Bankruptcy

Drama builds in Detroit bankruptcy as chief, Orr near witness stand

Detroit Police Chief James Craig testified about “deplorable” conditions within the department the endangered the lives of residents and officers and contributed to the city’s need for Chapter 9 bankruptcy relief.

Craig’s testimony was the most gripping during a day that also featured contentious exchanges between creditor lawyers and one of the architects of Detroit’s restructuring. The day also featured a brief stint on the witness stand by Emergency Manager Kevyn Orr.

Orr was just getting warm — testifying about his courtship with Gov. Rick Snyder — before U.S. Bankruptcy Judge Steven Rhodes ended testimony at 5 p.m.

Orr will return at 9 a.m. Monday and likely be interrupted at 1 p.m. by Snyder, the star witness who is expected to testify about why he authorized the city’s bankruptcy July 18 and defend against claims the filing is unconstitutional and will eviscerate constitutionally protected retiree pensions.

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

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

Kevyn Orr countered rumors surrounding his controversial appointment while testifying during the Detroit bankruptcy eligibility trial Friday.His early testimony, which will continue Monday, was aimed at supporting the city’s bid for Chapter 9 bankruptcy relief, and dispelling rumors that there was a link between Orr being appointed in March around the same time his law firm Jones Day won a contract to restructure Detroit’s finances.

Greg Shumaker

Greg Shumaker

“Was there any connection between you being considered for the position and Jones Day being retained as the city’s restructuring counsel?” city bankruptcy lawyer Greg Shumaker asked.

“No,” Orr said. “I made it very clear. Now that I am a candidate I don’t want it to help or hurt the firm. The firm will stand on its own.”

Orr said he recused himself from talks earlier this year that ended with Detroit hiring Jones Day as its restructuring counsel.

“Did you do this for the money?” Shumaker asked.

Orr, who walked away from a multimillion dollar career, laughed.

“No,” said Orr, who is being paid $275,000 as emergency manager. No, no.”

 

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

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

City lawyers started questioning Emergency Manager Kevyn Orr at 3:23 p.m. about the run-up to the biggest municipal bankruptcy filing in U.S. history.

Orr will have a short stint on the witness stand today because the trial ends at 5 p.m. before resuming at 9 a.m. Monday.

Orr is expected to argue Detroit is insolvent, defend his decision to file Chapter 9 bankruptcy July 18 complain that creditors were unwilling to negotiate concessions despite his good faith attempts — all requirements the city must satisfy to be eligible for bankruptcy relief.

Creditors, including unions, pension funds and retiree groups, have spent three days accusing Orr’s restructuring team of failing to engage in good-faith negotiations and claiming that a bankruptcy filing was always the goal despite Orr’s public comments to the contrary.

Creditors also claim the bankruptcy is unconstitutional because it ultimately will slash vested pensions, which are protected by the state constitution.

He likely will face questions about testimony he gave in multiple depositions, which can be found here here and here.

 Detroit Police Chief James Craig seeks community support to fight crime in early October.

Detroit Police Chief James Craig seeks community support to fight crime in early October.

Detroit Police Chief James Craig walked a fine line while testifying in bankruptcy court, saying he supports officers receiving a pension but understands action needs to be taken to fix the city’s financial crisis.

And under cross-examination from Barbara Patek, a lawyer representing a coalition of police unions, said he earns a pension after 28 years with the Los Angeles Police Department.

“I have my pension,” Craig testified.

Craig was called to testify in support of the city’s quest to be eligible for Chapter 9 bankruptcy relief — a quest pushed by the man who hired him, Emergency Manager Kevyn Orr.

But if Detroit is eligible for bankruptcy relief, Orr is expected to slash pensions for city retirees, including police officers.

Earlier, Craig said Detroit Police officers are underpaid, undermanned and risk their lives every day.

“Do you receive health benefits?” Patek asked.

A city lawyer objected. U.S. Bankruptcy Judge Steven Rhodes allowed the question.

“I do,” Craig said.

Orr wants to cut health benefits as of Jan. 1 for retirees and active workers.

“Would it be fair given what they face every day to impair those accrued vested and previously earned pension benefits,” Patek asked.

“I do support, uh, public service workers having a pension but I also understand the necessity to take bold action as it relates to addressing this fiscal crisis in Detroit,” Craig said. “I’m not the expert on what should happen but I certainly am concerned about pensions.”

Detroit Police Chief James Craig

Detroit Police Chief James Craig

The Detroit Police Department’s equipment was deplorable when new Chief James Craig arrived and found 500 bulletproof vests were expired and the city didn’t have one for him, according to testify.

“I brought my own from Cincinnati,” Craig testified during Detroit’s bankruptcy trial.

Craig described conditions in the financially strapped city, which bankruptcy lawyers say endangered lives and helps justify the need for Detroit to be eligible for Chapter 9 bankruptcy relief.

“I wanted to make sure we were effectively deploying sworn officers the best we could,” Craig testified.

Ambulance response times were so slow that officers were used to transporting young crime victims to hospitals.

“It was routine that officers transported injured youth victims of crimes,” Craig said.

Craig recounted a story of watching an officer jump starting an aging police cruiser. He said poor equipment put lives at risk.

A city lawyer asked Craig if he thought residents and visitors were at risk of violent crime in bankrupt Detroit.

“I did, and do,” Craig said.

Detroit Police Chief James Craig

Detroit Police Chief James Craig

Detroit Police Chief James Craig testified that after arriving in July he found “everything’s broken,” that morale was low and that crime was extremely high, conditions that complicated the department’s ability to solve crimes and protect the public.

The city’s bankruptcy team is using Craig to illustrate the impact the city’s finances have had on providing effective public safety services for residents. The city and Gov. Rick Snyder cited the inability to serve the public as justification for filing Chapter 9 bankruptcy in July.

Craig recounted the weeks following his July appointment meeting with community and business leaders and rank and file officers and was left with a clear impression of the city and department.
“Everything’s broken,” Craig testified. “Deplorable conditions. Crime is extremely high, morale low.”

Morale was the lowest of any department he had ever seen during his career.

Officers were forced into working 12-hour shifts and unhappy with 10 percent wage cuts.

“The thing I heard the most was they just wanted to be police officers again,” Craig testified.

Prior management took a cookie-cutter approach to staffing and deployment.

“There was no real science to how police officers were deployed,” Craig testified.

The average response to crime calls was 50 minutes when Craig arrived.

The response times when he worekd in Los Angeles was seven minutes. Four minutes when he worked in Portland, Ore. Six minutes when he was chief in Cincinnati, Ohio.

Detroit Police Chief James Craig outside federal court Friday.

Detroit Police Chief James Craig outside federal court Friday. (Todd McInturf / The Detroit News)

Detroit Police Chief James Craig took the witness stand around 3:20 p.m. after arriving at bankruptcy court Friday.

Craig was spotted entering U.S. District Court around 3 p.m. He is testifying for the city in its attempt to be eligible for Chapter 9 bankruptcy relief.

Craig started his new job in July and presumably cannot offer insight into the run-up to the city’s July 18 bankruptcy but is expected to talk about the city’s crime rate and challenges providing effective police services to residents.

Emergency Manager Kevyn Orr and Gov. Rick Snyder have cited poor city services, a high crime rate and slow response times as fallout from the city’s financial crisis — a crisis that could be reversed through bankruptcy.

The state and high-powered law firm Jones Day talked as early as March 2012 about having Detroit file Chapter 9 bankruptcy, 17 months before the city filed the biggest municipal bankruptcy in U.S. history, a witness testified Friday.

Investment banker Kenneth Buckfire initially said he couldn’t recall whether a Chapter 9 bankruptcy filing was being considered in 2012.

Lynn Brimer

Lynn Brimer

Attorney Lynn Brimer, who represents retired Detroit police officers, showed him an email that includes an exchange in March 2012 about a possible Detroit bankruptcy filing.

“So is it fair to say that as early as March 2012 the state and Jones Day were discussing a Chapter 9 filing for Detroit?” Brimer asked.

Buckfire paused momentarily.

“Yes,” he said.

Jones Day wasn’t hired to work on the city’s restructuring until this year but by then had spent about 1,000 hours analyzing Chapter 9 and the city’s finances as a potential business development opportunity.

 

Museum patrons leave the Detroit Institute of Arts on October 2, 2013.

Museum patrons leave the Detroit Institute of Arts on October 2, 2013.

Emergency Manager Kevyn Orr’s restructuring team unsuccessfully pressed officials Detroit Institute of Arts officials to find common ground regarding ownership of the museum’s art — and a potential sale.

That’s according to Kenneth Buckfire, the city’s investment banker, who insisted the city owned the museum’s art and the building — and that the assets could be liquidated amid Detroit’s financial crisis. His testimony during a trial Friday that will determine whether Detroit is eligible for Chapter 9 bankruptcy relief, illustrated the tension between Orr’s team and DIA officials over the fate of priceless art pieces.

Jennifer Green

Jennifer Green

“Those discussions did not prove fruitful,” Buckfire testified Friday.

Buckfire spent early Friday afternoon being cross examined by attorney Jennifer Green, a lawyer representing the city’s pension funds, which is fighting Detroit’s bankruptcy bid.

During occasionally tense exchanges, Green showed the investment banker a series of emails he exchanged with DIA officials, including Director David Meador.

Green pointed to one email and suggested Buckfire tipped off DIA officials that a bankruptcy filing was coming in July.

“Is it your information that you did not share that a bankruptcy filing would likely be in July?” Green asked.

“I never shared with anybody at the DIA that a filing was likely in July,” Buckfire said.

 

Protestors outside U.S. District Court this week included a mask of Gov. Rick Snyder.

Protestors outside U.S. District Court this week included a mask of Gov. Rick Snyder.

The state constitutional protection of vested public pensions was not “relevant” when restructuring experts considered slashing retiree benefits, said an investment banker working on restructuring Detroit’s finances.

Banker Kenneth Buckfire was questioned about Emergency Manager Kevyn Orr’s restructuring proposal issued on June 14, which calls for cuts to retiree pensions. The cuts would come despite the state constitutional protections.

AFSCME lawyer Jack Sherwood

AFSCME lawyer Jack Sherwood

“In concluding the proposal is even-handed and fair, did you consider the argument that vested pension claims are protected by the constitution of the state of Michigan?” asked attorney Jack Sherwood, who represents the American Federation of State, County and Municipal Employees.

“I am aware of that argument,” Buckfire said.

“Did you incorporate that argument into the proposal?” Sherwood asked.

“No,” Buckfire said.

“You don’t give that argument much value, do you, when you conclude that the proposal made on June 14 is even-handed and fair?” the lawyer asked.

“They don’t have security,” Buckfire said. “We did give it some weight but did not deem it relevant.”

  John F. Kennedy boards a plane at Detroit's City Airport and waves good bye to the crowds gathered to send him off in September, 1960.


John F. Kennedy boards a plane at Detroit’s City Airport and waves good bye to the crowds gathered to send him off in September, 1960.

Investment banker Kenneth Buckfire criticized city-owned Coleman A. Young International Airport while correcting a retiree lawyer today.

Steve Yzerman hobbles to his car after arriving at city airport in March 1988.

Steve Yzerman hobbles to his car after arriving at city airport in March 1988.

Retiree lawyer Claude Montgomery asked Buckfire about a January meeting involving Buckfire and law firms interested in restructuring city finances.

Montgomery referred to the meeting being held at “City Airport.”

Buckfire corrected him.

“You mean Metro,” Buckfire said, referring to Detroit Metropolitan Airport, before addressing City Airport. “No one would have a meeting there.”

City airport is one of several assets that could be sold during bankruptcy. On Thursday, Buckfire said the airport, which needs massive upgrades, was effectively worth nothing.

City of Detroit Water and Sewerage Department Wastewater Treatment Plant on Jefferson in Detroit, Michigan on June 13, 2013.

City of Detroit Water and Sewerage Department Wastewater Treatment Plant on Jefferson in Detroit, Michigan on June 13, 2013.

Money from the potential sale of the Detroit Water and Sewerage Department could be used to pay retiree pensions and health care benefits, the city’s investment banker testified Friday.

The city has proposed spinning off the department to a regional authority as part of a financial restructuring in bankruptcy court.

Investment banker Kenneth Buckfire was asked Friday what could happen with any money received from leasing the utility to a new regional authority.

Buckfire said the money could be spent on retiree pensions and health care benefits, but that would be subject to negotiation. The other scenario is retirees would share from a $2 billion payout, as proposed in Emergency Manager Kevyn Orr’s restructuring proposal.

One of the most popular spots in the DIA is the Rivera Court, where visitors can examine the auto industry-themed murals by Diego Rivera.

One of the most popular spots in the DIA is the Rivera Court, where visitors can examine the auto industry-themed murals by Diego Rivera.

Investment banker Kenneth Buckfire took credit Friday for recommending Detroit hire Christie’s Appraisals, the New York City auction house, to put a pricetag on the Detroit Institute of Arts collection.

The revelation came during a scrappy stretch of testimony between Buckfire and Claude Montgomery, a lawyer representing Detroit retirees, who face likely pension cuts if the city is eligible for bankruptcy relief.

Buckfire said he suggested hiring Christie’s in May or early June.

The city is paying Christie’s $200,000 for the auction house to value the DIA collection, pieces of which could be sold to satisfy creditors.

Later, Montgomery asked the investment banker whether he recalled a specific piece of data.

Buckfire couldn’t recall and apologized for not having “every scrap of data” memorized in his head.

Investment banker Kenneth Buckfire repeatedly answered “I don’t recall” Friday when asked about the first time he talked with Emergency Manager Kevyn Orr about slashing retiree pensions and health care benefits.

The exchanges were tense, terse and marked a stark reversal from Buckfire’s testimony a day earlier under direct examination from the city’s bankruptcy lawyers, who are trying to show the city is insolvent and eligible for Chapter 9 bankruptcy relief.

“When, sir, is the first time you recall you and Mr. Orr discussing the reduction of pension benefits and health care benefits, if ever?” Detroit retiree lawyer Claude Montgomery asked.

“I don’t recall,” Buckfire said.

“It never happened?” the lawyer asked.

“I said I don’t recall,” Buckfire said.

“Did it?” Montgomery asked.

“I don’t recall,” Buckfire said.

Orr is proposing to treat classes of creditors equally. The city’s largest secured bond debt would be restructured with new bonds. Unsecured bonds and other debt, including the city’s two pension funds, would divide $2 billion in “non-recourse participation notes” payable once the city’s financial condition improves.

Retirees are being treated “no better or worse than any other unsecured creditor of the city,” Buckfire testified today.

“The pension obligations of the city, is it fair to treat those exactly the same as trade creditors?” Montgomery asked.

“They’re unsecured claims,” Buckfire said.

“Isn’t the city paying trade creditors?” the lawyer asked.

“They are,” Buckfire said.

The city also is paying pension benefits. Pensions have not been slashed while the city tries to become eligible for Chapter 9 bankruptcy relief.

Pension cuts would be included in a plan of adjustment that could be filed later in bankruptcy court.

The city’s investment banker told Gov. Rick Snyder as early as spring 2012 that Chapter 9 bankruptcy was “to be avoided at all costs.”

Claude Montgomery

Claude Montgomery

Banker Kenneth Buckfire testified under cross examination about his earliest interactions with Snyder, who authorized the Detroit bankruptcy July 18.

Buckfire said he told Snyder that Chapter 9 bankruptcy, while it should be avoided, was “required to be studied as a last resort.”

Retiree lawyer Claude Montgomery pressed Buckfire about inconsistencies in his deposition testimony and testimony today, when Buckfire said he had a hand in creating Emergency Manager Kevyn Orr’s restructuring proposal given to creditors in June.

Today, Buckfire said he helped prepare the restructuring proposal, which Montgomery said was inconsistent with the banker’s deposition testimony.

 

U.S. Bankruptcy Judge Steven Rhodes refused Friday to strike testimony from an investment banker who discussed the city’s finances despite not being qualified as an expert.

Rhodes also granted a request from the city to reconsider allowing financial exhibits and certain testimony from the city’s financial analyst Gaurav Malhotra.

City creditors wanted testimony from investment banker Kenneth Buckfire stricken and faulted the city’s bankruptcy team for failing to qualify him as an expert witness.

Rhodes concluded the testimony was reliable and came from their personal experiences working on the city’s finances.

“What Mr. Malhotra and Mr. Buckfire did are a substantial part of the facts and circumstances that led to the filing of this case and are therefore highly relevant to issues of eligibility,” Rhodes said.

The judge replied to UAW lawyer Peter DeChiara, who said Buckfire was as qualified, under the circumstances, as a taxi driver.

“It is certainly true that as argued here, a taxi cab driver would not be permitted to testify as to these matters but that doesn’t mean neither Mr. Malhotra or Mr. Buckfire can’t testify to the matters tehy testified to,” Rhodes said.

City bankruptcy lawyer Geoff Stewart said the objections were untimely. Buckfire’s testimony was based on his own conclusions and conduct while trying to restructure the city’s finances, Stewart said.

The debate over Malhotra and Buckfire delayed additional testimony from Buckfire for more than an hour.

skyline people mover

The Columbia Journalism Review published a story today examining coverage of the Detroit bankruptcy case and approaches taken by the city’s two daily newspapers.

The story mentioned the flurry of national news stories that have emerged from Detroit in recent weeks, including the Kwame Kilpatrick sentencing.

From the story:

Is Detroit the newsiest city in America? You could make a case for it. Between the largest municipal bankruptcy filing ever; the appointment of an emergency manager; ex-mayor Kwame Kilpatrick’s racketeering conviction; a mayoral election; and the resignation of three city council members, reporters for the Detroit Free Press and The Detroit News have had to hustle to keep pace this year.

Kenneth Buckfire

Kenneth Buckfire

The city inexplicably failed to qualify its investment banker as an expert, meaning his opinion about Detroit’s finances are as credible as a cabbie’s, a United Auto Workers lawyer said.

UAW lawyer Peter DeChiara made the odd comparison while trying to convince U.S. Bankruptcy Judge Steven Rhodes to strike testimony from banker Kenneth Buckfire.

“Mr. Buckfire is no more qualified to answer these questions than a taxi driver,” DeChiara told the judge. “The court would not have allowed the taxi driver to answer those questions.”

Buckfire testified Thursday about the city’s dire finances but the city’s bankruptcy team did not qualify him as an expert.

“The real fact is he is an expert investment banker who has a lot of experience in this area,” DeChiara said. “But for some unfathonable reason, the city made a decision not to qualify him as an expert. So for the purposes of this proceeding, Mr. Buckfire’s testimony…was no more deemed expert than a person pulled off the street.”

Detroit's historic bankruptcy case is being held before U.S. District Judge Steven Rhodes.

Detroit’s historic bankruptcy case is being held before U.S. District Judge Steven Rhodes.

The Detroit bankruptcy trial resumed at 9 a.m. with lawyers urging U.S. Bankruptcy Judge Steven Rhodes to strike testimony from the city’s investment banker, arguing he is an unqualified expert.

Attorney Claude Montgomery, who represents the official committee of retirees, wants the judge to strike parts of investment banker Kenneth Buckfire’s testimony from Thursday about the city’s finances.

Montgomery want’s the judge to strike Buckfire’s testimony about the city’s general obligation bonds and differences between interest rates charged to taxing and non-taxing authorities.

Detroit Police Chief James Craig displaying the first set of keys to a new patrol vehicle from Roger Penske, (right), during a press conference at Hart Plaza in August.

Detroit Police Chief James Craig displaying the first set of keys to a new patrol vehicle from Roger Penske, (right), during a press conference at Hart Plaza in August.

The  alleged person who reportedly appeared to want to carjack plain-clothes Detroit Police Chief James Craig earlier this month couldn’t have picked a better time to (allegedly) victimize the highest ranking police official in a bankrupt town.

Craig disclosed the alleged carjacking attempt on the eve of Detroit’s bankruptcy trial,  illustrating the depths of life in a bankrupt town just as the city’s legal team tries to convince U.S. Bankruptcy Judge Steven Rhodes that it is eligible for Chapter 9 bankruptcy relief. Craig’s story, although controversial,  could help Detroit in bankruptcy court: How broke and broken is Detroit? So broke and broken that even the Detroit Police chief could get carjacked.

Don’t be surprised to hear the carjacking story come up once Craig reaches the witness stand, which likely will happen today. He is next on the city’s witness list.

Craig is expected to narrate the city’s dire level of services, crime rate and challenges policing a bankrupt city and run a department that is still subject to federal court oversight.

After hours of testimony Thursday from city financial consultants claiming to be witnesses to Detroit’s financial collapse, U.S. Bankruptcy Judge Steven Rhodes said he had “refrained” all day from one question about the city’s strategy in proving its insolvency.

U.S. Bankruptcy Judge Steven Rhodes

U.S. Bankruptcy Judge Steven Rhodes

“It’s hard for me to comprehend why you didn’t offer the Ernst and Young witnesses who prepared these projections as experts,” the judge told the city’s team of bankruptcy attorneys from the Jones Day law firm.

Ernst and Young is a financial consulting firm that’s been working for the city since May 2011.

Rhodes’ comment came in the middle of banking consultant Ken Buckfire’s testimony when creditor attorneys continued to lodge objections over various financial figures being tossed around as fact during the trial over whether Detroit is eligible for Chapter 9 bankruptcy.

Earlier in the day, Ernst & Young financial analyst Gaurav Malhotra and Conway MacKenzie restructuring specialist Charles Moore’s testimony was interrupted by similar objections from union and retiree attorneys.

Most of their objections centered on mention of an actuarial firm’s estimate that Detroit’s two pension funds are $3.5 billion underfunded – a highly disputed figure.

AFSCME attorney Sharon Levine

AFSCME attorney Sharon Levine

“We’re not offering these numbers for the truth, we’re offering these numbers to rebut the argument that’s being made that Mr. Orr did not negotiate in good faith,” city attorney Geoffrey Stewart said.

Rhodes said he would allow witnesses to mention the numbers in testifying about their advice to Emergency Manager Kevyn Orr concerning the city’s finances, “but not for the truth of it.”

After the second day of the trial, some creditor attorneys were smarting about the city’s lack of an expert witness attesting to their finances.

“I think the judge is a little confused by the city’s choice not to offer one of these witnesses as an expert on insolvency,” AFSCME attorney Sharon Levine told reporters outside of the courthouse.

AFSCME Deputy General Counsel Michael Artz added: “If it’s Detroit’s position that they had no choice but to file bankruptcy, you’d think they’d offer an expert on insolvency.”

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