Judge won't delay challenge to Detroit health care

Testimony continues in city's trial for Chapter 9 eligibility

DETROIT - Local 4's Rod Meloni is blogging from inside Detroit's bankruptcy trial

9 a.m.

There has been a motion hearing regarding retiree health care this morning. Both the city and the objector unions made their cases. It just ended and it was complicated… will need a minute to pull everything together on that.

In the meantime the city is now cross examining AFSCME National Vice President in charge of negotiating.

9:45 a.m.

The motion hearing had to do with retiree health care, and a city request to delay a hearing on a preliminary injunction by two weeks in order for a negotiated settlement to be reached here in federal court mediation to come up with a resolution on health care plans.

Retirees received some erroneous information from the city and there is a need to fix this.

Jones Day attorney Heather Lennox argued on the city's behalf to have the delay. She laid out a number of different plans the city is working on to ensure retirees get health care benefits. She said, "regardless of the rhetoric, the city is doing its best to manage this situation."

Of health care benefits, nothing is going to be changed at all between now and January 1, and she said the city has decided to extend that date to January 31 because of the delays in the affordable health care act website.

She said Medicare retirees have the choice of three plans … two are free with no premiums, one with a $30 a month.

She reiterated that if a retiree elects a new plan in the next few weeks, there will be no premium until January. If a retiree makes no choice at all, they automatically roll over to a new plan "with no chance of not being covered."

She said using Obamacare parlances the new Medicare plans that are gold and platinum plans. She said retirees have the platinum plan.

The objector unions, through attorney Sam Alberts of Dentons, represents the retiree committee. He told the judge there was no reasonable basis for delaying the hearing for preliminary injunction .

He argued there will be prejudice to retirees and he said he was fearful that retirees are option out of coverage based on the false information the city gave them.

He said of the negotiations in mediation, "there is a monologue, not a dialogue" between retirees and the city on health care and "retirees are being put in a very difficult box."

The city's attorney responded by saying its attorneys are too busy preparing witnesses for trial to do this hearing, but also told the judge the city is prepared to proceed should the judge decide not to give any delay.

That is precisely what the judge did, he denied the delay in the hearing saying:

"It seems the overriding interest here is our interest in minimizing confusion on the part of the retirees in regard to maintaining and obtaining health care benefits. That interest is best served by proceeding here. There is enough confusion in the rollout of the Affordable Care Act to add to it or compound it in the way the city proposed here is not fair to retirees. We will proceed with the hearing when we conclude the eligibility trial, trying to get the courtroom facilities for next week."

The judge scheduled the hearing on this issue immediately after the closing arguments in the bankruptcy eligibility trial, likely to come on Friday. If they go long, then this hearing will happen next week.

10 a.m.

The city of Detroit conducted its cross examination of AFSCME national vice president for negotiation Steven Kreisberg; doing that cross examination was Jones Day attorney Geoffrey Stewart. Stewart pushed Kreisberg hard on the issues of whether the union locals Kreisberg represents in the city never once offered a counter offer to the city's turnaround plan offered on June 14, 2013. Stewart wanted to know whether Kreisberg felt AFSCME was in the position to represent its membership and retirees. 

Stewart: Is it correct that AFSCME could not represent retirees?

Kreisman: That is not the case. 

Stewart then pulled up the text of Kreisman's deposition where he had previously had been interviewed under oath. In that setting Kreisman said he believed AFSCME could represent retiree interests.

Stewart: Was your testimony in the deposition truthful?

Kreisman: Yes.

This is an important part of the city's case in that it claims AFSCME never countered its turnaround offer and deliberately did not do so, meaning it was not willing to negotiate a settlement with the city, thus making negotiations "impracticable" because the unions were not willing to negotiate in good faith. These are the points that are requirements to whether a city is eligible for Chapter 9. 

Stewart went on and pushed Kreisberg on whether it was AFSCME's belief that it was not in a position to negotiate pension obligation changes because it violates Michigan's constitution. 

Kresiberg answered, "That's our position. I'm not a lawyer."

Stewart: Have you advised anyone to waive their constitutional rights to negotiate a settlement?

Judge Rhodes jumped in: "Don't answer."

The judge was concerned this question might box in the witness and told Stewart to change his question to include the timeframe only up and until July 18th, when the city filed for Chapter 9. Stewart did and Kreisberg did answer saying no. 

After a short re-direct, Kreisberg finished his testimony.

10:30 a.m.

On the stand now is United Auto Workers national legal counsel Michael Nicholson. He is a highly experience attorney who led negotiations and was part of the government restructuring of Chrysler and General Motors. He also helped them set up their VEBA, a health care fund that managed retiree healthcare benefits and the funding of those programs. Nicholson has been giving expansive answers about his experience with retiree benefits and bankruptcy.

In the most easily explained exchange, UAW attorney Peter DeChiara wanted to know whether Nicholson attempted to make his expertise available to the city and attempt to negotiate some kind of pension benefit settlement with the city. Nicholson pointed out questions he wrote to city attorneys in meetings and his first question was how could the emergency manager file for Chapter 9 if it violates the Michigan constitution? He said Jones Day's Heather Lennox answered the question and claims she said, "We didn't have any doubt and went on to say in Nicholson's words, effect that "It was our problem." 

DeChiara: Was the Union Willing to negotiate pension cuts?

Nicholson: No

DeChiara: Why?

Nicholson: The Michigan constitution Article 9 Section 24 is binding on everyone, our membership and even the governor. It precludes impairment and it is a violation of the law to do that. Only Michigan citizens have the authority to change that at the election booth and they have not done that. Neither the governor nor Mr. Orr can amend the constitution.

DeChiara: What were you willing to do?

Nicholson: We didn't have access to the data room.

Judge: "Please just answer the question."

Nicholson: UAW was willing to do a class action and lead the negotiations with the city in July [before the bankruptcy filing] and the city was unwilling to do so. 

Later there was more discussion regarding the lack of information available to the union as it was shut out of the "data room," where the city made its financial records available to parties in the bankruptcy.

Nicholson: Good faith negotiations cannot happen without access to information. It is a basic tenant of U.S. Labor law and we were denied access here.

10:50 a.m.

Nicholson continues his expansive answers and testimony and is starting the wear on the judge: Nicholson was asked by his counsel about his discussions with Jones Day attorneys [whom he knows from other bankruptcies] and Nicholson said, "I said what recovery would there be for lost benefits, benefits between what the city is offering and what retirees have coming, in other words the reduced benefits, under a deal. What would happen with that differential between? The Jones Day attorney Mr. Miller said no. I responded that is very unusual, that certainly is not the way it works in 11-14 [other bankruptcy law in the private sector]which I know about." 

Later Nicholson went on about a meeting with city attorneys and in particular Jones Day attorney Evan Miller]

"Near the conclusion of the meeting I spoke up, having thought about this issue going into the meeting and I said I want you to go back and tell Mr. Orr that the UAW… There is a way to deal with this issue, you know what it is. A class action. … tell Mr. Orr the UAW is willing to engage and tell Mr. Orr that we are willing to lead that process," he said.

DeChiara: Did they get back to you?

Nicholson: Never

DeChiara: To what extent would you consider, based on your experience, were there negotiations?

Nicholson: Two significant deficits precluding negotiations, access to information due to secrecy.

Judge Rhodes jumped in: please, just answer the question.

DeChiara: Were there negotiations over accrued pension benefits at the meeting?

Nicholson: As far as the UAW was concerned no. It would have been against the basic law, the Michigan Constitution.

DeChiara: To what extent were there negotiations open?

Nicholson starts to give another long winded answer. The Judge, un-amused, stepped in again:

Judge Rhodes: I want to tell you, sir, this question and the last few questions did not deal with the questions. Just answer the question.

Nicholson: [frustrated] "=There were negotiations that we tried to initiate with the city through a class action. The first step is to ask the other side to participate. We asked it to be taken to Mr. Orr and never did they respond. Ever. That's my answer.

Once again Judge Rhodes jumped in: You're not answering the questions. Given your perception to what actually happened, to what extent was what happened in your opinion. You just have to tell me to the extent it was negotiations. If that's your answer we'll move on. 

11 a.m.

As court begins after a brief five minute break, Nicholson spoke with the judge.

Nicholson: I want to make the court aware I am trying to stay focused. My brother is in the hospital with end stage liver cancer. I want to be with him and want to keep my focus. The second thing I want you to know, I should have responded on the July 11th meeting. After I asked Mr. Miller to go back to Mr. Orr and tell him the UAW was willing to engage in a class action process. The city replied that there was not enough time. I said it had been done quickly elsewhere. I received no other communication 

DeChiara: "Do you know the Flowers case?

Nicholson: Yes [and he goes on to say] 1.) I conceived of the idea behind the litigation. 2.) The UAW funds those attorneys. 3.) We consult with those attorneys.

DeChiara: Were you aware they filed for a preliminary injunction. It was scheduled by the Ingham Co. Circuit court on July 22

Nicholson: On July 18th we worked on case. Signed the affidavit known as exhibit 624 on that day. We received a call, working on reply had to be filed that day, driven up to Lansing and we got a call that day to that effect that they were going to court to get an exparte tro to prevent a ch. 9 filing." " We decided to finish the brief in the car and that's what we did. Should the state be notified of the T.R.O. [temporary restraining order] I was sitting in the back seat typing on my laptop. Bill asked me do you think we should notify the state. I took it as a practical ethics question. I think we have to do that, it's not in our interest. And he proceeded to call the AG's office. We didn't know ahead of time knowing what would happen in the court. I heard him talking to him in the car on two cars. I also know because I talked to the lawyer for the AG Mr. Carsono. He told me how much he appreciated his ethical behavior.[This chain of events led to the city filing its bankruptcy a day early, on July 18th instead of July 19th, 2013.] 

Geoff Steward now rises to cross examine Mr. Nicholson

11:20 a.m.

Nicholson continued his expansive answers and the judge once again asks him to just answer the question.

Stewart is asking Nicholson about previous "class action" cases, VEBA set ups that Nicholson was offering to the city, and he is now asking Nicholson whether he knows how long it takes to set up VEBA's and Stewart kept citing at least one year to two years for varying VEBAs that Nicholson was unaware of time frames.

Then, Stewart put up a slide showing the city's cash position and asked Nicholson to say what the city's cash position was.

DeChiara objected.

The Judge asked Nicholson to simply answer the question. He couldn't Stewart ended his cross.

The point Stewart was trying to make was that the UAW was offering to lead a process that would have taken longer than the city had cash to survive on, hoping to put to rest the notion that the UAW had a solution that the city did not respond to.

11:20 a.m.

On the stand now: Janet Witsome of Redford, a plaintiff in the Flowers litigation. She is a former Detroit Librarian. She is 66 years old and retired.

UAW Local 2200 list serve… there was a request for a person who wanted to be part of a lawsuit and I volunteered.

Her attorney is William Wortheimer and he is doing the cross examination. 

Wortheimer wrapped up his questioning with a line of questions that established she is a former UAW local president, is divorced, gets city health insurance gets a $2500 a month pension.

Wortheimer: Why did you become involved in the Flowers Litigation

Witsome: "I had always understood it [her pension] was protected by state law. Suddenly I was reading in the paper that it might not be. I decided I had better get involved.

Wortheimer wrapped up his questioning. The city cross examined and completed it without eliciting much information. Witsome is now off the stand.

Up Next is former state treasurer Andy Dillon.

11:50 a.m.

Wortheimer is questioning Dillon regarding the consent agreement, whether he understood how investment banker Ken Buckfire was using the Jones Day lawfirm in June of 2012 and why the law firm was not charging the state legal bills at the time.

Dillon said Buckfire had the relationship with Jones Day, Buckfire was working with the city on negotiating a consent agreement and he would deal with Jones Day on that basis.

Wortheimer to Dillon: Did you have discussions in March of 2012 that there might be a bankruptcy filing at that time?

Dillon: I don't recall.

Wortheimer has an exhibit put on the screen.

City objected on hearsay grounds. Judge says no question has been asked.

Wortheimer said considering the objection he showed an exhibit and asks Dillon to read the memo to see if it refreshes him memory of the question regarding a bankruptcy filing discussion ever happened.

12: 15 p.m.

Former treasurer Andy Dillon takes several minutes to read the memo offered as an exhibit in the case.

Wortheimer: re-asks the question.

Dillon: It was a topic of conversation. We wanted a consent agreement at the time. Chapter nine was always an option.  It wasn't front and center

Wortheimer shows a memo from Jones Day attorney Corinne Ball to a Laura  Marcero of Huron consulting.

Wortheimer asks about that emailed memo:

Wortheimer: I need to link you in on a conversation about Chapter 9?

Dillon: I don't have a specific memory of that?

Wortheimer: Do you have a general memory?

Dillon: As I read this it had to do with deciding what options were available, about Detroit's eligibility. It wasn't a priority it was always a last resort option to us.

Wortheimer: Were you involved in the hiring of Kevyn Orr at that point.

Dillon: Yes

Wortheimer: What was your involvement?

Dillon: The first time I met Kevyn Orr was when we were interviewing five different law firms. We interviewed five different law firms and each received an hour.

Wortheimer: Did you recommend him be hired?

Dillon: I spoke with Richard Baird, he [Orr] was impressive in the meeting and that he should be hired.

Wortheimer: Were you concerned he worked for Jones Day?

Dillon: Not terribly, there was a review team.

Wortheimer: So there was some concern that it could have an appearance of impropriety.

Dillon: I actually held my vote [on the law firm selection] back because I was one of two people who knew Kevyn was being considered.

Wortheimer: Were there more extreme propriety issues in April 2013 when it came to hiring Jones Day as counsel for the city as opposed to counsel for the state as it had been in the past?

Dillon: I thought that Jones Day was hired before Kevyn was hired.

Wortheimer: Did you you have the same concerns?

Dillon: No because there were quite a few people voting for Jones Day and I withheld my vote. Kevyn removed himself from pushing Jones Day to be the city's counsel. It was advised by Rich Baird that it would neither help nor hurt.

Wortheimer: Who is Brom Stibitz?

Dillon: He was my right hand. He did not have the title of chief of staff but that was the function he served.

Wortheimer: Who is Terry Stanton?

Dillon: He does Treasury my media relations.

Wortheimer: Were you aware that in April of 2013 he authored an email to Brom that took issue with Jones Day being hired as the attorneys being hired by the city?

Dillon: I don't recall.

Judge: interrupts and asks how long the cross will take. Wortheimer says a half hour. The judge then decides to call for lunch. Court is adjourned until 1:30pm.

1:55 p.m.

Wortheimer: Do you recall Terry Stanton or anyone else raising the question of impropriety of the city employing Jones Day as its attorney as of the spring of 2013

Dillon: I don't recall.

Wortheimer: Do you recall being concerned about it yourself at that time.

Dillon: It was an issue that I considered yes.

Wortheimer shows an email to Gov. Rick Snyder on July 8 discussing the Flowers case and a hearing of a preliminary injunction and an attempt to get a temporary restraining order on the state filing a Chapter 9 bankruptcy scheduled in Ingham County court for July 22nd.

Wortheimer: By July 15th you knew of the schedule of the Chapter 9 filing.

Dillon: I don't have a specific memory of the date, I do remember having a pretty detailed schedule of what Chapter 9 would look like.

Wortheimer: In this email on the 9th, you say to the governor ‘we remain in many ways at the informational stage." That was a true statement when you made it yes?

Dillon: Yes

Wortheimer: Were you aware as of July 9th taking things out of the informational stage?

Dillon: We were getting more information and things were just getting worse. The health of the pension funds were getting worse. Are you suggesting you learned of this after July 9th?

Dillon: I don't remember the specific dates but the information was coming in fast.

Wortheimer: Do you remember telling the governor he needed to take a more deliberative approach in the process of a Detroit Chapter 9?

Dillon: I don't have a specific memory of that no.

Wortheimer: Do you remember communicating to the governor's office at this time your view as the state treasurer that the governor's approach needed to be more deliberate.

Dillon: I do not remember but it sounds like a conversation I would have had at that time.

Wortheimer continues pressing Dillon about the memo, but the city objected saying the email did not go to Dillon, and Dillon invoked attorney client privilege prior to the objection. The judge agreed with the city and Dillon did not have to answer. 

Wortheimer offers another document: asking if he can identify it as an email to Brom Stimitz on July 10th, 2013.

Dillon reads and says "yes I recall this."

It was an email discussing the governor's recommendation letter.

Wortheimer: Did you think there was anything untoward with his asking you?

Dillon: No. I thought it was a courtesy.

Wortheimer: ou felt free to suggest changes did you not?

Dillon: Apparently, I guess.

Wortheimer is going over the communication between treasur and Kevyn Orr's office and changes to documentation to the recommendation. Wortheimer wanted to know who spoke with whom, and there was a conference call between Treasury staffers and Jones Day attorneys

Dillon: I spoke to some lawyers over the phone, what they communicated to Kevyn Orr I don't know.

Wortheimer: [talking about Dillon's email and reads] "no mention of grs." What is grs?

Dillon: the general retirement system. 

Wortheimer continues talking about Dillon's email

Don't think we are making the case in giving up so soon to reach an out of court settlement."

Wortheimer: You believed that to be true when you wrote it on your computer July 10th?

Wortheimer shows a Dillon email that was in response to Kevyn Orr's request for Chapter 9 where Dillon wrote, "I think there is a state court option to get retirees into a class."

Wortheimer: Does this reflect your thinking at the time?

Dillon: Yes. That was my thought at the time I was never briefed at that time.

Wortheimer continues reading from the email with Dillon writing at the time, ‘I think we may want a take or leave it demand before we pull this trigger."

Wortheimer: Was the trigger; Ch. 9?

Dillon: I thought that might have been beneficial.

Wortheimer: You write, 'I agreed with the recommendation but I don't think that Orr made the case?" Was that the case in your mind?

Dillon: In the document that I read. 

Wortheimer concludes his cross up next is Sharon Levine for AFSCME.

2:15 p.m.

Levine is working on Dillon his recollections of the hiring of financial consultants, the city's financial condition, and is moving into state revenue sharing.

Light Humor: At one point, there was an objection to a Levine question by the city. Asked and answered the attorney said. The judge said "many times." Levine moved on.

2:40 p.m.

On the subject of the tentative give back agreements struck with the city and its unions

Dillon: It would be a bad idea to enter into a three year collective bargaining agreement with unions.

Levine: Who told you?

Dillon: Huron consulting

Levine: Is it your belief the city's pensions are underfunded?

Dillon: I believe they are.

Levine: was that a contributing factor?

Dillon:One of them.

Levine: At no time prior to the spring of 2013 did you consider the unfunded liabilities of retirees.

Dillon: From day one the unfunded healthcare liability was number one with me but the retirement funds stayed the same and the actuaries said they were within a few percent of 80% funded and that was good enough considering how poorly funded so many other pensions are underfunded.

Levine: When did you believe the healthcare benefits were underfunded?

Dillon: The very first day I started.

Levine: Do you believe that the city could come to an agreement in the month between June 14th to July 19th

Dillon: Yes.

Levine: Did you think negotiations could work?

Dillon: I'll tell you thing that mattered to me the most was the numbers in the recovery for the unsecured creditors. I could not believe anyone could walk out of the room with a negotiated deal.

Levine: Did you think there should be funding to try and spend some time to negotiate a settlement?

Dillon: I was not optimistic you could reach it out of court, the numbers kept getting worse. I did not see how the creditors could accept that. That had the biggest influence to me.

Levine: Did you ever sit down and negotiate personally with the stakeholders?

Dillon: It's overly broad, I had some negotiations where we discussed various matters. I need more information.

Levine: :At any time did you think it was important to get out in front of this and negotiate?

Dillon: I don't believe so. 

Jennifer Green is now cross examining Andy Dillon 

Green: You testified at one point you were left out of the recommendation.

Dillon: I was not consulted but I believe the governor decided he would do it himself.

Green: Who told you the pensions were so badly underfunded?

Dillon: I don't recall.

Green: Do you know when?

Dillon: In the spring in talking with city consultants that said the numbers were not what we thought they were.

Green: Do you know if it was before Kevyn Orr became EM?

Dillon: I don't recall.

2:50 p.m.

Green: Do you recall getting an email on June 7th from Kevyn Orr?

Dillon: No. It said ‘based on this we expect a significant reduction in already accrued benefits… and the only way to address this would be in a chapter 9.

Dillon still did not recall receiving the email but he did say, "I remembered the numbers getting worse and did not have a lot of confidence in the numbers we received." 

As of July 9th Dillon said he "did not know what the underfunding of the pensions were and I had not seen a set of numbers that told me what the actual number was." 

Dillon: I thought it best to at least to see if there was common ground to determine what the underfunding was and then you can go from there. 

Dillon believed there were creative options to deal with pensions.

Green: Did you ever share them with anyone, the unions or retirees?

Dillon: No

Green: What changed between July 9th and July 18th? You said something different today than deposition.

Dillon: The pensions were not the major driving issue for me to file. Out of 18 billion that number between what the city's were and the unions was relevant but not a driving factor as to whether 9 was necessary. Nothing gave me reason to call the governor to say things are better or things are worse.

Green: There was as general understanding that pensions were protected. The governor and Kevyn Orr understood the constitutional protection existed. It was talked about early on and had to be grappled with.

Dillon: The discussions that the state was not responsible for local pensions and there was also the issue of the constitution.

Green: Do you recall citing this constitutional protection to unions prior to filing?

Dillon: I don't recall.

3 p.m.

The courts will ultimately decide what would happen with pensions and the constitutional requirements

Dillon: It was pretty clear that I was prohibited to lend money to local government. I swore an oath to uphold the constitution and I did.

Green: And if there were

Dillon: If I had loaned money to a local form a government it would have been in violation of the constitution.

Green: How about with the pensions? Were you concerned about violating the constitution there?

Dillon: I don't know that that provision influenced him [the governor] in any way. We had it in PA72, Pa 4 and PA 436 it was always there.

Green: Do you recall receiving a memo about pension obligations and the constitutional protection in June of 2012?

Dillon: I don't have a direct recollection. 

Court is adjourned and will reconvene Thursday Morning at 9 a.m.

Judge wants to know how long closing arguments will be. We are now in recess.

About Detroit's bankruptcy trial

A judge is hearing evidence before deciding whether Detroit is eligible to scrub its books in bankruptcy court.

Unions and pension funds say there were no "good-faith" negotiations before the filing, a key step under bankruptcy law. Detroit's emergency manager, Kevyn Orr, denies it.

Rod Meloni blog: Orr denies that bankruptcy was in the bag

More stories on Detroit's bankruptcy:

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