Is Detroit bankruptcy eligible?

Unions claim governor's deposition proves city is ineligible for Chapter 9

By Rod Meloni - Reporter, CFP ®

DETROIT - It appears an odd question to ask.

For those among us who do not know much about Chapter 9 municipal bankruptcies [and that would be most of America!] there are three stages. First is whether the community in question is eligible to even file. If found eligible, the community is then required to negotiate a "plan of adjustment" with its creditors. This plan divides whatever money it has available and pay those owed money. This usually means pennies on the dollar and large losses for unsecured creditors. [Unsecured means there is no dedicated income stream to cover their costs]

Thereafter, the third question is does the plan of adjustment allow the community to properly function financially after emerging from bankruptcy? Usually the plan includes a budget the community must follow.

Right now, even though the City of Detroit filed for Chapter 9 in July, it is still in phase one. Just as an aside: in many cases the eligibility process can take a year or more. This brings us to Detroit: bankruptcy Judge Steven Rhodes will hold an entire trial to decide just this eligibility issue later this month. Those who object to a community filing Chapter 9 can argue whether the filing was legal and justified.

According the Plunkett Cooney Law Firm's Chapter 9 Bankruptcy quick reference guide, there are a number of bases the filing municipality must touch to qualify. First it must show it is insolvent on a cash flow basis, desiring to adjust debts. Next, it must show one of four things:

1.) Has obtained the agreement of creditors holding at least a majority in amount of the claims of each class than the municipality intends to impair under a plan.
2.) Must have negotiated with creditors in good faith but has failed to reach an agreement
3.) Is unable to negotiate with creditors because to do so would be impracticable: or
4.) Reasonably believes that a creditor may try and obtain an avoidable preference.

For the purposes of this blog, we are going to concentrate on numbers 2 and 3 because they are the issues that came up during Gov. Rick Snyder's deposition in Lansing today.

Story: In rare step, Michigan governor agrees to speak under oath about Detroit bankruptcy decision

The American Federation of State, County and Municipal employees brought in attorneys from their Washington D.C. office to question [or depose] the governor in an historic meeting. They along with attorneys from the United Auto Workers spent the better part of three hours trying to get the governor to admit a couple of crucial things.

First, that he intended for there to be a bankruptcy filing all along, even before he hired the current Detroit Emergency Manager Kevyn Orr. That would mean the governor never intended to negotiate with the City's 40 separate unions to try and gain efficiencies and cost reductions that might have allowed the city to stay out of bankruptcy.

Second, that when Kevyn Orr took the job, the experienced bankruptcy and turnaround lawyer was hired for the specific purpose to take the city into bankruptcy and he was under orders not to negotiate with the unions.

Of course, Gov. Snyder made no such admissions in his testimony based on what AFSCME attorneys told us when they came out of the deposition this afternoon. But they did say the governor's actions in hiring Orr, his admitted [under oath in questioning] requirement that the emergency manager needed to be an experienced bankruptcy and turnaround expert, was evidence on its face that bankruptcy was the end game here. They said the governor felt there were negotiations with the unions prior to the bankruptcy filing and since those negotiations stopped he felt the need to pull the lever on allowing the City of Detroit's bankruptcy to move forward.

Most disconcerting to the union attorneys was the governor's admission there is no plan in place that would create a soft landing for retirees who stand to lose substantial amounts of their city-promised pensions. They pressed the governor hard on this issue, wondering if he had an opinion on this. They claim he had none. They wanted to know if there is not a plan in place now, would a plan be forthcoming? The governor's apparent answer was no. Now, there is likely more to this answer but portraying the governor as a heartless bureaucrat without feeling for those who will stand to suffer in this bankruptcy has been the union mantra from the beginning. This discussion is no surprise. The video tape of this deposition will likely come out tomorrow and we will let you know the governor's full answer to these questions to more fully flesh out this line of questioning and the governor's stated reasoning.

Ultimately the unions believe they came away from today's deposition with enough information to prove the city is ineligible for Chapter 9 because it is demonstrably provable the city not only did not engage in good faith bargaining but that it conducted no negotiations of any kind. As Michael Artz of AFSCME put it, "Inviting people to meetings and then saying the meetings are not negotiations, that they are just discussions, just talks but not negotiations and putting down a take-it-or-leave it proposal is not good faith negotiations." This will be their case against the city in the hopes it can salvage the pensions of its membership and keep Detroit out of bankruptcy.

This lack of negotiations has been troublesome from the start. You will recall back in June with Kevyn Orr met with the City's creditors out at Metro Airport and put out a 134-page document that laid out his idea of a turnaround plan. Yet, his office has since said it was also his idea of a "plan of adjustment." Orr said at the time this was how he saw the city's turnaround going and unless someone had a better idea this was what they would use.

The AFSCME attorney is correct that there were meetings with union representatives and there were discussions about possible changes to union contracts but none were ever made. Orr's office has maintained since June the unions never once came to the table with a counter offer or proposal. The unions have said since June they were not told who they would negotiate with, and their idea of negotiations usually starts with sharing information and looking at the books. They claim no information backing up the numbers ever came from the emergency manager's office. Also, they say, in a normal contract negotiation the unions, after agreeing on the numbers, discussions and give and take surrounding existing contract changes could be made that would bring costs down. None of this happened.

This could be a problem for the city when Judge Rhodes hears the case in that it is up to the city to prove it negotiated in good faith. But there is the thorny gray area of what legally does it mean to have negotiations in good faith? Are we speaking of changing contracts or reinventing an entire city?

This brings us to option number three. Kevyn Orr's argument at trial will be that he was unable to negotiate with creditors because to do so would be impracticable. Here is his reasoning: Orr said at his creditor meeting in June that the numbers in his turnaround plan are the numbers, there was no need to spend months debating whether the numbers are correct. What's more Orr said to them at the time the clock was ticking and if there were proposals or ideas they needed to come to the fore quickly. None ever showed up. Orr's office has said repeatedly the unions were thinking they could do what they usually do in a contract negotiation and take three to six months just to agree on the numbers and then start to deconstruct the existing contract.

Orr's office said that wasn't on the table, that the old way of negotiating a contract had nothing to do with negotiating the restructuring the city. Instead what the unions did, particularly AFSCME, was to sue the city and the state at every turn.

AFSCME Activist Robert Davis may be able to wallpaper half of city hall with his legal pleadings trying to derail the emergency manager and the bankruptcy. Orr's office believes those lawsuits were evidence the unions had no intention at all of negotiating anything, thus negotiations were impracticable.

So, if you stayed with me here, you just read what our stories will look like later this month when the eligibility case is heard. We do not know how Judge Rhodes will rule, but certainly what the governor had to say in today's deposition and what State Treasurer Andy Dillon will say in his deposition scheduled for tomorrow will play an important role in Rhodes ruling.

Local 4 will be there to keep you up to date.

Copyright 2013 by All rights reserved. This material may not be published, broadcast, rewritten or redistributed.