DETROIT -

Local 4's Rod Meloni is in court as a judge overseeing Detroit's bankruptcy is considering a recent agreement to pay off banks and settle millions of dollars in debt tied to an interest rate swap deal.

9:11 a.m.

Kevyn Orr is on the stand this morning discussing the forbearance agreement and we are back where we left off the week prior to Christmas.

Previous story: Detroit reaches deal with 2 banks to pay off debt

Much has happened since then.

The city re-negotiated a settlement with Barclay’s to pay off the “swaps and cops” agreement of 2005-6.

The city is now expected to pay $65 million less than originally agreed to last summer to undo this devastating loan Kwame Kilpatrick took to prop up the city’s pension funds.

Greg Shumaker of Jones Day is questioning Kevyn Orr= on direct examination. It is a continuation of questioning of the week prior to the Christmas Holiday. 

Shumaker: When did you learn about the service corporations?

Orr: Under the home rule act they service corporations were constructed. The city had borrowed 1.44 billion dollars for the pensions. The city had made a profit a $40 million profit. Although the structure was illegal the city was functioning and in fact made money. There were strong representations that the structure was illegal but then it worked, approved by city council and was working.

Orr: “The city’s arguments surrounded the underlying agreements are void for a number of different sub series and fraudulently produced.”

Shumaker: describe the legal basis for this.

Orr: My understanding of the legal basis the city did not have the legal authority to enter into the swaps agreement. State law prevented that. The casino revenue was improperly used to pay the banks for the swaps agreement.

Shumaker: Which state law?

Orr: The revised municipal finance act was violated because the city’s structure cops was an attempt to do an end around that law.

Shumaker: How so?

Orr: The city created an entity where the service corporations were placed between the city and the banks. There were questions whether the service corporations operated independently or were an entity of the city. It was explained to me that if they were not acting legitimately the city was therefore the borrower and the underlying cops were void.

Shumaker: Did you conduct a factual investigation into this claim?

Orr: Yes

Shumaker: Who did this?

Orr: Pepper Hamilton, Jones Day, Miller Canfield Law firms.

Shumaker: What were the results?

Orr: there were serious questions about the swaps. They could be void and claims could be brought and the entire deal could be brought down.

9:35 a.m.

We are hearing testimony that goes into depth of what Orr found when he became Detroit’s emergency manager.

He looked at the “swaps and cops” deal struck with Bank of America Merrill Lynch and UBS. 

Orr: volatile instruments, this was putting a “ticking time bomb” into the structure. The interest rate fluctuation it gave counter parties with a termination event and a termination fee.

The banks had participated in Libor price fixing. Particularly

There is an argument that they could defraud the city by manipulating .

Shumaker: what concerned you regarding the relationship with the swap banks.

Orr: The city’s chief financial officer took a senior level job Sean Werdlow, took a position with one of the swap banks. The city council has one person who objected to it. The city council did approve it with a 6-3 vote.

Shumaker: what do you know about the investigation regarding the libor situation

Orr: I considered there to be strong evidence the libor scandal with UBS and BOA was certainly an indication of a fraud claim. But on the other hand the city had approved the swaps the fact they had received legal advice and passed an ordinance and approved it it raised serious questions about we would prevail on a claim.

Shumaker: Had the city benefitted from the swaps.

Orr: The city had made tens of millions of dollars on the swaps and there appeared to be benefits.

Orr; The fraud claim there were concerns of the expense, tens of millions of dollars to go to Europe to investigate. There were questions we would ultimately prevail.

Shumaker: Casino revenues, did your advisors find any claims related to the casino revenues.

Orr: Under the state gaming act the pledging of casino revenue as collateral for the swaps was illegal. There were some limited use of the

Orr: there are certain specified uses, street patrol officers, improve the quality of life, it did not specify the use of casino revenue for an unrelated debt.

Shumaker: what are the facts of the investigation

Orr: because the city council passed two ordinances, one finding the use of funds was appropriate,

Shumaker: was the state aware of the pledge of casino revenue.

Orr: there was a letter from the gaming control board and they received and felt the use of the casino revenue was appropriate for quality of life. Based upon the advice of counsel, the council’s two separate ordinances, the state having had an opportunity to comment and did not have trouble with the transaction there

Orr: the pledge of casino was inappropriately made and fraudulently induced but because the city and state did what they did I believed there was a large question whether we would prevail.

9:51 a.m.

Orr: for all the arguments again these casino revenues were not special revenues. We had legal analysis. The parties appeared to work very hard to raise questions in everyone’s mind and they worked meticulously at every stage, and we were concerned we would not prevail.

Shumaker: did you consider taking any other courses of action in the May June area for the cops and swaps?

Orr: We considered doing nothing but we realized the city was running out of money. The cash flow projections showed we were running out of money. The projections of whether the city could fight the swaps, but there was language saying we had to pay the her side’s legal fees if we lost.

Shumaker: did you consider at any time talking to other third parties or agencies about what could be done about the cops and swaps.

Orr: I spoke with the S.E.C. [securities and exchange commission] about whether they could or would perform an investigation into the transaction

Shumaker: did you tell the swap banks about your concerns?

Orr: Yes, we told them we were not bluffing if things were not going to result in a settlement we would have to pursue legal action. It was my understanding that the counter parties had a legitimate interest and they felt they had a strong legal position. We wanted to make certain that despite the performance of the parties we wanted them to know we felt there was a way to litigate.

Shumaker: What were the upsides to this?

Orr: there were benefits of invalidating the swaps. It would have gotten the city out from under the termination risk, and get out from underneath the life of the payments over the lifetime of the loan.

Shumaker: Were there downsides to this?

Orr: yes. My appointment was a termination event, there were other termination events and from the city’s perspective the single largest revenue source was imperiled.

Shumaker: How long would the litigation take?

Orr: litigation takes on a life of its own despite what you think you’re going to do. My advice was if we pursued it what was the probability we were going to be able to stabilize the city’s finances during the litigation. The opposition would be up against a well financed adversary. While their estimates could be a million dollars a month if they prevailed in addition to the payment of legal fees.

Shumaker: what would the consequences be if the city lost.

Orr; It would have been quite severe, $200 million in lost revenue. 20% of the city’s budget could go away. If that happened you could not cut enough city services. You can’t cut anymore to make up $200 million in losses.

10 a.m.

Shumaker: when did you sign the forbearance agreement?

Orr: July

Shumaker: Do you believe the forbearance agreement was in the city’s best interest?

Orr: Yes

Shumaker: at the court’s suggestion you renegotiated this agreement.

Orr: I did that to relay to the mediators that we felt there were arguments against the parties of interest. There were good reasons to renegotiate the original agreement.

Orr described the mediation process where the parties would retire to separate rooms and the mediators would shuffle between the parties and eventually came up with an agreement on December 24th, 2013. Jones Day’s Greg Shumaker is putting into evidence the sixth amendment to the forbearance agreement.

Shumaker: What are the terms?

Orr: The terms remain the same but reduces the payment required by $65 million and gives us until January 31st 2014.

Shumaker: why was a fixed interest rate number put into the agreement.

Orr: the previous agreement had a floating interest agreement. During the course of the negotiations we thought it best we not be faced with market fluctuation. The mediators said the best agreement we could get.

Shumaker: Do you agree that the new agreement is better for the city?

Orr: Yes. It is $45 million less. It reduces our interest expense. It relieves us from litigation expense. It provides us more importantly with the city the opportunity to do some reasonable strategic planning with a revenue stream to redevelop the city.

Shumaker: How is the city going to pay $165 million for the forbearance agreement?

Orr: We’re going to borrow it.

Shumaker: did you give instructions to your team as to whether the financing should be secured or unsecured. They had canvassed some lenders in the capital markets and came back that it would be unlikely to get unsecured financing. Mr. Doak and Mr. Buckfire told me we were in bankruptcy and we would not be able to get unsecured financing.

They are now reviewing the “all in costs” for lenders who might lend the city money for its forbearance agreement trying to get at how the city chose Barclay’s for its forbearance agreement.

Orr: Barclay’s was the cheapest money… overall they were the best lender.

10:17 a.m.

Shumaker: Is this a good deal for the city?

Orr: It would appear to make it more attractive because we are reducing our cost to $165 million. It’s a $285 million total loan.

Shumaker: How much of the Barclay’s commitment will be available to the city

Orr: We believe it will be available until the end of January 2014. 

There is another exhibit being placed into evidence. It is Kevyn Orr’s letter to the state of Michigan department of treasury alerting the treasurer to the forbearance agreement sent to former treasurer Andy Dillon last summer talking about the Barclay’s original deal. Also put into evidence is Dillon’s approval of the transaction. None of this was required but Orr said based on an abundance of caution I had this agreement approved by the state. 

Orr: I recall treasurer Dillon was concerned about the swaps agreement and the risks of the deal, the interest rates and I was hoping he would recognize I was taking a belt and suspenders approach that everyone understood this was a final action to deal with this issue and was approved by the state.

Orr: I instructed our team to discuss with city council and was proposing a loan via city council They debated it and decided not to offer its own proposal.

Shumaker: Did city council approve the proposal?

Orr: No

Shumaker: did the city council propose an alternative?

Orr: No

Shumaker: So then what happened?

Orr: it went to the state emergency loan board

Shumaker: Did the emergency loan board approve the forbearance agreement?

Orr: Yes [although it was done after judge Rhodes ordered the board to take up the deal. Governor Snyder told Local Four news late last year that this was a mistake to have the judge have to tell the board to meet and approve this deal. He called it a “lesson learned.”

Court is in recess until 10:45 am

10:57 a.m.

Up now with Kevyn Orr’s cross examination. Attorney Caroline English representing AMBAC a bond insurance company. 

English: You admit you have no independent knowledge challenging the validity of the swaps contract.

Orr: I depended on counsel’s advice.

English: You made no independent assessments or analysis of the possibilities of legal action against the swap banks.

Orr: No

English: You are nevertheless are claiming attorney client privilege and have refused to produce any such representations yes?

Orr: Yes

English: Your honor we maintain “privilege” be raised or a subject matter of waiver of privilege and want all documents relating to these issues. The city gave us a “privilege log” last night though we have been asking for for months.

Judge: for instance

English: there is one inadvertent release of information that does not appear in the log.

Judge: may I see the log?

 Up now for the city of Detroit is Jones Day attorney Greg Shumaker who is giving the judge the privilege log.

Shumaker: There is no waiver and there has been no subject matter waiver.

Judge: I’ll take this under advisement and we will take a break until 11:15.

11:15 a.m.

The day is setting up to be a busy one here.

Kevyn Orr is about to be cross examined by the objector party attorneys.

They represent the bond insurance companies that insure the bank’s municipal bonds, the retirement fund and other parties who do not want to see the pensions and the banks take major haircuts as part of the city’s bankruptcy filing.

In particular, they are trying to prevent this deal between the city and Barclay’s that would erase the “swaps and cops” deal. They stand to lose hundreds of millions of dollars should the forbearance deal go through with Judge Rhodes’ approval.

11:31 a.m.

Judge Rhodes is taking the bench now with his ruling on the motion to waive the city’s attorney client privilege claims throughout the case and in particular as it pertains to the advice legal counsel gave Detroit emergency manager Kevyn Orr during his negotiations with UBS and Bank of America [Merrill Lynch] in the two rounds of talks to unravel the swaps and cops agreements.

The judge had been uncharacteristically tardy today. Both recesses today have gone a couple of minutes over the deadline he set to return to proceedings. He returned to the bench at 11:27, 12 minutes late.

Judge: The court concludes it must deny the motion of the objectors.

Mr. Orr did testify that the information he has and has testified concerning the claims and defenses came largely from, if not entirely from attorneys. That observation could be made in virtually every case in every case a trustee seeks court approval and yet is simply can not be the law that simply by filing and pursuing a motion to approve a settlement a party is subject to a general waiver of attorney client privilege in proposing a settlement. Such a view of the law would in a very real way not only discourage settlements but it would also give an unfair, grossly unfair advantage to a proposal party’s opponents in litigation should the settlement not be approved. It simply can’t be the law. For these reasons the motion is denied.

There is a disturbance in the courtroom… a man is being dragged out of the courtroom and the judge declared the court in recess… he left the bench.

11:43 a.m.

The judge returned to the bench now and told objector attorneys they may proceed.

Caroline English for AMBAC is up now and ready to proceed with her cross examination of Kevyn Orr.  

English: you were a practicing lawyer for 30 years? Correct.

Orr: Yes

Judge: Mr. Orr, you have my permission if there are any further outbursts, persist to leave and go with your security out this door behind you.

Orr: Thank You.

English: You were a partner in the Jones Day restructuring?

Orr: yes

English: You’ve worked in a number of cases where rule 9019 was used?

Orr: Yes.

English: you’ve instructed clients to understand when it is a good time to settle or not?

Orr: Yes

English: Now as EM you are exercising your judgment and it was your judgment that this forbearance agreement was best for the city?

Orr: Yes.

English: The city does not have a direct contract with the swap banks?

Orr: Yes

English: The service corporations don’t’ have any independent relationship with the city?

Orr: Yes

English: the swap parties never threated the city or said they would bring claims would they?

Orr: No

English: you believe nevertheless getting a deal with the swap parties was crucial?

Orr: Yes

English: as the EM of the city of Detroit you regularly review cash flow statements?

Orr: Yes

English: when you entered the negotiations you were looking at projections when you entered into negotiations.

Orr: Yes

English: you took Mr. Buckfire into negotiations for a week in June to these negotiations

Orr: They had started earlier but yes it was a week.

English: You did not have a backup plan to implement at that time did you?

Orr: No

English: Did you plan to sue the swap parties at that time?

Orr: No

English: I’m going to have to have you look at your deposition because that is not what you said before. So let’s look at it: ‘if you hadn’t gotten a deal would you have sued? And there was an objection and then you answered I don’t know”

Judge wanted to know lines.

English: You don’t remember seeing a draft complaint at that time?

Orr: Not that I recall.

11:58 a.m.

English is going over Orr’s assumptions at that time that the swap parties could put the city into the default and trap casino revenues.

One of your other objectives was to get a discount on the interest rates. Third, you wanted to have a new timeframe.

Orr: Yes

English: you discussed these with Mr. Buckfire?

Orr: Yes

English: You are aware Mr. Buckfire testified that he had not been involved with the legal proceedings

Shumaker: Objection, cannot use others testimony in this manner.

Judge: Objection sustained

 English goes on: starts working in the area of Orr’s letter to former treasurer Andy Dillon send June 12th, 2013 forwarding a letter from Mr. Buckfire telling of the state of negotiations of the swap parties  and he tells you in his email it is now time for you to enter the negotiations to close the gap of 2% in the talks.

Orr: yes

English: we know you actually closed the deal @ 75%?

Orr: Yes

English: I want to know about the portion of the negotiation you were involved with. You never recall saying that the swaps were null and void or invalid?

Orr: No

English: You never discussed or debated that the swaps were illegal?

Orr: No

English: You testified on direct that you testified your attorneys discussed legal claims with swap parties

Orr: Yes

English: The service corporations: the were for the police and fire retirement systems. They were parties to the swap negotiations correct?

Orr: Yes

English: You assumed there must have been negotiations with the service corporations before the forbearance agreements?

Orr: Yes

You also aren’t aware of any negotiations between the service corporations and the swap parties.

Orr: Yes

English is asking about the former city finance director and now the swaps in place in June of last year.

English: Had the city evaluate future interest rate moves and how it would impact you ?

Orr: Yes

English: To the extent that was done it was done by Miller Buckfire?

Orr: Yes

English: Would it surprise you to know if Mr. Buckfure testified he never did any of that analysis would it surprise you?

Orr? Yes.
Shumaker: Objection

Judge: Sustained 

English goes on now: The total termination liability the city faces fluctuates doesn’t it?

Orr: Not now

English: Under the original agreement the liability would change given what the rates were at any given time correct?

Orr: Yes

English: We can agree generally speaking as interest rates rise the city’s liability decreases.

Orr: Yes

English: you can agree that interest rates in the general trend was to go up?

Orr: generally yes

English: and the effect that the rise in interest rates over the last six months the liability the city would face has come down correct?

Orr: Yes

English: the estimated liability is between $300 to $400 million and it has dropped down to $278 million approximately?

Orr: approximately

English: And as of the end of the year the city’s liability is down to $240 million

Orr: I haven’t looked but if you say that is the general trend then it must be.

English: You were sitting right there and the trial halted and we took a break and you went off and had renegotiations with the swap counter parties?

Orr: yes

English: the negotiations happened between December 23rd and December 24th. Gone is the

English: it’s true your goal was to tie down the interest rate?

Orr: Yes.

English: Is it true you did not know what the termination liability was during the negotiations.

Orr: we called Jim Doak at Miller Buckfire to find out the number

English: You were told the number was $230 million correct?

Orr: Yes

12:03 p.m.

English: You didn’t have an updated libor curve in front of you going into those negotiations?

Orr: Correct

English: you don’t know whether when you entered negotiations that interest rates were going to rise?

Orr: Correct.

English:the mediation, you didn’t get into a room with the swap counter parties and debate the issues?”

Orr: Correct

English: You didn’t have any negotiations with the other parties either did you?

Orr: No

English: Your first proposal was in the range of $150 million or 50 to 60% but you weren’t looking below 50%

Orr: Correct

English: You consider the deal you got was materially better, you think it’s a savings of $65 million.

Orr: Yes

English: The reason you went for a fixed rate you testified is that you wanted to avoid the

Orr: the reason we went for a whole number? Yes.

They have waded into the area of interest rates and their impact on the liability.

Orr: It was our understanding that interest rates might go up and they might go down.

12:03 p.m.

English: You didn’t have an updated libor curve in front of you going into those negotiations?

Orr: Correct

English: you don’t know whether when you entered negotiations that interest rates were going to rise?

Orr: Correct.

English:the mediation, you didn’t get into a room with the swap counter parties and debate the issues?”

Orr: Correct

English: You didn’t have any negotiations with the other parties either did you?

Orr: No

English: Your first proposal was in the range of $150 million or 50 to 60% but you weren’t looking below 50%

Orr: Correct

English: You consider the deal you got was materially better, you think it’s a savings of $65 million.

Orr: Yes

English: The reason you went for a fixed rate you testified is that you wanted to avoid the

Orr: the reason we went for a whole number? Yes.

They have waded into the area of interest rates and their impact on the liability.

Orr: It was our understanding that interest rates might go up and they might go down.

12:16 p.m.

English is now going through Orr’s deposition to see of Public Act 34 was used a part of the city’s deliberations and discussions regarding whether to sue the swap parties on the original deal.

English: When you were pressed on these issues you didn’t know the details of the arguments and were confused with the gaming act when it was brought to your attention that the gaming act.

Orr: Yes 

Now English is pressing about Orr about the city council action on the liens.

Objection by Shumaker

English: I am trying to elicit the testimony as to what these arguments but started mixing them up and he didn’t know.

Judge: It’s fine to have the witness testify what he previously testified. But it’s not proper to summarize 

English: I just want to run through examples: you see starting at line nine you’re being asked about the valiadity of the swap liability but you then discuss swap obligations are not legal under the gaming act.

Orr: Yes

English: the gaming act might impose on swap obligations and you thought it might

Orr: Yes

12:19 p.m.

English: it’s true you wanted a deal with the swap parties because you did not want to litigate correct?

Orr: yes

English: You never asked for a single cash flow analysis and getting post petition financing would be better than a swap counter party deal

Orr: Yes

English wraps up her cross examination. 

We are breaking for lunch and reconvening at 2pm

2:08 p.m.

Court is back in session: Bill Arnaud is the attorney doing cross examination of Kevyn Orr.

The Syncora attorney quickly finished his questioning of Kevyn Orr delving mostly into the forbearance agreement and his understanding of it.

Now up is Vince Marriott attorney for one of the creditor banks.

2:30 p.m.

Marriott is showing paperwork to Kevyn Orr.

He wrapped up his questioning quickly which surrounded the new forbearance agreement.

Nothing particularly riveting. Up now is Retiree pension fund attorney Jennifer Green. She is going over much the same ground that has already been trod earlier.

Currently she is talking about the gaming revenues being funneled through a special account to make certain the swap banks got paid before anyone else in the city and then sent the rest to the city.

This was part of the agreement struck with the banks during the city’s 2009 default of the swap and cops agreement.

2:40 p.m.

Green: Would it surprise you to know that the swap parties did not feel the capture agreement with the casino revenues would have survived a chapter 9 filing?

Orr: At this point nothing surprises me.

She is now showing him a document he says he has never seen it. It is a draft letter by Jones Day to the attorney general’s office asking for a opinion regarding whether the casino revenue capture was legal. It apparently was never sent.

There was another draft order from the emergency manager wanting to declare the collateral agreement would be illegal and void. Green wants to know what the order says or does.

Orr: As part of our overall strategy I asked for work done on all areas but I never saw this or signed it or know who did the work.

Green: Would it surprise you to know your lead negotiator went into the negotiations assuming all the lien agreements were valid
Orr: No

Green has finished her cross examination.

Now up is Jerome Goldberg attorney for interested party David Soule.

3:08 p.m.

Goldberg: “The $165 million swap termination loan the Interest rate 5.5 to 8.5%”?

Orr: Yes

Goldberg: we’re talking about 20% of tax revenues over the next few years to pay off Barclay’s?

Orr: Yes

Goldberg: so $195 million will go to Barclays over the next four years?

Orr: Yes

Goldberg: This payments will go on long after you are gone from the city?

Orr: there is an exit facility but yes that is correct.”

Goldberg: “we’re talking about 300M paid since 2008

Orr: Yes.

Goldberg is known for his frustration with the global banks and their libor rate scandal of a couple of years ago. He is now questioning Orr regarding the interest payments the city was making on its swaps and cops agreement.

Goldberg: You described the city as a ticking time bomb as a result of this situation?