spared bankrupt Detroit costly litigation: manager
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[October 03, 2014]
By Karen Pierog
DETROIT (Reuters) - Without a series of
settlements, Detroit would face years of costly litigation from
creditors and others, with no guarantee that the city would win, Kevyn
Orr, Detroit's emergency manager, said on Thursday.
Orr, on the stand for a second day at a federal court hearing,
also defended Detroit's 1,111-page bankruptcy plan, saying it was
crafted in good faith and provides a framework and resources for the
An attorney for the city's last major hold-out creditor peppered Orr
with questions concerning the fairness of the plan's disparate
treatment of the city's unsecured creditors.
Orr, appointed by Michigan's governor in March 2013 to salvage
Detroit's finances, is considered the key witness in the city's
historic bankruptcy trial. Under Orr's watch, Detroit filed the
largest municipal bankruptcy in U.S. history in July 2013.
The emergency manager, during questioning by Ed Soto, attorney for
Financial Guaranty Insurance Co, verified several times that certain
unsecured creditors fare worse than the city's pensioners under the
plan. The bond insurance company, which local media has reported is
in settlement talks with Detroit, faces a recovery of 10 cents to 13
cents on the dollar for its $1.1 billion exposure from insuring
Detroit pension debt.
Soto played video snippets of Orr media interviews and a July
deposition to underscore that the "human dimension" of the
pensioners was a factor in determining creditor recoveries even
though Orr had initially intended to treat all unsecured creditors
Judge Steven Rhodes is holding the weeks-long hearing to determine
if Detroit's plan to exit bankruptcy, which contains the settlements
with major creditors, is fair and feasible.
Orr, whose powers were reduced by Detroit's elected officials last
week, testified earlier on Thursday that major creditors and others
either filed or were poised to file lawsuits against Detroit after
it declared bankruptcy.
"I don't think anyone was going to be pulling punches in any
litigation against the city," he said.
The cost of defending lawsuits filed just by bond insurer Syncora
Guarantee Inc, the city's fiercest opponent before it settled last
month, was estimated at as much as $10 million, Orr testified.
"I think they filed litigation to just about everything we tried to
do in bankruptcy court," he said, adding that included a dispute
over city casino tax revenue and a $120 million loan from Barclays.
Orr said Detroit also faced potential litigation from a
court-appointed retiree committee over healthcare claims and from
many parties, including Michigan's attorney general, over any
attempt to sell works at the Detroit Institute of Arts (DIA).
The city averted those threats with settlements reached through
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The most notable is the so-called Grand Bargain, struck to prevent
an art sale for paying off creditors. The bargain creates a pot of
money from foundations, the DIA and the state of Michigan for public
In questioning by Soto, Orr said Detroit never undertook a
comprehensive audit of the art work to determine its ownership. Orr
had testified that some of the pieces had been purchased with tax
money. Orr also said he did not know if the city had taken steps to
verify a Michigan attorney general opinion that the art could not be
sold to satisfy the city's debts.
FGIC has been pushing the city to sell or monetize the art to boost
recoveries for all creditors.
In testimony carefully steered by Detroit's attorney Greg Shumaker
at Jones Day, Orr said the settlements were meant to be affordable
and sustainable for the city, fair under certain circumstances, and
result in better city services.
"We are not trying to get to gold plate or platinum services. We're
trying to get to national averages," Orr said.
When the hearing began on Sept. 2, each side had 85 hours to make
Judge Rhodes on Thursday sliced 14 hours off the hearing schedule,
mostly because of Syncora's settlement. The objectors now have 54
hours and 3 minutes left for their case and the city 31 hours and 45
(Additional reporting by Lisa Lambert in Washington; editing by
Matthew Lewis and David Gregorio)
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