By Nick Carey and Joseph Lichterman
DETROIT (Reuters) - After a testy exchange between the judge presiding over Detroit's bankruptcy and a Michigan official, attorneys for the state agreed on Tuesday to drop a challenge to a request by creditors' lawyers to depose Governor Rick Snyder on the city's eligibility for bankruptcy.
Citing executive privilege, the office of the state attorney general had filed a motion late Monday arguing Snyder should not be deposed. Creditors' attorneys had said they wanted the governor's deposition to determine his motivation in approving a request in mid-July from Detroit's state-appointed emergency manager, Kevyn Orr, to take the city into Chapter 9 bankruptcy.
If Detroit's bankruptcy goes ahead, it will be the largest municipal bankruptcy in U.S. history. The city owes some $18.5 billion in long-term debt, and public sector unions have challenged the bankruptcy filing on grounds that it violates protections for worker pensions and benefits enshrined in Michigan's constitution.
Some unions have also argued in filings that Snyder and Orr arranged the bankruptcy filing specifically to target worker pay and benefits.
Clearly annoyed, U.S. bankruptcy Judge Steven Rhodes took issue with the lateness of the filing on Monday and said he had half a mind to waive the Tuesday hearing.
Assistant state Attorney General Margaret Nelson, who appeared in court to make the governor's case, argued that the issue of deliberations on Snyder's part were not relevant to the case.
But Judge Rhodes responded that as creditors had objected to the bankruptcy based in part on Snyder's motives, it was too late to cite executive privilege.
"It's hard for me to imagine what you thought they were going to ask the governor in a deposition other than that," the judge said. "That has been clear from the start."
"What else is there to ask him about?"
Attorneys for both sides agreed that Governor Snyder, a Republican, will be deposed for three hours and that creditors' attorneys may also depose Michigan's state treasurer, Andy Dillon.
After the hearing on Tuesday, Sharon Levine of law firm Lowenstein Sandler LLP, counsel for the union American Federation of State, County and Municipal Employees (AFSCME), said the agreement was "a victory for transparency."
"We want to understand the motivation behind the filing," she told reporters outside the courthouse.
Rhodes also delayed until October 15 a hearing to begin oral arguments surrounding legal challenges to the bankruptcy filing. The city's labor unions and other objectors said the process was too swift, so Rhodes tentatively rescheduled the beginning of oral arguments from an original date of Sept 18.
An attorney representing a committee of city retirees said the group would file its formal challenge to Detroit's eligibility for bankruptcy later on Tuesday.
The trial on Detroit's eligibility for bankruptcy will begin on October 23. The city plans to submit a restructuring plan by the end of the year.
(Editing by Steve Orlofsky)