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Bankruptcy not a topic in early talks with state, Detroit emergency manager says

By Joseph Lichterman and Bernie Woodall

DETROIT (Reuters) - Detroit Emergency Manager Kevyn Orr did not speak about filing for Chapter 9 municipal bankruptcy in his first meetings with Michigan state officials before he was named to his post, according to testimony he delivered on the third day of the city's bankruptcy eligibility trial.

Orr's testimony came in the last 50 minutes of Friday's session, which offered only a brief glimpse of what may be the most critical testimony as Detroit seeks to establish a case that it is bankrupt and has a right to work out its stark financial problems under protection of a bankruptcy court.

Orr said he first met with Gov. Rick Snyder's staff on January 29 when representing his former law firm, Jones Day, as part of a team pitching to advise the state on how to restructure Detroit. Orr subsequently met several times with Michigan officials in February, and a Chapter 9 filing was not discussed in those meetings, Orr said in response to questions.

Gov. Snyder named Orr to the emergency manager job on March 25. Orr said he at first resisted the appointment because he anticipated the strain on his family, including two young children.

In a lighter moment under questioning from Gregory Shumaker, a former Jones Day colleague, Orr said he was surprised his wife allowed him to take the demanding emergency manager job and move from the Washington, D.C., area to his post in Detroit. "I thought she would shut it down fairly quickly," Orr said.

When Orr returns to the stand on Monday, he likely will be asked to explain his efforts to negotiate with the city's numerous creditors, including retirees and pension funds, before the city filed for the largest-ever Chapter 9 municipal bankruptcy on July 18.

The questions to Orr Friday afternoon were confined largely to a review of his career before being appointed by Snyder to be emergency manager in late March.

Snyder also is expected to testify Monday.

In testimony earlier on Friday, Detroit Police Chief James Craig, whom Orr appointed on July 1, mainly spoke of the "deplorable" condition of the department when he assumed the job.

Two-thirds of the city's police cars were worn out, and it took 50 minutes on average for Detroit police to respond to an emergency call, Craig said.

Craig, a Detroit native who returned after stints as police chief in Cincinnati and Portland, Oregon, after more than two decades at the Los Angeles Police Department, compared Detroit's response time with those in other cities. It takes seven minutes in Los Angeles, five to six minutes in Cincinnati, and three to four minutes in Portland for police to respond to an emergency call, he said.

Still, most of the session on Friday was dedicated to the testimony of Kenneth Buckfire, one of the city's top consultants, who testified that cuts to public pensions and retiree healthcare were inevitable given Detroit's sagging financing.

A key claim made by attorneys representing the city's unions, retirees and pension funds is that Orr and his team were intent on filing for bankruptcy and did not make best efforts to negotiate with them prior to the bankruptcy filing. They also claim that plans to cut pensions would violate the Michigan Constitution.

But Buckfire said he did not have to recommend to Orr that pensions for the city's retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion (11.4 billion pounds).

Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them.

"It was a function of the mathematics," said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr.

"Are you saying it was so self-evident that no one had to say it?" asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes.

"Yes," Buckfire answered.

Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city's pensioners, 16 cents on the dollar. There are about 23,500 city retirees.

On Thursday, Buckfire was questioned by attorneys from Jones Day, the city's attorneys in the bankruptcy filing.

This portion of the trial is to determine whether the city is eligible to undergo Chapter 9 restructuring. To qualify for bankruptcy, Detroit must prove the city is insolvent and that it negotiated in good faith with creditors, or that there were too many creditors for negotiations to be feasible. The city also must prove it desires to enact a restructuring plan.

U.S. District Court judge Steven Rhodes, presiding over the trial expected to last at least through next Tuesday, is not expected to rule until at least mid-November on whether the city is eligible to undergo restructuring in bankruptcy.

The city has said about half of its liabilities stem from retirement benefits, including $5.7 billion for healthcare and other obligations, and $3.5 billion involving pensions.

Meanwhile, the Detroit City Council opted on Friday not to propose an alternative to a $350 million debtor in possession financing commitment that Orr secured from Barclays PLC last week. The council previously rejected the Barclays deal, which is subject to approval by the federal bankruptcy court. Orr wants to use a portion of the money from the deal to end costly interest-rate swap contracts at a discount.

"It's unfortunate that the city council has decided to again say no to an important restructuring component to the city without proposing a viable plan or alternative of their own," said Bill Nowling, Orr's spokesman.


As the cross-examination of Buckfire began Friday morning, Nowling said on Twitter, "the journey up the River Denial continues for union and creditors attorney(s)."

In an exchange with attorney Lynn Brimer, representing the Retired Detroit Police Members Association, Buckfire testified that the state and Jones Day were talking about filing for a Chapter 9 bankruptcy at least as early as March 2012. But he said negotiating with creditors was preferable and that bankruptcy was an option of last resort.

Buckfire said that Orr told him that the city decided to file for Chapter 9 bankruptcy on July 18 rather than the following day as had been planned.

"He said they were concerned about losing control of the process," Buckfire recalled Orr telling him.

Detroit's filing on July 18 came less than 10 minutes before lawyers for the city's pension funds and retirees had rushed to another court to try to block it, according to attorneys who were present in a Lansing, Michigan, courthouse at the time.

The two pension funds were seeking to safeguard Detroit retiree pension benefits by challenging the authority of Snyder to authorize a bankruptcy proceeding, because of protections for pensions in the state's constitution.

(Additional reporting Karen Pierog in Chicago; Editing by Gunna Dickson and Ken Wills)