Holdout creditor blasts Orr over debt strategy
The city's last major holdout creditor Thursday attacked Detroit's plan to shed $7 billion in debt, suggesting it unfairly discriminated against financial creditors and faulting Emergency Manager Kevyn Orr for failing to sell artwork.
During a lengthy cross-examination, a lawyer for holdout bond insurer Financial Guaranty Insurance Co. criticized the debt-cutting plan for favoring retirees and minimizing the amount of money left for banks and other creditors.
The cross-examination was a crucial, and perhaps last, chance to convince U.S. Bankruptcy Judge Steven Rhodes that Detroit's debt-cutting plan is unfair and unfeasible, and must be rejected. As The Detroit News previously reported, the bond insurer is simultaneously involved in behind-the-scenes negotiations with Detroit to settle the case.
FGIC attorney Ed Soto tried to show city fears that art sales would trigger a prolonged fight with Detroit Institute of Arts officials were overblown and attacked claims that artwork is an essential part of the city. The museum has about 60,000 pieces of artwork but 55,000 pieces are in storage, Soto told Orr.
"Those 55,000 works of art in storage are necessary and essential, correct?" Soto asked.
"I don't know if every piece … is necessary," Orr said.
After hearing testimony that the DIA and artwork are inseparable parts of Detroit's history, Soto asked if Detroit's schoolchildren or their families have ever seen the art hidden away in storage.
"I don't know," Orr said.
FGIC has claims worth about $1.1 billion but would receive about 6 cents on the dollar in Detroit's debt-cutting plan.
Sources have told The News that the bond insurer is interested in a $123 million bankruptcy reserve fund, city-owned real estate, including riverfront property east of the Renaissance Center, and a 300-space municipal parking garage on Riopelle Street.
Several tense exchanges between Soto and Orr came at the end of the emergency manager's second day on the witness stand. Saying Detroit can rise from the ashes, Orr mixed biblical and financial terms to emphasize the importance of the city's debt-cutting plan.
The plan has won widespread support among creditors who feared deeper, forced cuts since the city filed the biggest municipal bankruptcy case in U.S. history 15 months ago.
"This is yet another renaissance. We will come back," Orr said. "We dream of better things and that will happen."
A series of bankruptcy deals will save the city money, let Detroit leaders boost public safety and provide residents adequate, but not great, city services, Orr testified Thursday.
Orr, architect of Detroit's debt-cutting plan, spent a second day on the stand trying to sell Rhodes on the city's plan.
He justified the deals, saying the city's debt-cutting plan will free up $1.7 billion over the next decade to buy new police cruisers and fire trucks, fight blight and update antiquated computer systems.
"We will use revenues to pay debt and provide adequate services — not gold-plated or platinum," Orr testified.
Little will be left to chance or the political whims of the city's mayor and City Council. There will be several layers of oversight to ensure the debt-cutting plan is implemented and to prevent Detroit from filing bankruptcy again, he said.
Orr was self-effacing, admitting there was a major change in his duties last week.
"What did City Council do?" Detroit bankruptcy lawyer Greg Shumaker asked.
"They fired me," he said, "but not immediately."
Orr will continue to oversee the city's bankruptcy case but control of the city reverted last week to Mayor Mike Duggan and the City Council.
The emergency manager tried Thursday to blunt arguments from holdout creditors, namely FGIC, that the city failed to sell assets and maximize creditor recoveries.
"Why not sell city assets?" Shumaker asked.
"I'm not required to," Orr said.
Instead, Detroit leased some assets, including Belle Isle, to the state and pledged others in deals, including a Grand Circus Park underground garage to Syncora. If Detroit successfully emerges from bankruptcy later this year, the city will retain control of key assets, including its world-renowned art collection.
"For (Detroit) to come back, it needs the assets it has," Orr said. "We have struck a balance of what we can pay our creditors and what we need for restructuring and reinvestment."
Earlier Thursday, Orr said wealthy patrons vowed to bankroll a legal fight between the DIA and the city before mediators reached a deal to save the city's art collection.
Orr testified about behind-the-scenes pressure applied by the DIA and patrons who believed the multi-billion dollar art collection could not be sold and was held in public trust — and explained why the city didn't hire an auction house tied to a local billionaire. A costly, prolonged legal fight threatened to delay Detroit's attempt to shed debt and emerge from bankruptcy court.
"High-value net worth individuals who have an interest in the (DIA) were motivated and had the wherewithal," to support a legal fight, Orr testified.
Orr dodged a legal fight, however, earlier this year after a team of mediators, led by Chief U.S. District Judge Gerald Rosen, struck the so-called "grand bargain." The deal includes $195 million from Michigan taxpayers and $466 million in contributions over 20 years from private foundations and corporate donors to the DIA.
The grand bargain will shield the art from being sold to satisfy creditor claims and soften Detroit retiree pension cuts. Financial creditors have pushed for the sale of DIA art and faulted Orr for not maximizing the value of the collection.
The grand bargain was also a key component Thursday of testimony provided by Kresge Foundation President Rip Rapson.
Rapson, whose foundation has pledged $100 million to the funding pot, stressed the museum is "an inseparable part of the city's history. It drives economic energy."