Day 16: Detroit’s Bankruptcy Trial

Day 16: Detroit’s Bankruptcy Trial

UPDATE: Roger Penske testified, and we had our first individual objector question Detroit Emergency Manager Kevyn Orr.

At the start of the morning, after discussions about the court schedule and witness order, Detroit Emergency Manager Kevyn Orr was back on the witness stand. Attorneys for bond insurer Financial Guaranty Insurance Company will skip their cross examination of him, but Judge Steven Rhodes will ask questions. Court is only scheduled to run until 12:30 p.m. today. We’ll have updates until then.

11:58 a.m.

Miller Buckfire investment banker and city consultant James Doak, currently testifying, supports the portion of the Syncora deal that includes the company’s operation of and investment in the Grand Circus Park garage.

“The city gets further private sources to revitalize the city,” he said.

Doak said the garage has great potential but needs an outside investor to make the improvements and manage the operations. “The objective factor that I would cite at that level is everything we’ve seen to date does not suggest the parking department can do that. We’ve had difficulty getting adequate due diligence from the parking department, trying to get information,” Doak said.

In addition, the garage doesn’t have a lot of value in its current condition and will benefit from the renovations, part of the deal with Syncora.

“Our preliminary conclusion with regards to this garage is it’s one of the worst cases, poorer garages as far as its current circumstances. It clears only half a million dollars a year and it has been sorely undermaintained, and we estimate based on (a consultant’s) work that it will require over $13 million of remediation over the next 5 years to fix the structure of the facility.”

11:43 a.m.

City attorney Thomas Cullen, of Jones Day, asked Miller Buckfire investment banker James Doak about whether city-owned land, one of the assets listed in the city’s Disclosure statement in the bankruptcy case, could be used to raise money.

“City-owned land was not going to produce material value in the restructuring process in a way that would materially affect the outcome of the restructuring process. The values were insufficient for Miller Buckfire to devote restructuring energies to marketing this land in small or large swaths, as it would be, and the existing infrastructure or infrastuctures that was getting designed to monetize or otherwise push land back into the private market would be better suited for the task at hand, things like the Land Bank … working with the DEGC,” Doak said.

He said the development agreement was a fair deal for the city and did not provide Syncora special treatment.

“There’s no sweetheart deals in this,” Doak said.

11:35 a.m.

In his testimony, Miller Buckfire investment banker James Doak reviewed a list of assets the city provided to creditors that it might be willing to monetize in “value-enhancement opportunities,” as they say in court. The list included: the Coleman A. Young Airport (also known as City Airport), the Detroit Windsor Tunnel, city-owned land, parking operations and Joe Louis Arena.

For all of the assets, Miller Buckfire “evaluated the natural buyer pool that could be expected to engage with the city and come to a successful conclusion with regards to a transaction,” Doak said. The city’s creditors in the bankruptcy case were considered as potential buyers.

Doak testified about the Syncora settlement, which includes extending a lease to operate the Detroit Windsor Tunnel to a Syncora subsidiary. Doak called the arrangement “a reasonable exercise of the city’s business judgment.”

He also said the tunnel is an unusual, if aging asset, and there were other challenges realizing how the tunnel could be monetized in the bankruptcy case. “We also immediately encountered a tremendous absence of information at the city. The city was only entitled to receive summary audited financials from the company and the lease calculation on an annual basis, and the tenant had no obligation to provide carbon copies once it had already sent those materials on,” Doak said. “The city could only monetize its half of the tunnel and it could only do so after the current leases expired.”

He said no other businesses expressed interest in the tunnel operations.

The agreement with Syncora provides for the city to get more information about the tunnel, its condition and its problems. Under the current arrangement, negotiated during the Kwame Kilpatrick era, the city lacks information about the tunnel.

Doak did his own research in analyzing the deal.

“According to the Customer Officer that I discussed this with, it leaks occasionally. The status of the membrane, which would be expected for a tunnel of this age, is one that must be constantly maintained and examined, and it’s reasonable to expect, and we’re aware of that, that will be something that the parties continue to focus on as well as other elements of the tunnel, including the ceiling element.”

10:52 a.m.

Let’s go back to Orr for a minute and catch up on the last question Judge Rhodes asked him: Why not monetize the art?

Here are excerpts of Orr’s answer:

“Your Honor, some of the discussion yesterday showed the evolution, in fact some of the email from where we started to where we are now in addition to my understanding that under PA 436, the state (emergency manager) statute, in addition to Section 904 of the Federal Bankruptcy Code, the debtor is not obligated to monetize anything.”

“I do believe a one-time sale of city assets, even of cities in distress, is detrimental to the long-term business of the city, particularly the Detroit Institute of Art. That is one of the most significant cultural institutions, and I believe sincerely it would harm it irreparably (if art was sold.) The millage would be revoked. Other museums would not do business with the DIA, both nationally and internationally, maybe not forever … My understanding is that the endowment effort they had has taken a bit of a downfall as people wait to see what’s going to happen. There would be harm from a one-time sale of assets.”

“A one-time sale would be very problematic.”

“Although there have been other discussions about selling the art … the grand bargain that we pulled together through the mediation process … provide some value that I did not have at the beginning of this.”

10:45 a.m.

Another Miller Buckfire investment banker is on the witness stand: James Doak. He’s the firm’s managing director and is being questioned by city attorney Thomas Cullen, of the Jones Day firm. They’re discussing, in hypothetical and theoretical terms, how municipalities or corporations in bankruptcy determine whether to sell assets.

10:15 a.m.

After pensioner Estella Ball finished questioning Orr, Judge Rhodes allowed her to testify for five minutes. Here are some highlights of what she said:

“I really feel nobody is representing the true city of Detroit … There have been so many adjustment, I admit I’m lost but one thing I am opposed to is the third party relief of the state of Michigan. I believe there was collusion from the state to send the city into bankruptcy by state officials and other powers that be. …  Through state policies they decided to give Detroit a push over the edge and when we still didn’t fall over they sent Mr. Orr in to push us over the cliff. “

She called the emergency manager  a “public king lording over the city of Detroit, usurping the power of elected officials, negating my right to vote.” The emergency manager era, she said, will continue “the oversight of the state over every aspect of the city of Detroit for decades, making Detroit a feudal city under the control of people who do not live here.”

Ball also criticized the number of contracts to consultants and private contractors.

“Very few are Michigan companies and very few are Detroit companies,” she said. “The bottom line is that this is a redistribution for the resources of Detroit into the hands of persons who do not live in Detroit. No matter who I vote for or who wins the election, it is of no effect. This is a violation of the Voting Rights Act.

The bankruptcy case’s effects, she said, “smack of the Jim Crow laws. They will have the same devastating effect on people of color that they did hundreds of years ago. I understand these questions are not necessarily before the court,” she said.

10:04 a.m.

Retiree Estella Ball was the first of the individual objectors – people without attorneys, representing themselves – to appear at the trial. She questioned Orr, mainly about the Plan of Adjustment’s provision that recoups certain annuity monies from pensioners.

Here’s a previous post about the Annuity Savings Fund recoupment, as it’s commonly called.

Ball asked Orr why it was necessary to collect the money from pensioners. He gave an example of how the annuity funds were credited with higher interest rates than they actually earned, with the difference being paid from the pension funds.

“In the year 2009, I think the (annuity) fund actually lost 19.7 percent but it was attributed 7.9 percent (gains) so that’s almost a 28 percent spread. So for instance, that one year, if there was a $10,000 investment, it was worth $8,000 but it was attributed at almost $11,000,” Orr said. “The thought was in the general principles of receivership, you try to recoup an amount of funds that were improperly distributed to the beneficiaries.”

Here’s Ball’s motion to participate in the trial.

9:44 a.m.

In response to a question about why Roger Penske testified, he was originally listed as a city witness for the topics of Plan of Adjustment feasibility, the importance from a business and investment standpoint of the City’s ability to capitalize and  build on the efforts contemplated in the Plan post bankruptcy, the importance and effect of addressing in the Plan, among other things, the City’s blight,  public safety, and urban revitalization.

9:39 a.m.

Here’s what Penske said about Detroit’s bankruptcy:

“We have to do it in order to get our city back to where it needs to be for people to live and work.”

Penske on a meeting with Mayor Dave Bing, where the mayor asked business leaders for help cleaning up parks and providing police cars and EMS units:

“After that meeting, I talked to the mayor and said I felt I could be a catalyst to go out in the private sector and get 100 police cars and also 23 EMS units. I’m happy to say with seven or eight phone calls, people said yes. In August last year, we started delivering the 100 police cars and 23 EMS units. We supported with capital and there’s also a piece that’s being funded over time and we’re supporting that with guarantees to the banks.”

When asked about the Grand Bargain, here’s what Penske said:

“The Grand Bargain, from my perspective, is really an umbrella. We’ve been able to take the pensioners, who have worked for the city, and take our gem, the art museum, and put them under one umbrella and find a way to fund the pensioners and keep the art assets in ownership and not have them sold to help us exit from bankruptcy. I feel good about it personally. … It’s a great opportunity to see the unity of the art assets and also the human capital assets, who have worked in the city before, as we go forward.”

9:23 a.m.

City attorney Robert Hertzberg, of the Southfield-based Pepper Hamilton firm, is questioning Roger Penske, chairman of the Penske Corp.

He described his business as a “transportation service company in leasing and retail automotive,” with 40,000 employees and $18 billion in revenue.

Penske chaired the city’s Super Bowl efforts in 2006. He testified the event was the beginning of the downtown renaissance. “It started to bring people together. We have a thousand volunteers and people who really cared about the city,” he said.

9:20 a.m.

Judge Rhodes asked Orr about the settlement with bond insurer Syncora, which provides for several development opportunities in prime areas of the city. The Bermuda-based company was one of the most aggressive adversaries in the bankruptcy case until the deal was reached last month.

Judge Rhodes: The Syncora development agreement appears to intensify and broaden the relationship between Syncora and the city. DO you have a sense as to how that relationship will be monitored and executed on the city’s side of it?

Orr: Yes, I’m hopeful that the marriage is better than the courtship. …

8:54 a.m.

Judge Rhodes started by asking Orr questions about the Financial Review Commission, which would be part of the governance of a post-bankruptcy Detroit for at least 13 years. The state Legislature created the nine-member panel as part of the “grand bargain” legislation passed last Spring.

The commission “will provide a level of oversight that can be flexible according to the discretion of the commission itself,” Orr said.

Rhodes asked Orr about the representatives on the commission, which would include the Detroit mayor and city council president or their designees.

“In the current Financial Advisory Board, there are opportunities for the city to present, which occurs regularly, but there is no representing on that body,” Orr said. ““It was a good idea substantively to have representation from city officials on that commission.”

Judge Rhodes asked Orr about the future dynamics of having city officials or their designees on the oversight panel.

“My opinion is it is not so much dependent on whether the mayor or the city council president sits on the commission – there are nine members, they’re just two – my opinion is, depends on the commission to have access to data and to other department heads and city officials so that they get an unvarnished view” of city finances and operations, Orr said.

The Emergency Manager said he has a “high opinion” of the current city leaders, Mike Duggan and Brenda Jones. “We’ve seen instances in the past where that isn’t necessarily the case,” Orr said.