Rod Meloni: Live inside Detroit's bankruptcy trial

3 months after bankruptcy filing, trial will determine whether Detroit really is eligible for Chapter 9

By Rod Meloni - Reporter, CFP ®

DETROIT - 10 a.m. --

An historic morning where the city of Detroit's bankruptcy qualification trial is about to begin came with the expected response. As Judge Rhodes took the bench precisely at 9 a.m. to hear pre-trial motions, outside was a massive, lively and quite loud protest.

Related story: Bankruptcy or bust? Trial over Detroit's filing underway

Union members, retirees and activists protesting Detroit's bankruptcy were so numerous they had the street blocked off and marched in a large oblong circle on West Lafayette Boulevard promising at the prompting of a woman with a bull horn "no justice, no peace" among other rallying cries.

Slideshow: Protesters outside Detroit's bankruptcy trial

There are loudspeakers playing rock music, television satellite trucks parked side by side and the last time I remember seeing security like this at the federal courthouse was for the underwear bomber trial.

The signs the protesters were carrying complained about the process throwing grandma under the bus and demanding the banks pay the tab not the retirees.

The American Federation of State County and Municipal Employees are the most obvious of the unions involved in the protest and it is their lawyers leading the charge in the courtroom against Detroit's Bankruptcy. The line to get into the federal courthouse was roughly a half hour long.

Security at the door, which is usually very tight anyway, was even more careful and was only allowing the public into the courthouse on the West Lafayette side of the building, the Fort street side of the building was closed to public traffic until 9:30 a.m.

Inside the courtroom, the first order of business before the trial gets started was a bit of a replay of yesterday's court activity involving AFSCME activist Robert Davis.

Unions are asking Judge Rhodes to release emails between Gov. Rick Snyder's office, Snyder assistant Richard Baird, and Kevyn Orr. It is their contention they can establish through this email traffic that the governor's plan all along was to take Detroit into bankruptcy and therefore had no intention of negotiating settlements with the unions, thus making Detroit ineligible for bankruptcy.

Read: Judge: Emails, docs in Detroit EM case won't be released

Read: Judge: State must release names of Detroit EM candidates

The attorneys for Jones Day, who are representing the city of Detroit are arguing that their work product is privileged, meaning does not have to be disclosed, under the attorney client privilege rules of the court. The state's attorneys also argued that some of the emails the unions have been asking for, while the governor's office believes them to be privileged as well under the governor's exemption under disclosure rules, have been given to the unions in the spirit of moving the case along.

Judge Rhodes has gone into recess and said he will have a ruling on this situation at 10 a.m.

Special section: Detroit bankruptcy

10:20 AM --

The court is back in session.

Judge Steven Rhodes was ready to rule on whether Jones Day law firm emails should be provided but a UAW attorney started the proceedings with a lengthy argument about why the Judge should rule in the union's favor.

The judge made three different rulings and I will spell them out in a later post.  

This just in: Gov. Rick Snyder's lawyers had previously said they would try and keep Snyder off the stand. The governor has now apparently changed his mind and is now willing to testify in the Detroit bankruptcy qualification trial.

The Detroit Bankruptcy eligibility trial has just begun at 10:27 a.m. with opening arguments.

10:45 AM --

Jones Day Attorney Bruce Bennett has started his opening argument by saying, "I could stand here for hours talking about the city's insolvency, but I won't. Witnesses will offer a mountain of evidence that by every standard, sadly, the city is insolvent."

He went on saying, "There is no expert needed. The data will speak for itself clearly and persuasively on its own. The numbers speak volumes." 

He discussed that AFSCME charges on about how the city is not qualified to file for bankruptcy.

It has maintained the Belle Isle deal meant the state was a poor deal.

Bennett said, "The Belle Isle Deal never involved a generation of spendable cash. It has always meant a reduction in cost of the city's maintenance of the island."

On The DIA art sale: "It is very hard for us to understand how anyone could say that art sales were deferred. There were no pre-application opportunities to sell the art." 

Read: DIA: We save Detroit $35 million per year

Regarding AFSCME's claim the emergency manager appointment prevents the city to raise funds Bennett says, "There has no such action that specifies what are would be sold. It would be quite a surprise to see what that is." 

Bennett on whether the proposal to creditors… given by Kevyn Orr in June, on pages 101-109, was close enough to a confirmable plan of adjustment to qualify to show the city was trying to implement a plan and how it was trying to negotiate in good faith.

Read: City of Detroit Proposal for Creditors

The plan was the city's plan, could be the plan of adjustment, has met all rules under the federal bankruptcy law and the reality is there is no question the plan can be confirmed.

11:15 AM --

Bennett went on to the question of whether negotiations with creditors are impracticable which is the standard of bankruptcy eligibility.

Bennett said, "New York City when it was in trouble [in the 1970s] had less bond debt than the city of Detroit."

Bennett told Judge Rhodes that most of those bond holders do not have holder representatives, so there was no one to negotiate with on a grand scale. That in itself made the negotiations impracticable. But Bennett went on saying the city attempted to negotiate in good faith with the city's 40 plus unions largely represented by AFSCME.

Bennett pointed out AFSCME and the UAW admitted that while negotiations with bondholders may not be doable, negotiations with them were and they did not happen. There Bennett wondered if negotiations with large segments of the city's debtors was not practicable how is it that negotiating with the unions makes the negotiations possible? But he said the city of Detroit attempted to negotiate with its unions anyway.

11:20 AM --

Bennett is a slow, steady, calm litigator.

He continued laying out his case clearly.

In pleading the impracticability argument further, he discussed the fact that AFSCME pleadings in the case admit in on area: "The city impairs most of its creditors. We need impairment pretty much across the board. That to me is the end of impracticability." Because the other side is admitting negotiations are not practicable.

He then brought in a chart that labeled all the unions the city negotiates with. It charted a questionnaire the city gave the unions as part of its discussions after Kevyn Orr's June meeting, where he gave his reorganization plan to creditors.

On the chart is a row regarding representing retiree interests. Bennett said not one union wanted, or would represent, retiree interest.

On this point he said, "What do you expect of the city making a proposal?"

The city answered every question at the meeting with creditors and Bennett said, "It finds the people in the room who cannot represent the people impaired by your proposal. What should the city do? None of the objectors say how that should have been resolved."

11:40 AM --

Bennett went on to another subject. The city continued trying to negotiation with its unions. "We tried really hard anyway, presented the plan, Kenneth Buckfire [a city consultant] will testify the city told creditors it would have discussions for a month to figure out a possible solution." Bennett went on to say there was feedback solicited of the unions and the city would evaluate in the following month at a July 15th evaluation.

He said creditors were informed often and clearly that the city might find itself in a Chapter 9 without significant negotiations. In fact, he said at the same time the city was in contingency planning on a Chapter 9 and not to have done so would have been irresponsible.

Bennett said the city tried to solicit information or negotiations from the unions and never once was it said, "We  don't care what you think."

Bennett went on: When the city asked for responses back from its unions all that came back was responses from all unions saying "our position is better than other positions."

Bennett said it showed the unions were insensitive to the overall position the city faced."

Bennett asked: "What did labor do?"

He said UAW papers were instructive saying, "Of course we're not going to say yes to changing retiree benefits because of the state constitution it is a proposal we can not accept."

Bennett said the city was acting in good faith and all it received in return was the unions saying, "We're never going to agree to non-impairment. What is the city supposed to do?

"Well, gee will we go find money in a mattress somewhere?"

Bennett continued: "Negotiations were not in good faith because impairment was on the table."

He reiterated the city acted in good faith and the negotiations were not successful. 

Bennett summarized the city's situation to close.

"The problem is that the city of Detroit taxpayer puts up $1 and gets back 58 cents but soon it could be 35 cents.

He called Detroit's financial situation "not working now, won't work in the future and it needs to be changed."

He said the solution might be to raise taxes and Bennett pointed out Detroit has the highest taxes in the state.

What's more, there are enforcement problems of too high assessments on homes and businesses in the city and so there was "nothing left to do here, there is no other solution."

"Chapter 9 was more needed here than every other scenario you can think of," Bennett said.  

Bennett then went on to discuss a number of technical issues but finished his opening by saying there simply was no choice but file a Chapter 9. 

The State of Michigan said it was not going to offer opening remarks but said it intended to offer closing remarks at the trial's end.

The union's are now up with their side of the case.

11:50 AM --

Opening arguments for the city of Detroit Pension Board that is objecting to the Chapter 9 started her exhibit laden discussions by showing that the best and most explosive arguments that show the city of Detroit is not bankruptcy eligible.

The first argument is that the city's Chapter 9 filing was a foregone conclusion from the beginning in 2011. She showed a number of statements from the deposition of former Treasurer Andy Dillon that show the State had Chapter 9 in mind all along. Green stated when Kevyn Orr's appointment as an emergency manager was broached with Mayor Bing when he was told it was Kevyn Orr's 30 years of bankruptcy experience that made him the best candidate.

The paper trail Green is laying out shows considerable number of documents regarding proceeding with the Chapter 9, particularly form Kevyn Orr's media relations spokesman Bill Nowling that preparation for a July 19, 2013 bankruptcy filing was set in motion weeks before the actual filing … on July 18, 2013.

She then showed a number of internal documents from Conway McKenzie showing plans for a Chapter 9.

Lastly Green made one final argument: the city does not know the actual value of its two largest assets the water and sewer department and Detroit Institute of Arts art collection. Therefore the city prematurely filed for Chapter 9.

Lynne Brimer -- representing retired police officers -- is now up opposing to the Chapter 9 filing.
She is pleading PA 436 is not a properly passed law. That state law says no law properly submitted to referendum and then passed without being sent back to the electorate.

An act previously overturned, and disregarding the will of the people, that we not have an emergency manager who would supplant the democratic rights of the electorate.

We are taking a lunch break.

1:20 PM --

I had promised to update the judge's ruling regarding the earlier motions.

Judge Steven Rhodes he denied a motion on the common interest doctrine having to do with attorney client privilege. It had to do with who precisely the consultants and the attorneys who worked initially for the state and then the city and the correspondence between them could be considered "discoverable" -- in other words, could the objectors to the bankruptcy get internal memos.

The city and state said they were exempted under attorney client privilege, the objectors said they weren't.

The judge said they were but agreed to take a closer look of the same issue came up during the trial to see if he might change his mind.

Next up, the city agreed to give up emails the objectors were asking for even though they initially objected. They said they should not have to again on the attorney client privilege exception. The judge thanked the city for giving over the documents and asked the city to hand over the in-question documents right away.

There were other documents objectors were after that the judge denied them and he also denied an objector motion regarding the release of more documents the city did not want to part with. The judge said the objector attorney had not been specific in his document request and until the judge could understand specifically what the attorney wanted he was not able to rule any other way.

We are not awaiting the judge to re-take the bench and will have more in about fifteen minutes.

2 PM --

In the afternoon session, the objector unions are up, giving their legal reasoning for why Detroit is not bankruptcy eligible.

UAW attorney Babette Ceccotti continued with the notion of the timeline starting in December 2011 and going right up until July 18, 2013 the governor and his aides set the city of Detroit on a track that would guarantee a Chapter 9 filing.

In her crosshairs was PA 436, signed into law by the governor after taking office. In her crosshairs was the Kevyn Orr proposal for reorganization put out last June.

Read: City of Detroit Proposal for Creditors

She said it gave a one month timeframe to negotiate new contracts. She said it was deliberately set up to last only one month, "a compressed" timeframe, where the Governor and Kevyn Orr knew negotiations could not be accomplished and set up these alleged negotiations for failure. Therefore she said Detroit is not eligible to file for Chapter 9 municipal bankruptcy.

In another and aligned argument, Ceccoti also said the negotiations were stopped in their tracks by Kevyn Orr's proposed reorganization plan because it included a section discussing changes in retirement benefits.

The state of Michigan Constitution does not allow for any changes in retirement benefits.

The UAW sent a letter to Kevyn Orr during this time asking where he sees anything in the Michigan Constitution that gives it the authority to negotiate any changes in retirement benefits.

"On its fact, the proposal was unacceptable," Ceccotti said. "This has legal consequences. What authority gives the UAW the right to compromise retirement benefits?"

It does not, she said, and asked the judge to find Detroit ineligible for bankruptcy.

2:30 PM --

The American Federation of State County and Municipal Employees took their turn to argue the city's ineligibility.

Attorney Sharon Levine from Washington D.C. claimed the one month time Kevyn Orr gave unions to negotiate was too compressed, that the meeting where Orr gave his turnaround plan to labor negotiators and yet said at the meeting it was not a negotiating session.

She said Orr was not acting in good faith in the city's negotiations and that there are several different laws that address what constitutes "good faith."

This is where Judge Steven Rhodes asked anyone in the courtroom to weigh in or offer a brief that would flesh out what constitutes good faith negotiations.

Objector lawyers said they would come up with a brief in the next two weeks.

Levine said of the city's Chapter 9 filing, "What we seem to be hearing is if you have legacy liabilities you get to say I don't have to pay."

She went on saying "It's a very sad plea to take to Chapter 9: and the city cannot meet its burden of proof."

3:15 PM --

For the past twenty minutes Dentons Attorney Anthony Ullman, who had the judge ask him if he had any new information to add to the proceedings, he assured him he did and in fact did

Ullman started his presentation by saying Kevyn Orr violated the oath of office he took to uphold the United States and Michigan constitution in his actions as emergency manager. Because the state of Michigan constitution says retirement benefits cannot be adjusted the act of doing so is a violation of the oath. What's more, Ullman said the Chapter 9 filing in and of itself was not legal because nowhere can anyone show that the emergency manager was authorized to make a Chapter 9 filing.

He showed work product produced by Kevyn Orr while working for Jones day where he discussed the fact that PA 436 changed PA 4 [which was turned down by voters] gave a "veneer of a revision" and he was fully aware of the pension clause when he filed the Chapter 9.

Ullman went on to say, "Kevyn Orr decided to use the Chapter 9 filing to ‘trump' the pension clause."

Later Ullman said the City was unaware of the actual numbers of pension underfunding at the time of filing. Finally he said the city has not attempted to sell its art in the DIA as a way pay for some of the city's debt. 

As soon as Ullman finished his pleadings, AFSCME lawyer Sharon Levine stood up and proclaimed her colleagues at her lawfirm asked her if she was "crazy" for only asking for two weeks to make the arguments in their brief on what constitutes good faith bargaining. She asked Judge Rhodes for another week and he gave it to her. 

The court is now in a 20 minute recess.

After the recess, the eligibility trial got underway. Right now, a financial officer from Ernst and Young from Chicago is testifying about the city's financial condition.

Time to start preparing for the 5 and 6 p.m. newscasts. Will resume my blog in the morning.

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