Dillon emerges as skeptic of Detroit bankruptcy case

Former state Treasurer Andy Dillon emerged as an unlikely skeptic of the city’s bankruptcy, saying Tuesday that it looked “premeditated” and testimony suggested he was frozen out by Gov. Rick Snyder’s team in the days leading up to the Chapter 9 filing.

Dillon spent about two hours on the witness stand and will continue facing questions at 9 a.m. Thursday from the city’s pension funds, which are trying to kick Detroit out of bankruptcy court.

There is no trial time scheduled for Wednesday. Richard Baird, an aide to Gov. Rick Snyder, is likely to testify in the trial on Thursday.

Closing arguments in the trial could begin Thursday afternoon and stretch into Friday.

Updates have ended

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In early July, former state Treasurer Andy Dillon told the governor there were creative options available for dealing with an estimated $3.5 billion shortfall in Detroit’s pension funds.

But Dillon did not pursue any of those unnamed options. Instead, the city filed Chapter 9 bankruptcy July 18.

Jennifer Green

The city’s pension fund obtained a copy of a July 9 email Dillon sent to Gov. Rick Snyder in the days leading up to the bankruptcy filing.

“Because pensions have a long life there are a lot of creative options we can explore to address how they will be treated in a restructuring,” Dillon wrote to the governor and key aides, including Snyder’s aide Rich Baird.

“Did you ever propose these creative options with the pension funds or unions?” Detroit pension fund lawyer Jennifer Green asked Dillon.

“No,” Dillon said.

Dillon added that the pension fund shortfall was not the “major driver” of whether Detroit filed bankruptcy to restructure more than $18 billion in debts.

“The (shortfall) was relevant but not a driving factor of whether (Chapter) 9 was necessary,” Dillon testified.

Former state Treasurer Andy Dillon became “very skeptical” on June 14 that Detroit could avoid filing bankruptcy after seeing the city’s restructuring proposal.

The offer to unsecured creditors was so low it was not practical.

“What troubled me the most was the 10-year plan,” Dillon testified. “The recovery for unsecured creditors, I didn’t know how anyone could practicably cut a deal and walk out of the settlement room.”

The admission offered stark insight into the thinking of one of the highest-ranking members of Gov. Rick Snyder’s administration who spent almost two years trying to restructure Detroit’s finances.

The restructuring plan included pension and retiree health care cuts, offered some creditors less than 10 cents on the dollar and outlined an abrupt decision to stop paying unsecured debt so the city could fund essential services.

“I became very skeptical that an out-of-court settlement could be reached,” Dillon testified.

Andy Dillon

Former Michigan Treasurer Andy Dillon said in early July a Detroit bankruptcy filing would look “premeditated” and said there was another another option available to treat retirees outside of federal court.

Dillon’s sentiments were included in an email he wrote July 10, eight days before Detroit filed the biggest municipal bankruptcy in U.S. history. The email, which provided Dillon’s feedback on Emergency Manager Kevyn Orr’s request for permission to file bankruptcy, was obtained by lawyers who represent Detroit creditors that are trying to kick the city out of bankruptcy court.

“I don’t think we are making a case why we are giving up so soon to reach an out-of-court settlement,” Dillon wrote. “Looks premeditated. I think we need to say facts got worse as we dug into the numbers and I believe there is a state court option to get retirees into a class (we don’t acknowledge that) and why is that unpractical. We don’t even say they rejected the city’s proposal. I think we may want a take it or leave it demand before we pull this trigger.  I agree with the recommendation but  I don’t think we made the case.”

Andy Dillon

The health of Detroit’s pension funds was worsening in the days leading up to the city’s historic bankruptcy July 18, former Treasurer Andy Dillon testified today.

Dillon was shown emails he exchanged with Gov. Rick Snyder July 9. In one email, Dillon told the governor about the status of a possible bankruptcy filing.

“We remain, in many ways, at the informational stage,” Dillon emailed Snyder.

“That was true, was it not?” asked William Wertheimer, a lawyer representing current and retired Detroit employees, who are objecting to Detroit receiving bankruptcy relief.

“I believe so, yes,” Dillon said.

“Did anything happen between the 9th and the 18th to take it out of the informational stage?” the lawyer asked.

“We were getting more information and the numbers kept getting worse for the funding level of the pension funds,” Dillon said. “As we learned new facts, the health of the pension funds seemed to be getting worse.”

Emergency Manager Kevyn Orr claims the city’s pension funds have an estimated $3.5 billion shortfall. Pensions face cuts if Detroit is eligible for bankruptcy relief.

Andy Dillon

Former state Treasurer Andy Dillon took the witness stand shortly after 11:30 a.m. and testified that bankruptcy was the “last resort” to restructure Detroit’s finances.

A dour-looking Dillon was escorted into U.S. Bankruptcy Judge Steven Rhodes’s courtroom through a side entrance, the same entrance used earlier by Gov. Rick Snyder and Emergency Manager Kevyn Orr.

Dillon stepped down from public office last week following months of personal turmoil.

Dillon acknowledged that bankruptcy was discussed as early as March 2012, but not the preferred option for Detroit.

Kevyn Orr

“Even the thought at that time was we did want to get to a consent agreement,” to restructure the city’s finances, Dillon testified. “It was always the last resort option for us.”

Dillon also recounted meeting Emergency Manager Kevyn Orr for the first time in January. At the time, Orr was a partner of the law firm Jones Day, which was pursuing a lucrative deal to restructure the city’s finances.

Around the same time, Snyder aide Richard Baird started courting Orr to take the emergency manager post.

“He was impressive and someone we should consider,” Dillon said.

Willliam Wertheimer, a lawyer for several Detroit retirees and current workers, asked Dillon whether it was appropriate to court Orr for the emergency manager job while his law firm pursued a city restructuring deal.

Hiring Orr “would neither help nor hinder” Jones Day, Dillon said.

Gov. Rick Snyder and Emergency Manager Kevyn Orr the day after Detroit filed bankruptcy.

A UAW lawyer appeared to solve the riddle today of how Detroit and the state Attorney General’s office were tipped off on July 18 that the city’s pension funds were about to try and block a bankruptcy filing.

UAW General Counsel Michael Nicholson described a frantic drive to Lansing on July 18, rushed phone calls and a legal brief written in the back seat of a car and described legal maneuvers that ultimately prompted Detroit to file the biggest municipal bankruptcy case in U.S. history July 18 — one day earlier than planned.

Nicholson testified that he learned early on July 18 that lawyers for the Detroit pension funds were driving to Lansing to ask a judge for a temporary restraining order that would block Detroit from filing bankruptcy.

At the time, Nicholson was in his office at the UAW’s Solidarity House with attorney William Werthheimer, writing a brief relating to a separate lawsuit filed by Detroit retirees and workers against the city.

They got a phone call telling them that the pension funds had an emergency hearing in the afternoon of July 18 in an Ingham County court.

“Bill and I decided we had to go to Lansing anyway, and that this hearing would probably be important, so we would finish it in the car and had to get there in time for the hearing,” Nicholson said.

“Was there any discussion about if the state should be notified about the (temporary restraining order)?” UAW bankruptcy lawyer Peter DeChiara asked.

“Yes, we were finishing the brief and I was in the backseat of the car typing away,” Nicholson said.

“This was in the car on the way to Lansing?” DeChiara asked.

“Yes,” Nicholson said.

“Bill asked me, do you think we should notify the state?” DeChiara asked, referring to the pending temporary restraining order request.

“I took it as an ethical question — practical ethics,” Nicholson said. “What’s the right thing to do? I said ‘yeah.’ I think we have to. It’s not in our interest, but it’s the right thing to do.”

So Wertheimer called the state Attorney General’s Office, Nicholson said.

An assistant attorney general thanked them for the heads up.

“He said how much he appreciated Bill’s ethical behavior,” Nicholson said.

The phone call to the Attorney General’s office was round 3:35 p.m.

“How can you put it in such as tight timeframe?” DeChiara asked.

Nicholson said he had sent an email around the same time and he later reviewed Wertheimer’s cellphone records.

Detroit filed bankruptcy at 4:06 p.m. — 31 minutes after the call to the state Attorney General’s office.

The filing was initially dated July 19, but someone wrote in a new date: “July 18.”

Detroit Emergency Manager Kevyn Orr and his restructuring team did not negotiate with the UAW over proposed health care cuts, the union’s lawyer testified today.

General Counsel Michael Nicholson tried to underscore the lack of good faith negotiations with creditors before the city filed Chapter 9 bankruptcy July 18. Without good faith talks, the city could be ineligible for bankruptcy relief.

Nicholson focused on a July 11 meeting with Orr’s team, days before the city filed bankruptcy.

“To what extent were their negotiations?” UAW lawyer Peter DeChiara asked Nicholson.

U.S. Bankruptcy Judge Steven Rhodes

“There were negotiations that we tried to initiate with the city,” over health care cuts, Nicholson said. “We invited them to negotiate through a class-action process.

“We asked for that to be taken back to Mr. Orr and Mr. Orr never responded to us or his lawyers, ever.”

Nicholson’s testimony sparked a contentious exchange with U.S. Bankruptcy Judge Steven Rhodes, who last week snapped at Orr during the emergency manager’s testimony.

“Given that lack of response, is what occurred negotiations?” DeChiara asked.

“In my view, the first step is to…” Nicholson said, before being interrupted by the judge.

“That’s not an answer,” the judge said.

“I have to explain,” Nicholson said.

“No you don’t,” the judge said.

“The first step…,” Nicholson said before, again, being interrupted by the judge.

“If that’s your answer,” Rhodes said, “we’ll move on.”

UAW General Counsel Michael Nicholson

The UAW was unwilling to negotiate any cuts to vested Detroit retiree pensions because the benefits are protected by the state constitution.

UAW General Counsel Michael Nicholson described the union’s stance after Emergency Manager Kevyn Orr signaled June 14 that retiree pensions would be slashed to help restructure the city’s $18 billion in debts. The cuts would impact an estimated $3.5 billion shortfall in the city’s pension funds.

“Was the UAW willing to negotiate with the emergency manager over reductions in accrued pension benefits?” UAW bankruptcy lawyer Peter DeChiara asked.

“No,” Nicholson said.

Gov. Rick Snyder

“Why not?” the lawyer asked.

“The Michigan constitution…we believe is binding on the UAW, all citizens of Michigan, including the governor,” Nicholson said, “and precludes the impairment or diminishment of benefits. It would be in violation of state law for us to do that.

“We also believe that only the citizens of the state of Michigan, through the amendment process, can change that legal fact. And that hasn’t happened. The governor and Orr cannot amend the constitution.”

Nicholson also faulted the city for asking creditors to sign non-disclosure agreements before getting access to the city’s financial data.

“Good faith negotiations cannot occur without access to information,” Nicholson said.

UAW General Counsel Michael Nicholson

Emergency Manager Kevyn Orr and his team muzzled creditors during a key June 14 meeting during which the team unveiled plans to restructure the city’s $18 billion in debts, according to testimony.

Peter DeChiara

UAW General Counsel Michael Nicholson said he attended the June 14 meeting at Detroit Metropolitan Airport and said attendees, including bondholders, unions, pension funds and retiree groups, were not allowed to speak freely. Instead, they had to submit written questions.

Nicholson’s testimony is aimed at convincing U.S. Bankruptcy Judge Steven Rhodes that the city failed to negotiate in good faith with creditors and is not eligible for bankruptcy relief.

“Have you ever participated in negotiations in which one side was not allowed to speak freely?” UAW lawyer Peter DeChiara asked.

“I have never, never been involved in a negotiation when only one side speaks,” Nicholson said.

One month after the meeting, on July 18, Orr filed the biggest municipal bankruptcy case in U.S. history.

The city’s largest union never made a counter proposal regarding proposed health care changes before Detroit filed bankruptcy July 18, according to testimony.

Geoff Stewart

The city is fighting objectors who argue the city never negotiated in good faith before filing bankruptcy. The city is suggesting AFSCME didn’t negotiate in good faith and failed to make a counter-proposal.

“Did your union propose a counter-proposal?” city bankruptcy lawyer Geoff Stewart asked AFSCME’s collective bargaining director Steven Kreisberg.

“We never provided one,” he said.

“That wasn’t my question,” Stewart said. “Did you prepare one?”

“I did not,” Kreisberg said.

“Did your union prepare a proposal?” the lawyer asked.

“Post-petition we proposed one on health care,” Kreisberg said.

AFSCME’s legal team has argued there wasn’t enough time between Emergency Manager Kevyn Orr’s restructuring proposal on June 14 and the bankruptcy filing July 18 to negotiate concessions in good faith.

Detroit bankruptcy lawyers, including Heather Lennox, right, outside federal court.

The city will delay changing health care coverage for retirees who are not eligible for Medicare until Feb. 1.

City bankruptcy lawyer Heather Lennox made the announcement Tuesday while urging U.S. Bankruptcy Judge Steven Rhodes to wait two weeks before deciding whether to block the city from implementing significant health care changes.

Lennox said changes that were supposed to take effect Jan. 1 will be delayed one month due to problems with the Obamacare website.

“To allow non-Medicare retirees to have time to enroll, the city has decided to extend their current coverage until Jan. 31,” Lennox told the judge

A lawyer for retirees urged against a delay and Rhodes refused to delay hearing a request for a preliminary injunction.

“There is, I think it’s fair to say, enough confusion created by the rollout of the Affordable Care Act at this point in time that to add to it or compound it in the way the city proposes here is really not necessary and not fair to the retirees,” Rhodes said.

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.

Retirees have sued to block the changes from being implemented by the city. Lennox said the proposed changes are subject to mediation talks scheduled for Wednesday in federal court.

Emergency Manager Kevyn Orr doesn’t have a lot of time to get Detroit in and out of bankruptcy court and restructure $18 billion in debts. John Wayne Ballester, however, has plenty of time.

That’s why the 47-year-old Texas man tried to bigfoot Orr late last month and take over the gig restructuring Detroit’s finances without hocking Hokusais. In a handwritten letter to U.S. Bankruptcy Judge Steven Rhodes, Ballester offered his talents, which do not include robbing banks.

Robbing banks landed the career criminal a 32-year federal prison sentence. He won’t get out until 2025. With nothing to do, except recruit pen pals, he tried to step into the biggest municipal bankruptcy filing in U.S. history.

His Oct. 22 letter to Rhodes had penmanship so perfect it looked like a computer font:

“Movant submits that given the opportunity and a reasonable period of time, the authority, and the necessary resources he could fashion a framework for compensating the city’s creditors without liquidating its assets or endangering its citizens or businesses.”

The kicker was in his closing paragraph:

“Movant prays this honorable court, in the interest of justice and equity, grants the foregoing and fashions an order establishing movant as pro tempore mayor of the city of Detroit for the sole purpose of discharging the city’s debts and establishing a surplus.”

On Monday, the eve of the mayoral election, Rhodes let the convicted bank robber down easy — not a bad idea considering Ballester is a three-time loser with convictions for battery on a law enforcement officer, armed robbery and aggravated assault on a law enforcement officer.

“The Court finds that the motion is frivolous. Accordingly, the motion is denied.”

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