgers bankruptcy case — and has quickly become known for the serene way he issues threats and tells Detroit’s unions and pension funds that they are out of their freakin’ minds.

Skip to 1:19:35 in the audio file below and listen to the Harvard-educated, Brooklyn-born attorney parrying arguments Monday that vested pensions are sacred because they are protected by the state constitution. He’s so even-keeled and courteous that you might miss the slight insult of Detroiters. But it’s hard to overlook his threat that if creditors think bankruptcy court is tough, the alternative is much, much worse.

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Detroit must meet several requirements before being eligible for Chapter 9 bankruptcy relief.

Here they are:

  1. the municipality must be specifically authorized to be a debtor by state law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor. Gov. Rick Snyder likely will testify about his decision to authorize the July 18 bankruptcy.
  2. the municipality must be insolvent.
  3. the municipality must desire to effect a plan to adjust its debts.
  4. the municipality must either:
  • obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan in a case under chapter 9;
  • negotiate in good faith with creditors and fail to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that the debtor intends to impair under a plan;
  • be unable to negotiate with creditors because such negotiation is impracticable; or
  • reasonably believe that a creditor may attempt to obtain a preference.

EY

The city will call five witnesses during its portion of the eligibility trial. The testimony could span three days and will paint a harrowing picture of a crime-ridden city that has failed to adequately provide basic services, is bleeding cash and saddled with crushing pension and health-care costs.

First up is Gaurav Malhotra, a principal of the city’s restructuring consultant Ernst & Young. He is expected to emphasize that Detroit has about $18 billion in debt and is insolvent — one of five requirements for a city to be eligible for Chapter 9 bankruptcy relief.

Malhotra wrote a bit of noir nonfiction about the city’s finances and there are chapters on former Mayor Kwame Kilpatrick’s Wall Street boondoggle, cash-flows, and how job cuts, pension and health-care changes have failed to fix Detroit.

“Despite these changes, the city’s disbursements continue to exceed receipts after taking into account the costs associated with legacy liabilities such as pension, retiree healthcare and debt service.”

Charles Moore

Charles Moore

The city’s second witness is Charles Moore, a senior managing director with the city’s restructuring firm, Birmingham-based Conway MacKenzie. He will testify about the allegedly deep hole the city’s pension funds are in, and how they got there.

He has spent months chronicling what he calls decades-long mismanagement of the city’s pension funds. He already has alleged pension trustees weakened the city’s retirement funds by using hundreds of millions of dollars on savings plans for active workers and doling out annual bonus checks.

City lawyers have said the practices depleted the pension funds of $1.9 billion in investment value over two decades and contributed to an estimated $3.5 billion in unfunded liability.

Lawyers for city retirees want to block him from mentioning the $3.5 billion estimate.

No sweat, the city’s legal team says.

“Far from offering his own  complex financial analysis of the city’s unfunded pension liability, he will testify only to his own personal observations of the numbers contained in recent reports submitted by Gabriel Roeder, the actuary employed by the pension funds themselves,” city lawyer Bruce Bennett wrote in a court filing Tuesday.

Moore’s no show-off, Bennett added.

“To the extent Mr. Moore applies any of his own analysis to those reports, he will use basic math to show how the pension funds’ own underfunding calculations relate to the City’s financial forecasts…,” Bennett added.

Kenneth Buckfire

Kenneth Buckfire

The city’s investment banker is expected to testify as early as today about his role negotiating a proposed deal that would let the city access monthly casino tax revenues to finance operations during bankruptcy.

Kenneth Buckfire, co-president and managing director of New York City- based Miller Buckfire could narrate a complicated interest rate swap transaction with two big banks that he wants to terminate in order to access $11 million in monthly wagering taxes that are currently tied up in debt payments.

Emergency Manager Kevyn Orr wants to spend $1.25 billion over 10 years from the proposed settlement to replace equipment and vehicles for first responders and tame a city plagued by one of the highest crime rates in the country.

The city wants U.S. Bankruptcy Judge Steven Rhodes to approve the proposed settlement. It would pay UBS and Bank of America 75 to 82 cents on the dollar through $4 million monthly in casino revenues and a $250 million termination fee to end the swaps, which soured on Detroit when interest rates plummeted during the recession.

To come up with the $250 million termination fee, has secured a debtor-in-possession loan of $350 million and pledged the presumed casino revenue to finance the new debt, assuming the judge approves the settlement. The remaining $100 million would go for what Orr calls “quality of life” improvements in the city.

Buckfire was tight-lipped while being questioned about the proposed deal — and the fate of the city’s art collection — during an August deposition.

summers_matthew_040_crop.ashx

Matthew Summers

Here is the following exchange between Buckfire and Matthew Summers, an attorney for Erste Europäische Pfandbrief- und Kommunalkreditbank Aktiengesellschaft. You know, the bank in Luxembourg.

Summers: What other collateral is the City offering to secure the DIP financing loan?

Buckfire: I’m not going to answer that question.

Summers: Does the RFP define what collateral would be available?

Buckfire: Yes, it does.

Summers: And that’s been sent out to potential investors?

Buckfire: Who have signed nondisclosure agreements.

Summers: Is the city offering art work as collateral?

Buckfire: I’m not going to discuss the terms of the term sheet, sorry.
Detroit Police Chief James Craig

Detroit Police Chief James Craig

Detroit Police Chief James Craig is new, and one of the city’s newest carjacking victims, but he will soon testify about old, entrenched and well-documented problems plaguing Detroit and the department.

The city’s bankruptcy lawyers will call him to testify sometime between today and Friday about the city’s inability to provide basic services.

Gov. Rick Snyder wrote Craig a cheat sheet when he authorized the bankruptcy filing July 18. In it, Snyder addresses the scale and depth of Detroit’s problems. From Snyder’s written authorization green-lighting the Chapter 9 petition:

Gov. Rick Snyder

Gov. Rick Snyder

Detroit’s homicide rate is at the highest level in nearly 40 years and it has been named as one of the most dangerous cities in America for more than 20 years.

Its citizens wait an average of 58 minutes for the police to respond to their calls, compared to a national average of 11 minutes.

Only 8.7 percent of cases are solved, compared to a statewide average of 30.5 percent.

The city’s police cars, fire trucks and ambulances are so old that breakdowns make it impossible to keep up the fleet or properly carry out their roles.

Only a third of the city’s ambulances were in service in the first quarter of 2013.

Emergency Manager Kevyn Orr

Emergency Manager Kevyn Orr

Detroit Emergency Manager Kevyn Orr gets the closer role in the city’s bid for Chapter 9 bankruptcy relief and likely will testify about negotiations with creditors, the city’s finances and discussions with Gov. Rick Snyder.

Orr has sat for multiple depositions since the city filed bankruptcy July 18 but his upcoming testimony — anytime between today and Friday — will be the first time he’s faced questions under oath and in public since being appointed in March.

Orr’s depositions offered insight into the city’s finances and the fate of the Detroit Institute of Arts collection.

During a September deposition, Orr said he is considering taking $1.2 billion designated for repairing the city’s water and sewer system and spending the cash elsewhere, possibly on retiree pensions. The admission sparked outrage among suburban leaders.

Orr also was questioned about the DIA artwork during the union deposition. The city has hired Christie’s Appraisals, the New York-based international auction house, to put a price tag on the artwork.

Orr said a sale of artwork to pay creditors is possible. So is leasing pieces of art.

But making money off a lease deal is difficult, Orr said.

“You would have to have the right pieces at the right time at the right market to generate cash,” Orr said during the deposition.

In an earlier deposition, Orr said the city’s need to tap monthly casino tax revenues for operations during bankruptcy is a life-or-death matter for Detroiters.

“Every day that the city does not make reinvestment in the city that has tens of thousands of abandoned structures, that has four of the most dangerous neighborhoods in the country, that has police cars with over 250,000 miles on them, that has police officers I believe during this time, one of whom got shot in the head by a perpetrator that nine cars had surrounded and remains in the hospital today, every day that this city does not make reinvestment is a dangerous day,” Orr said.

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