DETROIT - Detroit’s attorneys renewed their arguments about city’s need for speed in its Chapter 9 case Thursday, telling the federal judge overseeing the case that the city’s fiscal recovery -- and its ability to secure financing -- hinge on a prompt decision on whether the city will officially be afforded bankruptcy protection.
“We need to convince the outside world we are making progress and we are close to the end, that’s a really big deal,” Detroit attorney Bruce Bennett, from Jones Day, argued in a late-afternoon hearing before U.S. Bankruptcy Judge Steven Rhodes. “We are always focused on decisions if people and businesses want to stay here or move here, and those decisions aren’t going to be made until this is made clear.”
The hearing centered on requests from attorneys for a committee representing thousands of retirees that the judge stay deadlines and discovery associated with the eligibility trial, scheduled in two phases for late September and late October.
Rhodes also heard arguments from union attorneys asking him to compel Detroit emergency manager Kevyn Orr to disclose additional information about the weeks leading up to the city’s July 18 filing.
Rhodes did not rule immediately on the retiree request. On the union’s motion, he ruled that Orr must sit for a second deposition, but set limits on the questions, saying some of it may be protected by attorney-client privilege.
Bennett argued that the request from the nine-member retiree committee to stay the eligibility process would delay the fast track that the city and Rhodes are hoping to stick to. The city’s ability to secure debtor-in-possession financing and successfully negotiate with its creditors depends on a speedy decision on the eligibility question, he said.
“The reality is that if the city is eligibility or not will have an enormous impact on negotiations,” said Bennett. “It is not the case that the kind of negotiations after eligibility are the kind we are having today. This is not the perfect environment to be working in right now.”
Detroit’s ability to secure a $250 million DIP financing loan also relies on an affirmative ruling, he said. Lenders are more likely to loan after the judge orders an order of relief than before, the attorney said. “Getting a financing done before an order is often very different than after an order of relief,” he said.
It was a mistake for Stockton, Calif. to delay its Chapter 9 eligibility decision by nearly a year, Bennett added.
“When people look back on it, they are going to decide the nine months’ delay added to the schedule, that was just wasted time tacked onto the case,” he said.
Claude Montgomery, an attorney for the committee representing roughly 22,000 retirees, argued the stay is needed because the bankruptcy court may not have jurisdiction over the case in light of objections that the bankruptcy filing violates the Michigan constitution. Part of Montgomery’s argument hinged on the fact that the constitutional protections of pensions make Detroit a special case.
Giving a glimpse of the city’s future argument over its ability to cut pensions, Bennett argued that the benefits are protected as contracts, no more or less.
“Every single bondholder can point to the same language,” he said. “But you don’t have a single bondholder here.”
Rhodes replied that there were lots of reasons, not all of them legal, as to why bondholders may not be at the hearing.
After hearing arguments, Rhodes said he would rule on the matter within a few days.
Attorneys for the city’s largest union asked the judge for the chance to re-depose Orr after the emergency manager invoked attorney-client privilege on key questions during the first deposition. At issue was a series of questions where Orr invoked the privilege based on the fact that attorneys for Gov. Rick Snyder -- not Orr’s own attorneys -- were in the room at the time of the discussions.
Sharon Levine, an attorney for the American Federation for Municipal, State and County Employees, said transparency was important to establish in the case. Bankruptcy “is a difficult, scary, and fast process, and transparency helps -- it just does,” Levine said. “Having all the facts is a better place for credible bankruptcy process than having a code of silence, hiding behind privilege.”
Levine said the union wants to clarify Snyder and Orr’s decisions leading to the filing to determine whether it was made in good faith, a criteria for eligibility.
“It’s the who, what, where, why and when,” she said. “It’s the basic decisions we look at in deciding good or bad faith.”
Bennett argued that Orr and Snyder, as representatives of the city and state, have a common interest, and therefore conversations with each others’ attorneys should be protected.
Rhodes ruled that AFSMCE may call Orr back for a second deposition, but that the common-interest doctrine does apply, allowing Orr to shield conversations he had with Snyder when the state’s attorneys were in the room if they were talking about legal issues.
“That does not mean that every question that Ms. Levine and others want to ask of Mr. Orr are protected,” Rhodes said, saying the privilege generally applies only to conversations that sought legal advice.
“It’s really impossible for the court to rule specifically,” the judge said. “All I can say is when you have questions during depositions, call me on the phone and I’ll resolve on the spot if I can.”
