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.