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Michigan Governor To Testify in Detroit Case

CHICAGO -- Michigan Gov. Rick Snyder will take the stand as soon as Monday to testify in Detroit’s bankruptcy case.

Snyder’s testimony will mark a first for a sitting governor in Chapter 9. Attorneys for the United Auto Workers union subpoenaed Snyder, a first-term Republican, to answer questions about the motives and decisions leading to Detroit’s July filing.

Snyder’s testimony comes as part of a mini-trial to determine if the Motor City is eligible for Chapter 9 bankruptcy protection. A ruling is not expected until at least mid-November.

Outgoing Michigan Treasurer Andy Dillon and top Snyder aide Richard Baird, who was responsible for hiring Detroit emergency manager Kevyn Orr, are also expected to testify, likely on Tuesday. Orr is expected to testify in the case Friday.

Snyder has already sat for a three-hour deposition, and his attorney originally argued that should be sufficient. But U.S. Bankruptcy Judge Steven Rhodes said Monday that he prefers live testimony.

At the start of the eligibility trial Wednesday morning, Snyder’s attorney, Matthew Schneider, said the governor would cooperate and be available to testify Monday afternoon.

“The governor -- because he wants to move this proceeding along -- is willing to testify,” said Schneider, who is chief legal counsel for the Michigan attorney general.

Wednesday marked the first day in the eligibility trial, which will last at least five days. Detroit’s lead attorney, Bruce Bennett from Jones Day, said during his hour-long opening argument that bankruptcy is Detroit’s only option. He argued that there’s a “mountain of evidence” proving the city is insolvent and presented a timeline that he said shows the city negotiated in good faith with its creditors -- two criteria the city must meet in order the be allowed to enter into bankruptcy.

Bennett argued that teams of people were working on the city’s problems by the end of 2011. “It was a lot of time and a lot of effort in search of alternative solutions,” he said. He said negotiations were tough because unions refused to consider cutting pensions. Without bankruptcy, the city would soon be devoting 65 cents out of every tax dollar to pay off its debt, he said. 

He also argued that it was impracticable to negotiate with the creditors -- a threshold that allows the city to avoid the good faith test -- which includes “thousands” of bondholders. “They were impracticable on the retiree side and ... on the bondholder side,” Bennett said. “But we tried really hard anyway.”

Creditor attorneys argued that Orr and Snyder always planned to file for bankruptcy with the aim of cutting pensions and never negotiated in good faith. “It all adds up to a fairly deliberate plan to use Chapter 9 to find new ways to undermine the Michigan constitution,” UAW attorney Babette Ceccotti said.

Sharon Levine, attorney for the city’s largest union, American Federation of State, County and Municipal Employees, argued that Detroit in fact had the ability to negotiate in good faith, contrary to Bennett’s assertion.

“The timeline the city set for itself was a timeline to not allow an out-of-court negotiation to take place,” Levine said, arguing that the city cannot meet its burden of proof in the case and therefore is not eligible for Chapter 9.

After opening arguments, Detroit called its first witness in the case, Ernst & Young consultant Gaurav Malhotra. Malhotra was hired in May 2011 to review the city’s books and later to craft 10-year projections that are a key part of Orr’s restructuring plan.

Malhotra testified to the city’s increasingly cash-strapped position that officials tried to mitigate by borrowing from other funds and halting pension payments. Creditor attorneys will cross-examine him Thursday.

Rhodes signaled that he would not rule on the city’s eligibility until at least Nov. 13. That’s the date he set for the city and its creditors to submit briefs on their legal definitions of good faith negotiations.

Separately, the Detroit City Council plans to meet Friday morning to consider an alternative financing plan to Orr’s $350 million debtor-in-possession loan from Barclays. The council rejected Orr’s DIP loan proposal on Monday, and said later that another “credible entity” had come forward with a similar loan. Council members on Wednesday would not name the bank, but said the terms offered were essentially the same as those offered by Barclays.

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