Detroit bankruptcy judge waits on whether city gets bankruptcy relief

Detroit’s bankruptcy judge said Friday he would rule later whether the city is eligible for Chapter 9 bankruptcy relief.

A decision is not likely for days from U.S. Bankruptcy Judge Steven Rhodes, who set a Wednesday deadline for additional briefings from lawyers representing the city, unions, retirees and pension funds.

Rhodes listened to nine days of testimony and arguments during a trial involving the biggest municipal bankruptcy case in U.S. history. The case is being closely watched around the country for its possible implications on the municipal bond market and other struggling cities.

Detroit’s legal team Friday argued the city is eligible for Chapter 9 relief and should be spared the chaos of coping with $18 billion in debt outside bankruptcy court.

Objectors, including unions, pension funds and retiree groups, spent hours delivering closing arguments and labeled the bankruptcy filing unconstitutional because it would slash pensions. They also argued the July 18 bankruptcy was not properly authorized and came after Emergency Manager Kevyn Orr failed to negotiate concessions in good faith.

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Detroit’s bankruptcy judge said Friday he would rule later whether the city is eligible for Chapter 9 bankruptcy relief.

A decision is not likely for days from U.S. Bankruptcy Judge Steven Rhodes, who set a Wednesday deadline for additional briefings from lawyers representing the city, unions, retirees and pension funds.

Rhodes listened to nine days of testimony and arguments during a trial involving the biggest municipal bankruptcy case in U.S. history. The case is being closely watched around the country for its possible implications on the municipal bond market and other struggling cities.

Detroit’s legal team Friday argued the city is eligible for Chapter 9 relief and should be spared the chaos of coping with $18 billion in debt outside bankruptcy court.

Objectors, including unions, pension funds and retiree groups, spent hours delivering closing arguments and labeled the bankruptcy filing unconstitutional because it would slash pensions. They also argued the July 18 bankruptcy was not properly authorized and came after Emergency Manager Kevyn Orr failed to negotiate concessions in good faith.

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Detroit’s bankruptcy judge saved tough questions for the end of the city’s eligibility trial, grilling Detroit’s top bankruptcy lawyer and a state lawyer.

After grilling the city’s lead lawyer, U.S. Bankruptcy Judge Steven Rhodes asked a state lawyer about the new emergency manager law that replaced one overturned by voters in November 2012.

The new law — enacted a month later during a lame-duck session — included an appropriation that insulated the law from being overturned by voters again.

“Am I missing something?” the judge asked Matthew Schneider, chief legal counsel for the Attorney General’s Office. “So putting an appropriation in the bill has the effect of denying what would otherwise be a right of referendum?”

“But plenty of bills have appropriations,” Schneider said.

“Do they?” the judge asked. “There’s no evidence of that. Let’s assume that’s true. Does it show anything other than that the legislature often violates the right of referendum?”

The city’s creditors have argued the emergency manager law, which allowed the governor to authorize the Detroit bankruptcy, is unconstitutional.

The city’s eligibility trial neared a tense finish Friday after a federal judge asked whether Emergency Manager Kevyn Orr mislead retirees by saying their pensions were sacrosanct — a month before filing a bankruptcy case that threatens drastic cuts.

U.S. Bankruptcy Judge Steven Rhodes

U.S. Bankruptcy Judge Steven Rhodes

A dramatic exchange between the city’s lead lawyer and U.S. Bankruptcy Judge Steven Rhodes followed a nine-day trial in the biggest municipal bankruptcy case in U.S. history and focused on whether the city negotiated with creditors in good faith — a requirement of Chapter 9 law.

Rhodes wanted to know whether Orr mislead a retiree during a June 10 public meting when he said pensions would be untouched amid Detroit’s restructuring. The judge is weighing whether the videotaped comment, and a second statement that there was only a “50-50 chance” of a Detroit bankruptcy, shows Orr negotiated in good faith with creditors.

“This may not have been the moment he used the best words,” city lawyer Bruce Bennett said. “If your honor believes the statement was misleading, it was corrected three…or four days later.”

On June 14, Orr unveiled a restructuring proposal that prescribed unspecified pension cuts.

Bruce Bennett

Bruce Bennett

“The entire proposal was put on the web,” Bennett said.

“But not on the 10th,” the judge said.

“At a maximum, there was a three- or four-day period where there was misinformation,” Bennett said.

There were only 200 people at the public meeting, Bennett argued.

“It’s bad, but there are 685,000 residents and 23,000 retirees,” Bennett said. “Mistakes happen. I can’t do anything about this one.”

The judge shifted to Orr’s claim in June that there was only a “50-50″ chance of Detroit filing bankruptcy. The city filed bankruptcy July 18.

“It was a very optimistic view,” Bennett said. “He was entitled to be optimistic.”

“But doesn’t that raise a question about what he really thought?” the judge asked.

“He was hoping negotiations would succeed,” Bennett said.

“But on June 10, did he really believe there was a 50-50 chance he would succeed?” the judge said.

“I’m the wrong person to ask,” Bennett said.

“You’re his lawyer,” the judge said. “You’re his lawyer.”

The judge asked Bennett to point to evidence that Orr genuinely believed the odds were 50-50 and that he wasn’t knowingly misleading retirees.

“Given the assertion of bath faith, that’s not our problem,” Bennett said. “That’s the objectors’ problem. There is no evidence on that point.”

“Well, alright,” the judge said, “let me ask the next question: Assuming both were misleading, what impact should that have on the court’s analysis of good faith here. That’s ultimately the point.”

“Your honor, it should have no impact at all,” Bennett said. “You have seen a mountain of evidence of a careful, deliberative process to pull together the best reorganization process anyone could put together.”

Orr’s comments do not reflect on whether the city negotiated in good faith, Bennett said, because negotiations did not start until after June 14.

“Mistakes happen,” Bennett said, “and more will. Nothing that happened before negotiations inform whether the city negotiated in food faith.”

The Detroit bankruptcy trial went into overtime Friday with rebuttal arguments expected to finish around 6:30 p.m.

U.S. Bankruptcy Judge Steven Rhodes let lawyers continue arguing about Detroit’s eligibility for Chapter 9 bankruptcy relief.

Detroit’s lead bankruptcy lawyer Bruce Bennett offered to come back Tuesday to finish rebuttal arguments but Rhodes wanted to finish tonight after a nine-day trial.

Bennett said he wanted to offer a detailed rebuttal after saying retiree lawyer Claude Montgomery accused Gov. Rick Snyder, aide Rich Baird and Emergency Manager Kevyn Orr of lying about the city’s bankruptcy planning and negotiations with creditors.

Detroit’s 10-year restructuring proposal shared with creditors June 14 was dead on arrival and never intended to be accepted by bondholders, retirees, unions and others, a lawyer said Friday.

Retiree lawyer Claude Montgomery said the June 14 proposal, which prescribed deep cuts to pensions and others, is evidence Detroit failed to negotiate in good faith — a requirement of Chapter 9 bankruptcy law.

“DOA is another way of saying it,” Montgomery said while urging U.S. Bankruptcy Judge Steven Rhodes to kick Detroit out of bankruptcy court.

“It wasn’t supposed to be acceptable,” the lawyer added.

He pointed to testimony from former state Treasurer Andy Dillon, who thought the proposal for unsecured creditors was too low.

“If you put something on the table that nobody can accept, where’s the good faith?” Montgomery said. “We think the logical inferences to be drawn by the court are that the players, the emergency manager, lacked the requisite intent to be a good faith actor in this drama and therefore you must find the city is not eligible.”

Protestors carry signs that depicts Michigan Gov. Rick Snyder as a devil during a rally in front of federal court Monday. (Photo by Bill Pugliano/Getty Images)

Protestors carry signs that depicts Michigan Gov. Rick Snyder as a devil during a recent rally in front of federal court. (Photo by Bill Pugliano/Getty Images)

Emergency Manager Kevyn Orr, a veteran bankruptcy lawyer, was chosen by Gov. Rick Snyder to lead a march into bankruptcy court, a retiree lawyer said Friday.

The city’s restructuring plan and public statements about negotiating in good faith with creditors were misleading, Detroit avoided selling assets to raise money for creditors and did not treat retirees fairly, retiree attorney Claude Montgomery said during closing arguments.

Montgomery is making one last argument for why Detroit is not eligible for Chapter 9 bankruptcy relief following a nine-day trial. He is the lawyer for the official committee of retired city workers, which represents more than 23,500 retired municipal workers who are fighting plans to slash constitutionally protected pensions.

 

On April 10, 1922, the Detroit Fire Department celebrated its final run using horses. Clomping out Engine Co. No. 37, horses Pete, Jim and Tom pull the steam pumper while Babe and Rusty pull the hose cart. Fifty thousand weeping Detroiters viewed the final run that marked the end of an era. (The Detroit News)

Forget good-faith negotiations. Detroit didn’t negotiate with retirees at all and hatched a scheme to claim in bankruptcy court that negotiations were impractical, said a lawyer representing about 12,000 retired city employees.

Ryan Plecha

Ryan Plecha

The only meeting retirees had was a conversation between former state Treasurer Andy Dillon and a retiree union leader, retiree attorney Ryan Plecha said during closing arguments Friday.
During the meeting, Dillon said retirees and their pensions were protected by the state constitution, said Plecha, who represents retired cops and firefighters.

“He told retirees they had protection from the oncoming financial storm, or upcoming war, and need not worry,” Plecha said.

Dillon was wrong, Plecha said, and now retirees face pension cuts if Detroit is eligible for Chapter 9 bankruptcy relief.

“The only individual meeting with retirees was based solely on misinformation and can in no way constitute negotiations, let alone good-faith negotiations.”

Detroit Police Commandos: A 12-man riot squad deploys in V-formation for action on July 15, 1948. (The Detroit News)

Detroit used every tool in its legal and political toolkit to avoid negotiating in good faith with public safety unions, a union lawyer said Friday.

Barbara Patek

Barbara Patek

“We believe in order to solve this problem, and knowing what it knew, thatthe city had an obligation to begin negotiations much, much sooner,” public safety union lawyer Barbara Patek said during closing arguments in Detroit’s bankruptcy eligibility trial. “Why didn’t they? I’m not certain. I’m going to suggest they passed up an opportunity to begin to solve a significant portion of this process.”

Patek said the city’s stance made it inevitable that Detroit’s legal team would claim negotiations with creditors were impractical — a requirement the city must satisfy in order to be eligible for bankruptcy relief.

William Wertheimer

William Wertheimer

Detroit rushed to file its bankruptcy petition July 18 after Gov. Rick Snyder let politics influence his decision regarding Detroit’s restructuring, a retiree lawyer said Friday.

Lawyer William Wertheimer, who represents several retired and current Detroit workers, has accused Detroit of filing bankruptcy to avoid being restrained by a state court judge from filing Chapter 9.

Gov. Rick Snyder

Gov. Rick Snyder

The rush is evidence that the city failed to negotiate in good faith with creditors, an argument that prompted a question from U.S. Bankruptcy Judge Steven Rhodes.

Rhodes said “many many” bankruptcy filings are prompted by creditors threatening actions such as foreclosing on a home or trying to repossess cars.

“I think in my experience it’s fair to say that many, many bankruptcy filings, maybe even most bankruptcy filings, are precipitated by creditor action, and so even if this one was, why is that evidence of bad faith?” Rhodes asked.

“Because the governor took an oath,” Wertheimer said. “We think it is different when it is a governor rushing to court to avoid a state court decision that he believes will be politically damaging to him and make it more difficult to maintain his political position that there should be no financial support from the state and that this bankruptcy should go forward without condition.”

“Battle of the overpass,” by James Kilpatrick, May 26, 1937. UAW officer Richard Frankensteen is attacked by Ford Motor Company security officers.

It was not impractical for Detroit to negotiate concessions with the UAW and other creditors, the labor union’s lawyer said Friday.

“Impractical? I don’t believe so,” UAW attorney Thomas Ciantra said during closing arguments Friday.

Ciantra was attacking one of the city’s central arguments for why Detroit is eligible for Chapter 9 bankruptcy relief.

“The financial crisis was known for years,” Ciantra said. “There is no reason why (negotiations) could not have been addressed beforehand. Indeed, here, the unions had a history of coalition bargaining over concessions.”

The state and Emergency Manager Kevyn Orr are trying to bankroll Detroit’s rebirth on the backs of retirees, the UAW’s bankruptcy lawyer said.

UAW lawyer Thomas Ciantra made the claim during closing arguments in Detroit’s bankruptcy eligibility trial.

Thomas Ciantra

Thomas Ciantra

The strategy is illegal because it relies on slashing pensions, which are protected by the state constitution, Ciantra said.

Orr is using Chapter 9 bankruptcy to gut constitutionally protected pensions so “the financially vulnerable retirees of the city may be used to finance a rather extensive restructuring plan the emergency manager has promulgated,” Ciantra told U.S. Bankruptcy Judge Steven Rhodes. “No one can deny there is a fiscal problem here. No one can deny there is a need for reinvestment. The question is: Who is going to pay for that?”The city should never have proposed slashing pensions, he said.
That prompted the judge to interrupt.The judge asked whether Ciantra was arguing that it was impractical for the city to negotiate pension cuts.If so, the city could satisfy one requirement of being eligible for bankruptcy relief.””It may have been difficult,” Cianta said.”But apart from that, what I’m hearing you say is it would not have been in good faith for the city to even attempt to negotiate directly on impairing their pension benefits,” Rhodes said.”Yes,” Ciantra said. “That was bad faith. The pensions were the third rail.”

Ciantra agreed that Detroit’s restructuring team could have tried to negotiate changes to health-care benefits.

“The pensions are a piggy bank they cannot touch,” Ciantra said. “There’s no safety net to those benefits here, unlike the bondholders,” who have insurance.

Criminal Justice Institute, 6001 Cass: Mayor Coleman A. Young spoke to 97 laid-off Detroit Police officers who were reinstated on Aug. 26, 1981.

A lawyer for retired Detroit cops tried to use the words of the Attorney General’s Office’s chief legal counsel against him while trying to kick the city out of bankruptcy court.

Lynn Brimer

Lynn Brimer

This morning, Matthew Schneider delivered a closing argument heavy on weather themes, calling Detroit’s economic woes an “impending storm.”

“I would probably argue that those of us in the courtroom who live in or near the city would not disagree that weather reports for the city, sadly, have in fact deteriorated over the past few years,” said Lynn Brimer, who represents retired Detroit police officers. “However, an impending storm, and poor weather reports, are simply not a basis for the state, the governor and treasurer to disregard the constitutional rights of the citizens of the state of Michigan.”

Brimer argues the city’s bankruptcy filing is unconstitutional because it would slash pensions, which are protected by the state constitution.

Emergency Manager Kevyn Orr and his consultants negotiated in bad faith and predetermined that Detroit would file bankruptcy, Brimer said.

“The record is replete with that evidence,” she said.

If U.S. Bankruptcy Judge Steven Rhodes finds Detroit failed to negotiate in good faith, the city could get kicked out of bankruptcy court.

U.S. Bankruptcy Judge Steven Rhodes

U.S. Bankruptcy Judge Steven Rhodes

Detroit’s restructuring team and the governor’s office gambled that a bankruptcy judge would let them “run roughshod” over the state constitution, which protects vested pensions, according to a lawyer for the city’s pension funds.

There were viable alternatives to slashing retiree pensions but the city never pursued one, pension fund lawyer Robert Gordon said during closing arguments Friday.

“Instead, they took their chances they could run roughshod over the pensions clause and the state constitution,” Gordon said.

U.S. Bankruptcy Judge Steven Rhodes froze him with a question.

Robert Gordon

Robert Gordon

“Your client submitted no evidence that there was a viable way for the city to propose a restructuring of its retirement program,” Rhodes said.

“Your honor, that’s, hmm,” Gordon said. “That’s putting the shoe on the wrong foot.

“If the city had asked us to have a conversation, we would have been happy to.”

“My question was what do I do? There is no evidence that there was a viable alternative plan,” Rhodes said. “I don’t know whether there is or not, all I know is what’s here in the evidence.

“You didn’t submit any evidence that there was a viable plan,” the judge said. “What inference do I draw from that?”

Gordon ended his closing argument minutes later.

“Who’s next?” the judge said.

City of Detroit worker Alonzo Griffin joined protestors recently outside federal court. "They're going to take our pension, we say it's unconstitutional, we worked for that pension, they shouldn't take our pension."  "They want to take the crumbs off the table from us and that's just not right."   (Image by Daniel Mears/ The Detroit News)

City of Detroit worker Alonzo Griffin joined protestors recently outside federal court. “They’re going to take our pension, we say it’s unconstitutional, we worked for that pension, they shouldn’t take our pension.” “They want to take the crumbs off the table from us and that’s just not right.” (Image by Daniel Mears/ The Detroit News)

There was not enough time for good faith negotiations before Detroit filed the biggest municipal bankruptcy in U.S. history and Detroit should be kicked out of bankruptcy court, a pension fund lawyer said Friday.

Attorney Robert Gordon launched his closing argument by accusing Detroit of failing to follow the law before taking the “extraordinary step of filing bankruptcy” July 18.

“There simply was not enough time for good-faith negotiations,” Gordon told U.S. Bankruptcy Judge Steven Rhodes.

Gordon represents two Detroit pension funds that are urging the judge to kick Detroit out of bankruptcy court. Detroit is ineligible for Chapter 9 relief because the city failed to negotiate in good faith and it is unconstitutional to cut vested public employee pensions.

Jennifer Green

Jennifer Green

The 34 days between Detroit’s presentation of a debt-cutting proposal June 14 and its bankruptcy filing was not enough time for good faith negotiations, an attorney for the city’s pension funds said Friday.

Attorney Jennifer Green used her time during closing arguments to walk U.S. Bankruptcy Judge Steven Rhodes back through a lengthy and succinct timeline she put together about the behind-the-scenes deliberations that preceded the July 18 filing.

Good faith negotiations are a requirement for Detroit to be eligible for Chapter 9 bankruptcy.

To do so, she tried to beat back state attorney Matthew Schneider’s arguments this morning that a financial “storm was headed toward the city of Detroit” over the past two years.

“They said the storm was coming for two years but then only gave people 30 days to prepare,” Green argued.

The pension funds sued the city on July 16 in a last-ditch effort to block Gov. Rick Snyder from authorizing the bankruptcy filing under Public Act 436, the state’s emergency manager law.

Sharon Levine

Sharon Levine

The American Federation of State, County and Municipal Employees attorney Sharon Levine came out swinging Friday afternoon in her closing argument against Detroit being eligible for bankruptcy protection from its creditors.

In a fiery courtroom speech, Levine told U.S. Bankruptcy Judge Steven Rhodes that he would set a “dangerous precedent” if he allows Detroit to proceed forward with its stated plans to slash pension benefits in the debt-cutting phase of bankruptcy.

“It will be a road map for governor’s across the country to use Chapter 9 to create a self-created emergency” to slash vested pension benefits, Levine argued.

She argued the city hasn’t “demonstrated insolvency” after Detroit’s legal team only put paid “a flock of financial consultants” on the witness stand, instead of calling in expert witnesses to attest to the city’s inability to pay its bills.

Emergency Manager Kevyn Orr sent powerless underlings to creditor meetings but that does not show a lack of good faith, Detroit’s bankruptcy lawyer said.

Lawyer Bruce Bennett tried to combat complaints from creditors that they attended meetings aimed at reaching concessions but were met by Orr’s advisers, who were not authorized to negotiate deals.

“The reality is that representatives of the city were there to collect feedback and figure out what to do about it,” Bennett said during closing arguments. “They had the ability to make recommendations to a single person who…could instantly or very promptly recommend what to do. That Orr was not in the room does not make a difference.”

 

City unions and pension funds disputed the exact shortfall in the city’s retirement system, refused to accept any pension cuts and balked, initially, at representing retirees during talks, Detroit’s bankruptcy lawyer said.

Attorney Bruce Bennett shot down arguments that Detroit rushed into bankruptcy court instead of spending more time negotiating concessions with creditors.

“Spend more time? The city didn’t have more time,” Bennett said during closing arguments in Detroit’s bankruptcy eligibility trial. “There was constant tension between spending more time in negotiations and facing more instability and risk.

“What would more time have led to? There was no evidence or any overt indication that the city could have looked at and said ‘there’s a path to a deal.’”

Detroit sensibly prepared for the possibility of a bankruptcy filing but that does not mean the city negotiated in bad faith, the city’s lead lawyer said Friday.

Attorney Bruce Bennett attacked arguments from creditors who pointed to a detailed schedule describing steps the city would take in the event of a bankruptcy filing.

“Pre-bankruptcy planning is not a reflection of a lack of good faith,” Bennett said. “That is sensibly managing affairs in circumstances in which you are under extreme financial pressure and know the only proposal you can afford isn’t so great.”

The city’s finances deteriorated earlier this year to the point that reaching an out-of-court settlement and avoiding bankruptcy decreased substantially, Detroit’s bankruptcy lawyer said.

“It’s harder to get a deal done when there are low recoveries,” attorney Bruce Bennett said during closing arguments. “I don’t think that at any time people thought recoveries could be great.”

The city’s June 14 restructuring plan offered low recoveries, in some cases less than 10 cents on the dollar.

“What they were seeing is the worst situation anyone envisioned,” Bennett said.

But the city tried to reach concessions and negotiated in good faith, he argued.

Detroit faced insurmountable odds of reaching concessions with creditors that could have avoided a bankruptcy filing, but the city tried anyway, lead lawyer Bruce Bennett said Friday.

“You can absolutely believe in your head that this is never going to work but try anyway,” Bennett told U.S. Bankruptcy Judge Steven Rhodes during closing arguments. “That’s what the situation was in this case.”

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

Creditors, including retiree groups and city unions, refused to consider pension cuts, which is evidence that good-faith negotiations were impracticable, Detroit’s bankruptcy lawyer said.

Other union leaders refused to represent retirees in negotiations, attorney Bruce Bennett said while trying to convince U.S. Bankruptcy Judge Steven Rhodes that Detroit is eligible for Chapter 9 bankruptcy relief.

Several witnesses testified “they would never agree to a (restructuring) plan that modified vested pension benefits,” Bennett told U.S. Bankruptcy Judge Steven Rhodes.

Emergency Manager Kevyn Orr wants to slash pensions, which are protected by the state constitution, while restructuring more than $18 billion in debt.

Protestors outside federal court last month.

Protestors outside federal court last month.

Detroit is not emotionally indifferent to the plight of Detroit’s pensioners, who face cuts to retirement benefits if the city is eligible for Chapter 9 bankruptcy relief, Motown’s lead bankruptcy lawyer said Friday.

“This is an issue to which, in a lot of ways, the city is indifferent,” bankruptcy lawyer Bruce Bennett told U.S. Bankruptcy Judge Steven Rhodes said. “Not emotionally indifferent, but legally indifferent.”

Under the restructuring plan, 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.

Bennett attacked arguments from Detroit’s retirement system, which is fighting the city’s estimate that there is a $3.5 billion shortfall in the pension funds.

“It is strange to say that it’s really less,” Bennett said. “The consequences are you’d get lower distribution if the underfunding amount is less than the city believes is right. But nevertheless, we found ourselves… in that strange place.”

skyline river

Detroit is eligible for Chapter 9 bankruptcy relief because the city has a plan to adjust more than $18 bill in in debts — a plan shared with creditors, the city’s lawyer said.

Bankruptcy attorney Bruce Bennett pointed to the June 14 restructuring proposal, which is expected to form the backbone of any plan of adjustment if Detroit is eligible for Chapter 9 relief.

Bennett is ticking off each requirement that Detroit must satisfy in order to be eligible for Chapter 9 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.
Kenneth Buckfire

Kenneth Buckfire

Detroit is insolvent and $18 billion in debt and even pension funds, retirees and unions haven’t seriously fought claims the city is insolvent, Detroit’s lead bankruptcy lawyer said during closing arguments.

“I promised a mountain of evidence,” attorney Bruce Bennett told U.S. Bankruptcy Judge Steven Rhodes. “It wasn’t pretty but it turns out we did, in fact, do that. This evidence was not rebutted by any evidence introduced by anybody.”

Bennett pointed to earlier testimony from the city’s investment banker, Kenneth Buckfire.

“When Buckfire testified, he said he took a hard look at the city’s liquidity and found the city was on a razor’s edge in May,” Bennett said. “This was at a time when vendors were not getting paid on schedule.”

The city’s biggest union, AFSCME, initially claimed that Detroit was not insolvent, and ineligible for Chapter 9 bankruptcy relief, but “I didn’t see them prove anything,” Bennett said.

The city isn’t just insolvent. Detroit is unable to provide police, fire, lighting and other services, Bennett said, pointing to earlier testimony from Police Chief James Craig.

For every $1 in taxes collected by the city, only 57.5 cents is spent on services for residents, Bennett said.

“This has to be addressed,” Bennett said. “This cannot be ignored.”

It is inconceivable to suggest the state schemed to slash vested Detroit retiree pensions, a state lawyer said during closing arguments Friday.

The city is more than $18 billion in debt and the estimated $3.5 billion shortfall in the city’s pension fund is a relatively small slice of Detroit’s liabilities, said the state’s chief legal counsel Matthew Schneider.

“Even if you take out the $3.5 billion in liabilities, the city’s still $14 or $15 billion in debt,” Schneider said. “It is inconceivable to suggest the purpose of seeking the Chapter 9 filing was to get the pensions.”

Schneider insisted the state and city’s restructuring team negotiated with creditors in good faith before filing bankruptcy July 18.

“This world is full of critics,” Schneider said. “The objectors can criticize the governor and state and treasurer and emergency manager because they don’t like where they think this case is headed.

“This is about leadership. By authorizing a Chapter 9 filing, the governor took on an enormous task. He saw the problem was getting worse and no one was solving it. He showed leadership by making the decision to authorize the (bankruptcy) filing. That’s not a showing of bad faith. That’s good faith. It’s good faith to step up and do what is needed to be done to protect the health and safety of the citizens of Detroit.

Retiree groups, unions and pension funds make no logical sense in arguing Detroit and Gov. Rick Snyder were wrong to prepare for a Chapter 9 bankruptcy as a financial storm headed for Motown.

Matthew Schneider, the state’s chief legal counsel, continued his theme that storm drenched Detroit in debt. He attacked arguments from creditors that Detroit’s restructuring team and Snyder schemed to push the city into bankruptcy court after conspiring with bankruptcy lawyers and consultants last year.

“The objectors’ theory appears to be ‘don’t go speaking with weather experts too early, or consultants.’ That must mean you want the storm to come,” Schneider told U.S. Bankruptcy Judge Steven Rhodes. “Their theory, apparently, is the city or state shouldn’t consdier the last resort and shouldn’t be prepared. Don’t even ask if you need a raincoat.

“If you ask, then you want the storm to come,” objectors are arguing, Schneider said. “This makes no logical sense when you have a storm of this magnitude. You want all the help you can get.”

Schneider said the city’s restructuring team and the state “prepared for the worst, but hoped for the best.”

“Years ago, the people of Michigan and citizens of this city started to learn that a tremendous and terrible storm was headed toward the city of Detroit,” said Matthew Schneider, chief legal counsel for the state Attorney General’s Office. “This is no secret.”

Since 2006, Detroit has experienced significant financial problems caused by the loss of residents, the financial challenges of the auto industry, disruption in the financial markets and the country’s overall economic issues.

Bankruptcy is the only solution to deal with more than $18 billion in debts, Schneider told U.S. Bankruptcy Judge Steven Rhodes.

“The impending storm here is not getting better,” Schneider said. “It’s getting worse.”

Panelists for the Oct. 10, 2012 Federal Bar Association's panel discussion, “Between a Rock and a Hard Place: Municipal Entities in Distress” were, left to right, state Treasury Department official Frederick Headen; attorney Edward Plawecki; U.S. Bankruptcy Judge Steven Rhodes; bankruptcy attorney Douglas Bernstein; attorney Judy O’Neill; and Detroit financial consultant Charles Moore of Conway MacKenzie.

U.S. Bankruptcy Judge Steven Rhodes, front center, who is overseeing Detroit’s bankruptcy case, moderated a Oct. 10, 2012 Federal Bar Association panel discussion in Southfield entitled, “Between a Rock and a Hard Place: Municipal Entities in Distress.” Detroit financial consultant Charles Moore, far right, participated in the discussion.

U.S. Bankruptcy Judge Steven Rhodes on Thursday rejected a local activist and freelance writer’s request for a court hearing on his partiality in Detroit’s bankruptcy case.

Detroit resident Diane Bukowski, a retired city worker and editor of the Voice of Detroit blog, wanted the judge to recuse himself from the nearly four-month-old bankruptcy case for not disclosing that he participated in a panel discussion on distressed municipalities last year with one of the city’s witnesses in the on-going eligibility trial.

Diane Bukowski

Diane Bukowski

Rhodes moderated an Oct. 10, 2012 Federal Bar Association panel discussion in Southfield that featured Charles Moore, a city financial consultant with the restructuring firm Conway MacKenzie. Moore testified Oct. 23-24 about the need for Rhodes to be granted Detroit bankruptcy relief from its creditors.

The panel also featured Judy O’Neill, an attorney of Foley & Lardner who helped author Michigan’s former emergency manager law, Public Act 4, and Frederick Headen, an official in the state Treasury Department who was part of the state’s financial review team of city finances last winter.

Bukowski’s complaint claimed Rhodes neglected “to disclose his participation in this forum nearly a year before the instant bankruptcy trial, and to disclose his comments at the forum and his connections with the forum participants constitutes an ‘appearance of impropriety’ and raises questions about his impartiality.”

As evidence of the veteran bankruptcy judge’s alleged impartiality, Bukowski attached to her motion a copy of an article published by the Flint-Genesee County Legal News featuring opinion quotes from all of the participants, except Rhodes.

Rhodes issued a six-page ruling Thursday denying Bukowski’s motion for him to disqualify himself from case, citing case law related to judicial ethics and partiality.

The judge also took the unusual step to speak in his own voice in an official court ruling.

“In this case, a reasonable person with knowledge of all of the facts would know that I was only the moderator of the program and made no presentation at all,” Rhodes wrote. “Instead, my role was limited to introducing the speakers and asking occasional questions to keep the presentations moving, focused and concise. Certainly, I heard the speakers’ presentations and found them informative, but this proves nothing more than my interest in the law and in my community.”

Strap in for about five hours of closing arguments today. Based on court filings and arguments made during the eight-day trial, here’s what you’ll hear:

Bruce Bennett

Bruce Bennett

In this corner: Detroit bankruptcy lawyer Bruce Bennett

Argument: The state constitutional protection of vested retiree pensions is trumped by federal law.

Money quote:

“Indeed, as demonstrated in the City’s prior briefing, far from being forbidden, the pre-emption of state constitutional law – notably, the various state contracts clauses – is a commonplace in municipal bankruptcies.”

Argument II: It is unwarranted for creditors to argue that the emergency manager law violates the state constitution because it allegedly was designed to thwart the referral process. (Legislators included a spending provision insulating the law from being overturned by voters)

Money quote II: 

“The Michigan Supreme Court has made clear that, if the State’s citizens believe its legislators to have been improperly motivated, their recourse is not the judiciary, but the constitutional powers of referendum and initiative and the ballot box.”

Robert Gordon

Robert Gordon

In this corner: Detroit pension fund lawyer Robert Gordon

Argument: Vested pensions “are claims of entitlement which are protected under the State’s highest law, and public employees rely in their daily lives upon the inviolability of these rights. It is widely accepted that cities may separately classify pension obligations and treat them as unimpaired, while materially impairing bondholders and other classes of unsecured creditors…”

Money quote:

“The only way for the City to proceed in Chapter 9 without violating the United States and Michigan Constitutions is to condition the filing on the non-impairment of accrued pension benefits. If the Court were to find that this condition conflicts impermissibly with the Bankruptcy Code, then the City simply is not eligible to be a debtor…and the petition must be dismissed.”

Matthew Schneider

Matthew Schneider

In this corner: The state of Michigan’s Chief Legal Counsel Matthew Schneider

Argument: “The city is eligible for bankruptcy relief because the state emergency manager law and Gov. Rick Snyder’s authorization are constitutional. Objectors’ fail by arguing that the emergency manager law is invalid because it does not exclude pensions from bankruptcies and that Snyder’s authorization is unconstitutional because it did not exclude pensions.

Money quote:

“These arguments fail for three reasons. First, they are not ripe because neither the passage of Public Act 436 nor the authorization has caused or compelled a diminishment or impairment of accrued pension benefits. Second, § 18 of P.A. 436 is not unconstitutional in all applications and the authorization was a valid exercise of discretion. Third, the common understanding of the pension clause does not limit a municipality’s bankruptcy options”

Claude Montgomery

Claude Montgomery

In this corner: Official committee of Detroit retirees lawyer Claude Montgomery

Argument: The city failed to negotiate in good faith — as required by Chapter 9 law — because Orr wants to slash constitutionally protected pensions. Orr also misled people about the size of the Detroit pension fund shortfall — an estimated $3.5 billion.

Money quote:

“The Emergency Manager has admitted that, notwithstanding his sworn oath to uphold the Michigan Constitution, he commenced these proceedings with the express purpose of “trumping” the Michigan Constitution in order to impair vested pension benefits that the Michigan Constitution explicitly provides cannot be impaired.”

Barbara Patek

Barbara Patek

In this corner: Detroit Public Safety unions lawyer Barbara Patek

Argument: Retired cops and firefighters are even more at risk if their pensions – which are protected by the state constitution — are cut because they do not receive Social Security or disability benefits.

Money quote:

“Given the lack of “social security” extended to police and firefighters, including Detroit police and fire fighters, it seems unimaginable that the citizens of Michigan, when they ratified this provision in 1962, thought the protections…could be “trumped” by federal bankruptcy law.”

Lynn Brimer

Lynn Brimer

In this corner: Retired Detroit Police Members Association lawyer Lynn Brimer

Argument: The state emergency manager law – which gave Gov. Rick Snyder the power to authorize Detroit’s bankruptcy — is unconstitutional because it included an appropriation that protected the law from being overturned by voters.

Money quote:

“In this case, we have clear evidence…that the State devised a scheme to insulate PA 436 from a referendum vote, to appoint an emergency manager over Detroit under PA 436 and to compel the filing of a Chapter 9 petition by the City.”

Babette Ceccotti

Babette Ceccotti

In this corner: The United Auto Workers lawyer Babette Ceccotti

Argument: The governor could not approve a bankruptcy petition that would ultimately slash retiree pensions and violate the state constitution.

Money quote:

“Here, the EM—aided by the Governor—embarked upon a plan to cut off the City’s pension funding obligations and use the money for a massive revitalization program, transforming those obligations into bankruptcy claims. Little wonder that pensioners, relying upon their state’s constitution to protect their accrued benefits, didn’t recognize that the Governor and the EM expected them to replicate the voluntary debt compositions of Depression-era bondholders.”

Sharon Levine

Sharon Levine

In this corner: American Federation of State, County and Municipal Employees lawyer Sharon Levine

Argument: The judge should not let Detroit solve its financial challenges by violating fundamentally protected constitutional rights – namely, vested pensions.
Money quote: “If the City cannot dump its toxic waste in violation of state law, surely it cannot put its elderly pensioners in harm’s way by taking away their only source of incomeand violating their constitutional rights.”

 

 

 

Thomas Morris

Thomas MorrisIn this corner: The Detroit Retiree Association parties’ lawyer Thomas Morris

Argument: The city is ineligible for Chapter 9 bankruptcy relief because the state constitution blocks the city from slashing vested pensions.

Money quote:

“The City argues that, if it proposes a plan of adjustment which impairs pensions, it will not have violated the Pensions Clause because confirmation of that plan would be effectuated by court order. The City’s argument is the logical equivalent of saying that a person who uses a gun for a violent purpose is innocent of any wrongdoing. In this analogy, the plan is the bullet, the target is accrued vested pensions benefits, the City is the person holding the gun, and chapter 9 is the gun. The bullet does not get into the gun unless a person loads it. The gun does not fire itself; the person must pull the trigger. The target is not hit if the bullet is not fired.”

 

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