Mich. Gov., Emergency Manager Defend Bankruptcy

Michigan Gov. Rick Snyder and Detroit emergency manager Kevyn Orr, the two men most involved in the decision to make the city the nation's largest to file for bankruptcy, testified Monday that a court-led reorganization is necessary to save a city embroiled in crisis.

The men were summoned on the fourth day of a rare trial before federal Judge Steven Rhodes to determine whether the city could fix its troubled finances in bankruptcy court. They were grilled for hours by attorneys representing groups that oppose the bankruptcy, which was authorized by Snyder and filed in July by Orr.

Those attorneys, representing unions, state retirees and others, sought to show that the two had plowed ahead with bankruptcy proceedings without good faith negotiations or regard to pension protections in the state constitution. Orr has said cuts to state pension benefits could be part of a bankruptcy deal.

Orr and Snyder said the city's rising debt and falling revenue, combined with lawsuits against them and a lack of cooperation among debtholders, forced them to seek the court's intervention.

"This is not the way any major city ... should operate or should look," said Orr, citing widespread and persistent problems such as blight, poor public services and crime. "I don't think any serious person ... would say the city is not in need of some form of remediation."

During the trial, Detroit must show it is broke and tried in good faith to negotiate with creditors. Orr, who represented automaker Chrysler LLC during its successful restructuring, has said the city is saddled with $18 billion in long-term debt.

In the days leading up to the bankruptcy filing, retirees sued, claiming their pensions are protected by the constitution and are at risk in a bankruptcy. The lawsuits were put on hold with the bankruptcy petition.

Snyder, a Republican, said that the bankruptcy filing wasn't an attempt to forestall court-imposed injunctions that could result from the lawsuits, but that he was concerned that the lawsuits from state retirees and others showed that there "wasn't a meeting of the minds" and that the city needed to protect itself as it struggled to pay bills.

"Bankruptcy is a very last resort," he said. "It was a tremendously difficult decision to make, but the right one," he added.

Attorneys for both sides were largely respectful of the governor - a lawyer for the city mistakenly called him "your honor" several times - but some exchanges between Snyder and attorneys opposing the bankruptcy became testy. Snyder frequently said "I don't recall" or cited attorney-client privilege. Some attorneys objected to Snyder opting to remain silent when asked about things he said to Orr or others if a lawyer was in the room, though the objections were often overruled.

Dozens of protesters critical of Snyder showed up outside the courthouse just before he took the stand in the afternoon. They carried signs, one depicting him with devil's horns.

Earlier Monday, Orr testified that he had thought as late as June that a bankruptcy filing could be avoided but that he knew time was running out for the city and its creditors to agree to concessions. Orr said he received a couple of counterproposals from creditors after a June meeting, but none from unions or retirees before filing for bankruptcy protection.

"Detroit spends more than it takes in. It is clearly insolvent on a cash-flow basis," Orr testified as he read from a report he issued in spring after 45 days as emergency manager.

Anthony Ullman, an attorney representing retirees, wanted to know why Orr and his team did not mention in the proposal to creditors that the city sought to cut public pensions, which are protected in the Michigan Constitution. Orr said it was widely known and discussed at the time, and argued that federal law would trump the state as it relates to pensions protections.

Orr is expected to return to the stand on Tuesday. The trial could end this week, but a decision on Detroit's eligibility appears to be several more weeks away. The judge has set a Nov. 13 deadline for lawyers to file legal briefs on certain issues.