Rod Meloni: Day 3 of Detroit's bankruptcy trial

By Rod Meloni - Reporter, CFP ®

DETROIT - 9:30 AM --

No protests outside the federal courthouse this morning, but the long line packed with people was the security line getting inside the federal courthouse.

It is taking 15-20 minutes or more to get inside, thus the tardy start today with this blog.

Rod Meloni: Day 2 of Detroit's bankruptcy trial

Rod Meloni: Day 1 of Detroit's bankruptcy trial

The Detroit bankruptcy eligibility trial is on hold for the time being as a set of motions is being argued before Judge Stephen Rhodes.

The motions are from the objector unions who are looking to have the testimony heard yesterday by two city of Detroit financial analysts thrown out as hearsay.

Hearsay, in a legal setting, is someone testifying based on what they heard and did not personally witness.
AFSCME and the UAW are trying to have the testimony of Guarav Molhatra and Ken Buckfire thrown out because, even though they are financial analysts with considerable financial credentials, they were not qualified as "experts" in the legal sense for a trial and therefore they are merely bystanders testifying to the city of Detroit's financial condition based on the reports and work product of others.

The objector unions are saying while these may be smart people, they know little more than anyone else in the eyes of these proceedings. In fact, an attorney for the United Auto Workers said the Jones Day attorneys working for the city of Detroit made a strategic and tactical decision not to have Malhotra and Buckfire qualified as experts. They are arguing that anything Malhotra or Buckfire testified to is pure opinion and nothing more.

The UAW lawyer went so far as to say for the purpose of this case "you could ask the taxi driver who drove Mr. Buckfire from the airport his opinion about the city's financial condition and Mr. Buckfire is no more able to answer those questions than the taxi driver."

The city's attorney, Geoffrey Stewart from Jones, is now up responding.

He said this is a very simple case and the unions are wrong. He says the law says when it comes to using expert testimony there is a two tiered test for how an expert can testify:

1.) Having personal, particularized knowledge of the situation and then 2.) the expert would have to use that personal, particularized knowledge in the testimony. Steward says in the case of Mr. Malhotra was hired two years ago because the city of Detroit had laid off so many of its internal financial analysts he was brought in to do the job.

Stewart is now pleading that the law does allow for this testimony… did you have knowledge and did you use the knowledge?

He says Malhotra and Buckfire are coming from a place of that particularized knowledge. The particularized knowledge was the historical data about the city came from many publically available data, inside reports created by the city, the city's analysts are using those reports so they know and have personal knowledge.

10:22 AM --

Stewart went on to say Ken Buckfire is a very well known, experienced, highly trained highly skilled, with an immense amount of knowledge about investment banking and was hired by the city of Detroit because of that expertise. He depended largely on the Malhotra reports about the city's financial condition to form his decisions.

Buckfire testified about general obligation bonds and their impact on the city and Buckfire has intimate knowledge of the Wall Street bond market. He knows what will allow a city like Detroit to borrow on the bond market and the city was in no position to do so because the numbers he had to work with were all negative.

Steward added both Buckfire and Malhotra were making conclusions that were operative facts so the judge would be allowed to consider both men as giving qualified lay testimony.

Part of the reason this situation has arisen is that yesterday Judge Stephen Rhodes said during Ken Buckfire's testimony "it's hard for me to comprehend why you didn't offer the Ernst and Young witnesses that prepared these projections as expert witnesses."

So what is at stake here is how much testimony from day two of this case will be allowed. If so the case carries on, but should the judge toss the city's expert testimony then it is back to square one in the city's case of demonstrating insolvency. It is entirely possible the Judge might just "split the baby" and say Molhatra can be considered experts as to what happened up until the bankruptcy filing as that has already happened. But Malhotra and Buckfire were also discussing future projections as how the city made the decision to take Detroit into Chapter 9.

We will see at 10:15 am when the judge returns to the bench for a ruling. We are now in recess.

You can tell time by Judge Stephen Rhodes, He was back on the bench at 10:15 a.m.

He gave his ruling in this way:  

Motion to strike Mr. Buckfire's testimony opinion testimony based on his expertise… motion for reconsideration should be granted.

Motion to strike testimony denied.

10:45 AM --

Applicable law. So just to be clear Ken Buckfire will be allowed to continue to testify as an expert.

The Judge is still discussing his reasoning and he also allowed Mr. Molhatra's testimony as well.

In his ruling, Judge Rhodes said "a taxi driver would not be allowed to testify, but that does not mean that Buckfire and Malhotra cannot testify."

They had extensive personal knowledge of the city's affairs that they acquired of their consulting work and it formed the basis of their conclusions. Perhaps more fundamental than that is a key consideration… what both Mr. Molhatra did and what Mr. Buckfire did are a substantial part of the facts and circumstances that led to the filing of this case and are therefore highly relevant to the issues of eligibility of the City of Detroit's bankruptcy before this court at this time.

Accordingly, not only what they did, and why they did what they did, through the documents is in the court's view, entirely admissible."

10:50 AM --

Ken Buckfire is on the stand and is now undergoing cross examination by an objector union attorney.

Buckfire testified he has only met former Michigan Treasurer Andy Dillon once or twice and he has met Gov. Rick Snyder a few more times and knows him better. 

In a conversation with Snyder, Buckfire said: "I told him that bankruptcy should be avoided at all costs… but it is usable as a last resort." 

The union attorney has been probing Buckfire's involvement with the June 14th presentation of the city's turnaround plan.

He called it "a collaborative effort to determine the treatment of unsecured creditors."

Read: City of Detroit Proposal for Creditors

Attorney to Buckfire: "Who made the recommendation to the emergency manager regarding making retirees unsecured creditors?"

Buckfire: "It was a function of the insolvency and lack of cash. Because the claims of the pension were so large and there was no way to pay it they became unsecured creditors."

Attorney: "Who made the recommendation?

Buckfire: "It was a function of the mathematics, I am not sure any one person made it."

Attorney: "It was so self evident no one had to say it?"

Buckfire: "I didn't have to, the mathematics showed that was the result."
Attorney: "What do you recall as the first discussion of reduction of pension benefits?"

Buckfire: "I don't recall."

Attorney:"Did it ever happen?"

Buckfire: " don't recall."

They moved on.

11:20 AM --

Buckfire's testimony has veered off into highly technical areas. He is discussing the intricacies of Wall Street finance. Buckfire has defined a "Dutch Auction" as a manner in which a unsecured creditors can bid into the process of getting cash out of a bankrupted entity. He has also defined a "waterfall" which is how lienholders end up getting paid before other creditors when money is paid from a bankrupt entity.

The objector attorney grilling Buckfire is trying to establish Buckfire's role in making certain retiree pensions were lumped in with other unsecured creditors that in effect made them less able to collect any money in retirement.

The attorney asked Buckfire if he felt the retirees were being treated fairly in the restructuring plan. Buckfire said "they are treated no worse or no better than any other creditor."

He went on to say the opening offer made as part of the restructuring plan was fair because it treated all creditors fairly.

He said a lot of municipalities have attempted in the past to favor some creditors over others and Buckfire said "that has not proven to be an effective strategy. Everyone [meaning all unsecured creditors] wanted to be treated better than others." The city wanted to be viewed as being impartial how it treated its creditors."

Noon --

The cross examination of Ken Buckfire continues. There are intricate questions regarding values of Detroit art, the city's side of the Detroit/Windsor Tunnel and the water department. The Judge was concerned about the relevance of the questioning saying he was not going to allow testimony about work accomplished by Mr. Buckfire after the bankruptcy filing.

Of the water department sale Buckfire said, "it would be a very fortunate outcome for our customers" if the department were allowed to be made part of a regional authority where the city would receive annual lease payments as part of the deal. Buckfire is involved in those negotiations that are ongoing.

The objector union attorney wanted to find out about insolvency.

Attorney: "When did you decide the city was insolvent?"

Buckfire: "I didn't decide" He then went into the definition of insolvency as an inability to pay debts when they are due. He said "it was evident to me."

Attorney: "When did you find out Detroit was insolvent."

Buckfire: "May 7th when I first saw the projections of short term cash flow, projections from Ernst and Young." 

There was a humorous moment this morning.

As the questioning went on the objector union attorney in asking Buckfire about a meeting "at city airport" when he really meant to ask about the public presentation of the restructuring plan at Metro Airport in June. Buckfire leaned into the microphone and said "you mean Metro airport." Of city airport he said "no one would have a meeting there." 

As the morning wore on the questioning has been increasingly esoteric, delving into deep corners of bond finance and how bonds are insured and what amount of the city's debt is insured by bond insurers.

Buckfure did say "substantially all of the city's debt is insured. Of $6 billion in water and sewer debt, $5 and a half billion is insured and the general obligation bond debt is insured."

The court is adjourned until 1:45 p.m, where Ken Buckfire will return to the stand.

1:50 PM --

We are now back in session with Ken Buckfire still on the stand.

Pension attorney Jennifer Green is asking Buckfire about the possible sale of DIA art.

2:30 PM --

Buckfire said discussions with DIA officials for the possible sale of art was started in the summer of 2013 and he tried to convince officials there it was in everyone's best interest to try and find a way for this situation to be resolved that would be beneficial for everyone involved. Buckfire said these discussions did not bear any fruit and ended. 

Jennifer Green, a pension lawyer began her cross examination of Ken Buckfire. She started digging into Buckfire's advance knowledge of Detroit's Chapter 9 bankruptcy filing. She produced an email that was between two DIA officials that said they had discussed a lot of things in a meeting with Buckfire and included the line "a bankruptcy filing will likely be in July."

Green wanted to know "Is it your testimony that you did not share with anybody at the DIA a possible bankruptcy filing in July."

Buckfire: "No."

She wondered if he had discussed chapter nine at all. He said he spoke only in generalities that "there was a raised risk for a bankruptcy." "I never said it was coming in July, it was in his email."

Green: "You had just met with him. Did you respond that says I did not share any information like that with you?"

Buckfire: "This was not my email."

Green: "Are you denying you told them a bankruptcy was coming in July?"

Buckfire: I never told them that. I told them the city did not have a forbearance agreement and they should be concerned about doing something about the DIA as soon as possible."

Green: "Was it possible that someone in that meeting said that a bankruptcy filing would be coming in July? "Mr. Bennett and Myself were there."

Green: "Did Mr. Bennett say a filing was coming in July."


Green produced a number of emails showing discussions of chapter 9 filings and even a formal plan of adjustment [a bankruptcy resolution] would be filed by November 13th.

Green: You discussed a formal plan in November with DIA representatives?

Buckfire: I explained to Mr. Medor if we were successful in coming up with a plan, it would be the end of this year, but the city needed to get one as quickly as possible."

Looping back around, Green asked "so did Bankruptcy in July ever come up?"

Buckfire: "No, we were explaining what we were doing with the creditors."

2:40 PM --

Green's line of questioning Buckfire's recollection of his discussions of different subjects. One was the repeal of PA 4. Buckfire testified he never had any discussions with anyone, including Jones Day the city's bankruptcy counsel, regarding the repeal of PA 4. Then she produced some emails that Buckfire was copied on discussing the very topic.

Green asked: "Did you recall discussions with Jones Day regarding the repeal of PA 4?"

Buckfire: "No"

Later, Green asked Buckfire about a meeting with Gov. Rick Snyder and he said:

Buckfire: "Meeting where we briefed the governor June 6th… they were interested in the application of restructuring techniques in the city of Detroit on how to resolve the situation."
Later Green shoed a June 5, 2012 email and asked, "Any discussion about Chapter 9 filing? Did you discuss pension liabilities or memos regarding constitutional protections of the pension liabilities at this meeting?"

Buckfire: "No."

Green: Did you receive any memos from Jones Day on Chapter 9 proceedings?

Buckfire: In general yes but not specifically.

Green then moved on to what Buckfire had discussed with Detroit Emergency Manager Kevyn Orr regarding chapter 9

Buckfire: "I had told Mr. Orr that he should not file a Chapter 9 unless there was a forbearance agreement executed. It was executed on July 16th.

Green: did you know the Chapter 9 would be filed before July 16th?

Buckfire: No

Green: "How soon after the forbearance agreement was signed would there be a chapter 9 filing?"

Buckfire: "I did not know"

Green: "You had no idea the petition would be filed two days later?"

Buckfire: "No."

Green: "Were you surprised the filing came on the 18th?"

Buckfire: "Yes."

Once again there was a little bit of levity:

It was at this point that the judge admonished Buckfire for volunteering more information than was asked for in his answers.

The judge told Buckfire, "I am asking you to answer just the question asked."

It was at that point Green said she was finished with her cross examination but thanked the judge for his assistance.

2:55PM --

Bill Wortheimer is the attorney for the so-called Flower plaintiffs. They were the five Detroit retirees who sued to prevent a Chapter 9 filing based on the Michigan Constitution's requirement that pensions cannot be altered.

Wortheimer: Did you ever talk about the constitutional requirement with Mr. Orr.

Buckfire: "No."

Wortheimer: "Why?"

Buckfire: "It just wasn't important."

Later, Wortheimer wanted to know if Buckfire had discussed the bankruptcy filing on July 18th, 2013. Buckfire had testified it was a surprise to him it would be filed that day.

Wortheimer wanted to know if he ever discussed it the reason for the filing with Kevyn Orr. Buckfire said, yes, that it came a few days after the filing.

Wortheimer wanted to know how the conversation went.

Buckfire: "Mr. Orr feared losing control of the process."

Wortheimer pressed on to get specifics about the reasons for that. Buckfire admitted the Flowers lawsuit being heard by Judge Aquilina in Ingham county was in fact the case.

Wortheimer: Orr told you one for the reason for moving-up the filing was the lawsuit.

Buckfire: "Yes."

3:08 PM -- Court is in recess

Some Housekeeping: Though the testimony has been moving very slowly it was decided Friday afternoon that no matter where the trial is, when the time comes Governor Rick Snyder will testify on Monday at 1 p.m.

3:25 PM --

Detroit Police Chief James Craig, who took over the DPD on July 1, 2013, has come to the stand. He is giving his work and educational history now.

4 PM --

New Detroit Police Chief James Craig is testifying with Robert Hertzberg of Piper Hamilton law firm conducting the direct examination.

H: "Why take the job?"
Chief: "It was a great opportunity. I knew the city was facing a myriad of problems. It was home. When I look across as my job as police chief it was very significant for my career."

Chief is here to testify regarding service delivery:

He was asked what he was told about the DPD's condition prior to taking the job.

Chief: "Everything is broken, deplorable conditions, crime is extremely high, morale is low. An absence of leadership."

H: "What were you told about the city as you met with ... "

Chief: "Low morale, broken conditions."

Chief: "I've had a chance to go to all of the precincts the conditions of stations were deplorable. Our crime lab technicians work out of the heat sometimes worked, not a lot of space, deplorable conditions. As recent as yesterday in community meetings the deplorable conditions at police stations and people are wondering what I intend to do about that. In terms of Solving the crime: The homicide clearance rate was roughly 11 percent."

Please tell us about Crime statistics:

H: "Did you consider Detroit a violent city?"
Chief: "Very violent compared to cities I have worked. Compared to L.A. or Cincinnati it was the most violent city I had ever seen."

What was the clearance rate on Homicides?

Chief: "It was around 11 percent."

H: "Is that good?"
Chief: "Deplorable."

H: "Using the crime of robbery the clearance rate."

Chief: "It was 8 percent."

H: "Is that low?
Chief: "Extremely low."

H: "What was it like in L.A.?"

Chief: "25 percent."

H: "In Cincinnati?"

Chief: "It was roughly 25 or 35 percent."

H: "Were there problems with accountability?"

Chief: "Accountability was absent. The one thing the department did well. When I talk about accountability I'm talking about at the executive level. The department could be lauded for its success in the consent judgment. They were 31% compliant and got to 92% in a couple of years. But when you looked at other areas of the department managers were not being held accountable."

What do you view as your job?

Chief: "To reduce violent crime and increase morale."

H: "What was morale like?"

Chief: "It was the worst than anything I had ever seen even beyond when I was here as an officer in the 70s. They had been put on 10-hour shifts and had taken 10 percent paycuts and they were just looking to be police officers again."

Chief: "Detroit police management had taken a cookie cutter style management and there was no style in how the officers were deployed. After my staff started looking at it we started adjusting staffing."

H: "What is the average response time when you took over?"

Chief: "I was reported out to me it was 50 minutes."

H: "What was it like in LA?"

Chief: "7 minutes."

H: "Do you think this put residents safety at risk?"

Chief: "I did. The expectation that police would get there the expectations were that the cops would come immediately. I was told there were people calling and no cops showing up. We have two dispatchers facing charges for not sending police officers to crimes. One was a stabbing."

Chief: "It was very odd to me when I took over my office a full duty officer was assigned to gas and wash my car and several other officers doing clerical duties. We moved them out on an operational assignment and then started looking at other places in the department."

H: "Mayor's personal protection: when you took over did DPD give the mayor protection. How many officers?"

Chief: "23. We have reduced that staff. There are now six officers with the mayor others were reassigned."

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