Michigan Gov. Rick Snyder (Carlos Osorio / Associated Press)
Detroit — Gov. Rick Snyder could be called to the witness stand in Detroit’s bankruptcy eligibility trial this week, as legal maneuvering escalates in a historic case being defined by the sanctity of public pensions and the reach of Michigan’s controversial emergency manager law.
The city’s Chapter 9 filing puts municipal bankruptcy law at a crossroads that could end with a precedent-setting slashing of billions of dollars in public pension obligations in violation of the state constitution, a union lawyer said Monday.
A final pretrial hearing in federal court Monday signaled that the fight over the fate of public pensions is likely to intensify Wednesday. That’s when a trial begins to determine whether Detroit becomes the largest U.S. city ever granted bankruptcy protection from its creditors.
“We are at one of those moments that I think we will look back on and say ‘this is where Chapter 9 changed,’ ” United Auto Workers lawyer Babette Ceccotti told U.S. Bankruptcy Judge Steven Rhodes while objecting to the city’s eligibility for Chapter 9 bankruptcy relief.
Ceccotti urged the judge to uphold state constitutional protections of vested public pensions, despite the city’s goal of shedding the obligation in bankruptcy court.
Also during Monday afternoon oral arguments over legal issues surrounding Detroit’s eligibility, Rhodes continued to raise questions about how the emergency manager law authorizing the city to declare bankruptcy came into effect. Last week, he grilled a state attorney about why the Legislature passed a new emergency manager law in December, a month after voters tossed the old statute, Public Act 4.
Rhodes ordered the state’s attorneys to bring forth evidence at the trial justifying why the Legislature tacked on $5.78 million to pay for emergency managers and consultants to a new emergency manager law — making it akin to an appropriations bill and immune to a voter referendum.
“What was the purpose of adding the spending provision to PA436?” Rhodes asked.
Retirees and unions opposed to bankruptcy are trying to get the judge to strike down Public Act 436 as unconstitutional for denying citizens their right to a referendum. If Rhodes found the entire law unconstitutional, it could unravel the bankruptcy filing and void Emergency Manager Kevyn Orr’s appointment, Wayne State University bankruptcy professor Laura Bartell said.
“If the emergency manager law is unconstitutional, then the correct party has not authorized the bankruptcy,” Bartell said. “That means one of the requirements for eligibility is not met.”
Rhodes also could strike down the spending provision tacked onto to the law, while still finding the rest of the emergency manager law legal and the city eligible for bankruptcy, Bartell said.
Appearing before Rhodes, a state attorney said lawmakers passed the replacement law with numerous changes giving local elected officials more involvement in state takeovers in response to the will of voters.
“This is how it works in our constitutional republic,” said Matthew Schneider, chief legal counsel to state Attorney General Bill Schuette. “The city residents voted for a Legislature that enacted PA436.”
'Isn't enough money'
At Monday’s hearing, Detroit’s top bankruptcy attorney Bruce Bennett said the state constitution might protect vested public pensions, but the city’s financial situation is dire. Chapter 9 bankruptcy lets municipalities cut pensions and contracts despite state constitutional protections, Bennett said.
“You can say pensions cannot be impaired, but the reality is, at the end of the day, there isn’t enough money to pay them,” Bennett told the judge.
If city unions and retiree groups don’t like expected pension cuts, try life outside bankruptcy court, Bennett said.
“We’ll see how it turns out,” Bennett warned. “I think that will not be a good outcome.”
Unions and the city’s pensions funds have asked the judge to consider ruling that pensions can’t be cut before the city proposes a plan to restructure its estimated $18.5 billion in debts.
Rhodes suggested Monday that protecting the pensions at the eligibility stage may violate the federal bankruptcy code.
“It gives priority to one creditor over all others,” the judge said.
UAW wants gov to testify
Also Monday, the UAW indicated it wants to put Snyder, outgoing state Treasurer Andy Dillon and gubernatorial aide Richard Baird on the witness stand under oath about the administration’s “motivation for Chapter 9 filings and dealings between Emergency Manager and state officials,” according to a proposed pretrial order obtained Monday by The News.
The UAW, which represents a portion of the city’s unionized workforce, has sent subpoenas to Snyder, Dillon and Baird.
“Our plan is to have them go ahead and testify live during the trial,” UAW lawyer Peter DeChiara said Monday.
The state Attorney General’s Office doesn’t want the trio to testify and offered, instead, to have their depositions available during the trial.
“We do not believe the governor should testify because it is unnecessary,” Schneider said. “If he did not testify, it would speed up the trial.”
Other city labor unions, retiree groups and Detroit’s pension funds want to use Snyder, Dillon and Baird’s sworn depositions as testimony in the trial.
Rhodes, however, said he prefers live testimony. It was not clear when Snyder might be called to testify. Snyder spokeswoman Sara Wurfel said late Monday that the governor is “willing to do what he can to help make that happen and ensure the process can move forward.”
In all, there could be 15 to 16 witnesses testifying.
The city anticipates its case could be finished by the end of Friday; objectors said they hoped to wrap up their case by next Tuesday. Rhodes has scheduled additional trial dates Nov. 4-8.
The city will open the eligibility trial by calling five witnesses, including Orr, Police Chief James Craig and financial consultant Kenneth Buckfire.
Rhodes told lawyers for the city and creditors not to file post-trial briefs, a possible signal he could rule from the bench immediately after the trial.
“You should focus the full thrust of your arguments that you want to make to the court on your closing arguments,” Rhodes told lawyers Monday.
In the bankruptcy case of Stockton, Calif., the bankruptcy judge ruled immediately after the trial that the city was eligible for Chapter 9 relief.