Detroit bankruptcy trial stretches into 6th day

Emergency Manager Kevyn Orr spent his fourth day on the witness stand in the city’s bankruptcy eligibility trial Monday continuing to deny that a Chapter 9 filing was a forgone conclusion before he took over City Hall in March. Attorneys at Jones Day were discussing the logistics of a Detroit bankruptcy case as early as Jan. 28 in emails Orr received, according to evidence that emerged during the sixth day of the trial.

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The Detroit City Council did not implement concessions last year agreed to by several unions after talking to state Treasurer Andy Dillon and a key aide to Gov. Rick Snyder, according to testimony Monday.

The concessions in February 2012 would have saved Detroit more than $100 million a year and could have helped the city restructure outside of bankruptcy court, according to representatives from the city’s biggest union, AFSCME.

Sharon Levine

Sharon Levine

“Was this agreement ever put into effect?” AFSCME lawyer Sharon Levine asked Steven Kreisberg, the union’s director of collective bargaining.

“What is your understanding of why it was not?” Levine asked.

“The City Council never voted based on instructions it received from state officials,” Kreisberg testified.

U.S. Bankruptcy Judge Steven Rhodes interrupted the questioning. He asked Kreisberg to identify the state officials.

“Treasurer Dillon and, perhaps, Mr. Baird,” he said, referring to the governor’s aide Richard Baird.

“That was for tomorrow, your honor,” joked Levine.

“I jumped the gun,” the judge said.

Protestors outside federal court last week.

Protestors outside federal court last week.

The head of a Detroit retiree group admitted he was not authorized to negotiate concessions with Emergency Manager Kevyn Orr that could have helped keep the city out of bankruptcy court.

Donald Taylor, president of the Retired Detroit Police and Fire Fighters Association, said he thought any authorization was premature because Orr had not proposed specific pension cuts.

“Why would I seek that in advance?” Taylor asked the city’s bankruptcy lawyer Geoff Irwin.

The exchange came as retiree groups mounted a bid Monday to kick Detroit out of bankruptcy court. Retirees, unions and pension funds allege the city failed to negotiate in good faith before filing Chapter 9 bankruptcy. Good faith negotiations are required for a city to receive Chapter 9 bankruptcy relief.

“Did you ever, prior to the (July 18) bankruptcy, seek authorization from your membership to reduce benefits?” Irwin asked.

“No, I don’t see that as part of the negotiation process,” Taylor said.

“I assume you never indicated to Mr. Orr or other city officials that you were prepared to renegotiate?” the lawyer asked.

“No,” Taylor said. “Mr. Orr never indicated to me that he intended to reduce our benefits. I wasn’t going to suggest he reduce our benefits.”

“Have you ever asked for consent or authorization,” from retirees to renegotiate pensions or benefits, the lawyer asked.

“It would be premature,” Taylor said.

“Is that a no?” the lawyer asked.

“That’s a no,” Taylor 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 head of a police and fire retiree group said Emergency Manager Kevyn Orr and state Treasurer Andy Dillon assured him retiree pensions would not change under the new emergency manager law because they were guaranteed by the state constitution, according to testimony.

As recently as April, Retired Detroit Police and Fire Fighters Association President Donald Taylor said Orr reassured him pensions were safe.

Andy Dillon

Andy Dillon

Dillon made an earlier comment during a meeting with Taylor.

“He brought up what possible changes we could see and one of those included the composition of the Detroit Police and Fire retirement board, but they would not effect retirees’ pensions,” Taylor testified. “He informed me there would be no change, that current retiree pensions were guaranteed by the state constitution.”

Taylor testified on behalf of retiree groups that are objecting to the city’s eligibility for Chapter 9 bankruptcy relief.

In late May or early June, Taylor was told to reach out to Kenneth Buckfire, the city’s investment banker, who is spearheading the city’s financial restructuring.

Taylor and Buckfire traded emails and phone calls but despite the retiree group leader’s attempts, there were no meetings or negotiations, he said.

The city’s pension plans changed in June. That’s when Orr announced plans to cut pensions as part of restructuring the city’s $18 billion in debt.

Last month, Orr announced sweeping changes to health insurance for 28,500 active and retired workers slated to take effect Jan. 1. The changes, which were met by a lawsuit, include  axing their city-paid $605 per month retiree health insurance coverage ($1,834 for families) and instead giving them a monthly $125 payment to use toward a private plan on the federal health insurance marketplace exchanges.

Disabled retirees under age 65 will get a $200 monthly payment for their health insurance needs.

More than 10,500 retirees over 65 will be offered a Medicare Advantage plan with city-funded premiums, but will be responsible for paying their deductibles and secondary insurance coverage, according to the plan.

Detroit’s 10,000 active city workers will see their individual deductibles nearly quadruple from $200 annually to $750, while employees with families on the city’s insurance will see their maximum annual out-of-pocket costs rise 50 percent from $3,000 to $4,500.

Under cross examination, a Detroit retiree leader admitted her group, in its approximately 50-year history, had never agreed to cuts that would reduce pensions or health care cuts.

Detroit’s bankruptcy lawyer Geoffrey Irwin countered Detroit Retired City Employees Association President Shirley Lightsey earlier testimony that she was not invited to hear Emergency Manager Kevyn Orr’s restructuring proposal June 14.

Irwin suggested her attendance would have been irrelevant, given her union’s history.

Her lawyer Ryan Plecha tried to salvage her testimony by asking her if Detroit had ever filed Chapter 9 bankruptcy before July 18.

The questioned sparked a spontaneous insult/objection from the city’s bankruptcy team.

“Seriously?” an unidentified city bankruptcy lawyer told U.S. Bankruptcy Judge Steven Rhodes.

The judge moments later ordered the parties break for lunch.

Protesters seen outside the federal courthouse on Wednesday. (Daniel Mears/ The Detroit News)

Protesters seen outside the federal courthouse on Wednesday. (Daniel Mears/ The Detroit News)

The president of a key Detroit retiree group testified she was never invited to hear Emergency Manager Kevyn Orr unveil his June 14 proposal to restructure $18 billion in debts.

Detroit Retired City Employees Association President Shirley Lightsey was the first witness to testify Monday on behalf of creditors that are fighting Detroit’s bid for Chapter 9 bankruptcy protection.

The June 14 meeting was held at Detroit Metropolitan Airport and for the first time outlined how Orr proposed cutting retiree pensions and restructuring the city’s finances.

plecha

“Did you attend the June 14 meeting?” retiree lawyer Ryan Plecha asked.

“No,” Lightsey said.

“Why not?” the lawyer asked.

“I was never invited,” Lightsey said.

“Did you learn whether other retiree associations attended this meeting?” Plecha asked.

“Yes,” Lightsey said.

Retiree groups, pension funds and unions are arguing Orr failed to negotiate in good faith before the city filed bankruptcy July 18.

Lightsey said she never received a copy of Orr’s restructuring proposal before the city filed bankruptcy.

She said her group never had enough information from the city in order to make a counter proposal that could have avoided a bankruptcy filing.

Under cross examination by the city’s bankruptcy lawyer, Lightsey said she had no power to enter binding agreements on pension and health care benefits.

The city’s legal team rested its case after almost six days of testimony and objectors, including pension funds, retirees and unions, will formally launch their cases today why Detroit should be denied Chapter 9 bankruptcy relief.

Several witnesses will be called, including outgoing state Treasurer Andy Dillon and Richard Baird, a key aide to Gov. Rick Snyder, as objectors argue the bankruptcy filing was unconstitutional and would violate the state constitution, which protects vested pension benefits.

Objectors questioned Gov. Rick Snyder last week, briefly interrupting the city’s case. The first witness called by objectors today was Shirley Lightsey, president of the Detroit Retired City Employees Association, and a former city personnel manager.

“Would you be negatively impacted if pensions were reduced?” retiree lawyer Ryan Plecha asked her.

“Yes,” she said.

“Would you be negatively impacted if health care benefits were reduced?” the lawyer asked.

“Yes,” Lightsey said.

 

 

Emergency Manager Kevyn Orr

Emergency Manager Kevyn Orr

Detroit Emergency Manager Kevyn Orr insisted he did not mislead creditors on June 10 when he called pensions “sacrosanct.”

The testimony prompted U.S. Bankruptcy Judge Steven Rhodes to interrupt Orr.

U.S. Bankruptcy Judge Steven Rhodes

U.S. Bankruptcy Judge Steven Rhodes

“Excuse me one second. What would you say to that retiree now?” Rhodes asked.

A pillar of Orr’s restructuring plan is to slash vested retiree pensions while restructuring more than $18 billion in debts.

“I would say his rights are in bankruptcy now,” Orr told the judge. “I would say his rights are subject to the supremacy clause of the..constitution.”

“That’s a bit different than sacrosanct, isn’t it?” Rhodes replied.

Orr argues pensions, which are protected by the state constitution, can be cut in federal bankruptcy court.

Manager Kevyn Orr tried to meet and discuss restructuring proposals, including cuts to pensions and health care benefits, according to testimony Monday.

Orr’s testimony was aimed at bolstering his claims that the city tried to negotiate in good faith with creditors, including the United Auto Workers and the American Federation of State, County and Municipal Employees.

Orr sent letters to the unions in hopes of discussing proposed cuts.

The unions said they were not authorized to negotiate for retirees.

“Did other unions respond in this fashion?” city bankruptcy lawyer Greg Shumaker asked.

“That was the general response — that no one wanted to represent retirees,” Orr said.

Orr later pushed to have a committee created to represent retirees. The nine-member committee was established and represents about 23,000 retirees.

Kevyn Orr

Kevyn Orr

Emergency Manager Kevyn Orr emphasized bankruptcy was not the preferred option for dealing with Detroit’s debts.

Orr made the comment after being questioned by lawyers representing creditors, who spent several days trying to show Orr failed to negotiate in good faith with creditors and that bankruptcy was a foregone conclusion.

Greg Shumaker

Greg Shumaker

The city’s bankruptcy lawyer Greg Shumaker showed Orr a page from the Jones Day law firm’s written proposal to win a lucrative job restructuring the city’s finances.

The page emphasized that “out of court solutions are preferred.”

“Did you agree with this?” Shumaker asked.

“Yes,” Orr said.

The proposal explained that bankruptcy is expensive, disruptive and draws publicity. But avoiding Chapter 9 bankruptcy is extremely difficult, the proposal said.

“Typically out-of-court solutions require parties to agree to significant concessions, in some cases, to deal with legacy issues that have been under discussion and review for a long period of time,” Orr said. “A lot of times, parties are unwilling.”

Under redirect, Orr also said the city’s largest union and its 19 local presidents, never responded to a May letter his team sent regarding the city’s restructuring.

Creditors continued trying to prove Emergency Manager Kevyn Orr failed to negotiate in good faith before filing bankruptcy July 18.

A lawyer for four public safety unions showed Orr a July 12 letter requesting specific details on Orr’s proposal to slash vested pension benefits. The unions never received more details but got a letter saying his office “appreciates your strong cooperation.”

The unions are trying to kick Detroit out of bankruptcy court and have argued the city did not negotiate in good faith — a requirement the city needs to meet in order to receive Chapter 9 bankruptcy relief.

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 did not respond to a request from a key group of Detroit retirees that wanted to meet in May,  an allegation that could undermine his claim that the city negotiated in good faith before filing Chapter 9 bankruptcy.

Attorney Ryan Plecha, who represents two groups of about 12,000 Detroit retirees, showed Orr a copy of a May letter requesting a meeting.

“You say you’ve never turned down a request for a meeting,” Plecha said.

“Me or my staff,” Orr said.

“Do you recall seeing this letter?” Plecha asked.

“Uh, no,” Orr said.

“Do you see that it clearly requests a meeting?” the lawyer asked.

“Yes,” Orr said.

“Did the meeting happen?” Plecha asked.

“No,” Orr said.

Kevyn Orr was still communicating with lawyers at his law firm after becoming Gov. Rick Snyder’s favorite for the Detroit emergency manager position, according to emails that emerged Monday.

Attorney Lynn Brimer showed the Feb. 15 email to U.S. Bankruptcy Judge Steven Rhodes in an apparent effort to cast doubt on the propriety of the city hiring Jones day to restructure the city’s finances and the state naming a key Jones Day partner to the powerful emergency manager post.

In the email, Orr told a state official his law firm was “pretty good about keeping me in the loop,” about the process of hiring a restructuring law firm.

“At what point did you think it was appropriate to withdraw from the Jones Day team that was negotiating and dealing with the city and the state for its engagement?” Brimer asked.

“I recused myself at some point during the process,” Orr said.

Gov. Rick Snyder, left, and Kevyn Orr.

Gov. Rick Snyder, left, and Kevyn Orr.

Emergency Manager Kevyn Orr was urged to the the “star” on diversity issues during a pitch meeting his former law firm Jones Day had with city officials while trying to win a gig restructuring Detroit’s finances.

Orr was part of the Jones Day team in January that made a presentation to the city in hopes of winning a lucrative restructuring job. After the meeting, Orr quit the firm and was appointed by Gov. Rick Snyder as the city’s emergency manager.

Creditors obtained internal emails sent by Jones Day partner Corinne Ball to Orr ahead of the meeting. Orr was shown one email Monday during testimony in the city’s bankruptcy eligibility trial.

“There are diversity related issues, you have to be the star on this stuff and be able to discuss what we can provide…” Ball wrote in one email shown by lawyer Lynn Brimer, who represents retired Detroit police officers.

It is unclear whether Ball was referring to legal diversity issues or racial diversity.

 U.S. Sen. Debbie Stabenow and Ron Bloom walk the floor at the GM display at the 2011 North American International Auto Show. (Elizabeth Conley/The Detroit News)

U.S. Sen. Debbie Stabenow and Ron Bloom walk the floor at the GM display at the 2011 North American International Auto Show. (Elizabeth Conley/The Detroit News)

A Detroit retiree group fighting to preserve pension benefits during the bankruptcy fight, and whose bills are footed by the city, wants to pay former Obama auto czar Ron Bloom’s firm $175,000 a month for its financial advise.

The nine-member retiree committee, which represents about 23,500 former Detroit workers whose pension and health care benefits face cuts, retained Bloom and New York-based Lazard in September to aid the pension fight.

Lazard is providing the following services, according to a court filing:

a. to analyze the City’s long-term business plan, operations, and related
financial projections, including budgets and operational assessments and
assumptions of the City;

b. to analyze the City’s debt capacity and proposed capital structure;

The Detroit Institute of Arts collection includes the original Howdy Doody marionette.

The Detroit Institute of Arts collection includes the original Howdy Doody marionette.

c. to review and analyze any valuation of the City’s assets;

d. to review and analyze any restructuring alternatives for the City proposed
by any party;

e. to evaluate the financial aspects of any potential DIP loan or other
financing by the City;

f. in connection with the financial aspects of negotiations with the City;

g. in meetings with the City or other third parties as appropriate in
connection with the matters set forth herein;

h. to prepare documents and by providing testimony in or related to the
City’s chapter 9 proceedings in the United States Bankruptcy Court for the
Eastern District of Michigan Southern Division (the “Bankruptcy Court”),
as necessary and customary, with respect to matters on which we have
been engaged to advise the Committee hereunder;

i. in relation to all of the aforementioned services, to assist in the
communications between the Committee and the other professionals
performing services for the Committee in relation to the chapter 9
proceedings and potential litigation related thereto; and

j. with such other financial advisory services as the Committee may from time to time reasonably request and which are customarily provided by financial advisers acting in similar situations.

CEO Dan Akerson (center red tie) and other executives applaud after ringing the opening bell of the New York Stock Exchange in New York on November 18, 2010 after GM launched the largest Initial Public Offering of 2010 at the NYSE. (TIMOTHY A. CLARY/AFP/Getty Images)

CEO Dan Akerson (center red tie) and other executives applaud after ringing the opening bell of the New York Stock Exchange in New York on November 18, 2010 after GM launched the largest Initial Public Offering of 2010 at the NYSE. (TIMOTHY A. CLARY/AFP/Getty Images)

Here’s the contract’s fee section:

Monthly Fees: Lazard will be paid a monthly fee (the “Monthly Fee”)
equal to $175,000 per month, which will accrue upon execution of the
Engagement Letter and on the first day of each month thereafter until any
termination of Lazard’s engagement pursuant to the Engagement letter.
Each Monthly Fee will be paid in advance on the first day of each month.

The Treasury Department tapped Lazard Freres to handle GM’s initial public offering in 2010. In GM’s case, the firm’s fee was $500,000 a month.

But wait, there’s more:

Transaction Fee. In addition to the Monthly Fee, upon the earlier of
approval by the Bankruptcy Court of a settlement of the material claims of
the Retiree Committee and the consummation of the City’s chapter 9
proceedings, Lazard shall be paid an additional fee that will appropriately
compensate Lazard in light of the magnitude and complexity of the issues in
the chapter 9 proceedings, which fee will be mutually agreed in good faith
by Lazard, the Retiree Committee, and the City.
Expenses: In addition to any fees that may be payable to Lazard, the
Debtor will promptly reimburse Lazard for all expenses (including expenses
of its counsel, if any) incurred in connection with, or arising out of Lazard’s
activities under or contemplated by, their engagement.

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