The Closing Arguments: Detroit’s Bankruptcy Trial

The Closing Arguments: Detroit’s Bankruptcy Trial

Judge Steven Rhodes is on the bench, and closing arguments have begun. Here’s the lineup attorneys predicted last week.

This morning, city attorney Bruce Bennett has been outlining why the latest Plan of Adjustment should be confirmed, focusing so far on the settlements and moves that reduce city expenditures. This afternoon, additional attorneys supported the plan while two individual objectors spoke against it.

5:32 p.m.

Detroit’s bankruptcy trial is done. Judge Rhodes will give his opinion at 2 p.m., Friday, Nov. 7.

Assuming he confirms it, he said he will schedule a hearing to discuss the form of the confirmation order and implementation issues.

4:58 p.m.

Individual objector Michael Karwoski also objected to the city’s plan, arguing to the judge he should reject it and require the city to file another plan.

Karwoski filed this objection and 98 people filed joinders. During the trial, Karwoski questioned witness Cynthia Thomas. She’s the executive director of the city’s retirement systems, the General Retirement System and the Police and Fire Retirement System. Karwoski’s questions for her covered topics of pension fund governance, investment interest rate assumptions and the annuity savings fund recoupment.

He disputes the city’s contention that some retirees received “excess interest” on their annuity savings fund accounts, calling the city’s plan to reclaim some of the money an “illegal and unjust” measure.

4:46 p.m.

After attorneys supporting the city’s plan spoke, individual objector John Quinn, an attorney, argued against adopting it. He objects specifically to pension cuts and the “clawback” of some annuity savings fund monies from general service retirees.

Here’s the background: the annuity savings fund was a program that allowed non-uniform city employees (everyone but police and fire) to invest 3, 5 or 7 percent of their after-tax income in a fund co-mingled with the general pension funds. The annuities had a guaranteed rate of interest regardless of how the fund actually performed.

As part of the bankruptcy negotiations between the city and creditors, several employee and retiree groups agreed to allow a partial recoupment of “excessive” interest payments on the annuity savings fund. The provision was in the plan that the pensioners approved in their vote on the Plan of Adjustment. The recouped funds would be put back into the pension fund to make up what the city calls “excess interest payments” made to pensioners who have collected their annuity savings funds.

Here is the objection Quinn filed in the case.

4:08 p.m.

Barbara Patek, representing the Detroit Police Officers Association, spoke in support of the plan. She said police officers were uniquely positioned to observe the bankruptcy’s real effects in the city.

“We didn’t need a bus tour or a complicated set of spreadsheets to understand the insolvency. Our members lived it every day in their work,” Patek said.

4:02 p.m.

Robert Gordon, of Clark Hill law firm, represents the pension systems. He also spoke in support of the Plan of Adjustment and its settlements for pensioners.

“These settlements vary in their treatments and their projected recovery reflecting the varying rights of creditors groups,” Gordon said. “Somewhat miraculously a consensual plan is now before the court. … All of Michigan should be proud.”

He was followed by Ryan Plecha, who represents the Detroit Retired City Employees Association and the Detroit Retired Police and Fire Fighter Association. He credited the mediation process as the “only way” settlements were reached.

“I must also note the courage and the dedication of the DRPFFA … along with the same efforts of the DRCEA … in making the difficult choice to reach an agreement withe the city,” Plecha said.

 

3:50 p.m.

Representing the Official Committee of Retirees, Claude Montgomery urged Judge Rhodes to adopt the plan. “The official request comes only from the city but we would ask you to approve the global settlement,” Montgomery said.

Here are highlights of what else he said:

On the varying impacts of the cuts of cost-of-living allowances (COLA) for retirees, depending on their age:

“If you don’t have very long to live, COLA doesn’t mean very much to you. If you have a long time to live, COLA means a lot to you.”

On the 6.75 percent rate presumed for pension investments:

“It’s a negotiated number.  A higher number means fewer benefits cuts but greater city susceptibility to financial risks.”

2:40 p.m.

Representing the state, Steven Howell, of Dickinson Wright, made some closing statements in support of the Plan of Adjustment. “Although the filing of Chapter 9 has not been popular, there’s no question it was the right thing to do,” Howell said. “In this confirmation hearing, many of the city’s witnesses has since testified to the strides the city has made in improving services to its residents. … We cannot allow the city to fall back and continue its downward spiral.”

The state is providing $195 million to the city’s two pension funds and has financial oversight of city operations and pension fund management, according to terms of the Plan of Adjustment that were passed by the Legislature and signed by the governor earlier this year.

Also in the courtroom audience: Rep. John Walsh, R-Livonia, who chaired the committee that first considered the “grand bargain” bills in the Michigan Legislature.

2:28 p.m.

Judge Rhodes asked Bennett what he thought the two or three top risks were to the feasibility of the Plan of Adjustment. Here’s how Bennett answered:

Everyone recognizes that there has to be flexibility in implementing the (restructuring initiatives) going forward, and it’s impossible sitting here in 2014 to decide exactly how money is appropriated in like 2018 or 2019 should be spent. I know that your Honor has confidence in Mayor Duggan and his administration – it’s a very impressive group. We don’t know how long they’re going to stay. We have to make guesses about who’s going to be there in the future. I would say the risks that are controllable are sticking with the plan and using the money, the huge amount of budget surpluses are projected and earmarked … earmarked for critical investments in critical areas. To the extent that they’re deployed or adjusted in any way, it’s got to stay for that: critical purposes in critical areas that may evolve over time to a degree but what we don’t need is the use of that money for other purposes that someone might decide is more politically expedient.

Bennett also said a risk is if there is misspending or the perception of misspending of the $1.7 billion budgeted over the next decade for improving city services. “Either would be a huge problem,” Bennett said.

He also said the city needs to regularly invest in critical infrastructure and services, for example, an information management system.

When Rhodes asked about how the city can ensure pension obligations are met, Bennett said:

The national labor organizations have to put pension funding high on the bargaining list.

12:09 p.m.

Before breaking for lunch, Judge Rhodes told Bennett he wanted him to clarify what the plan intends to do with respect to 1983 claims. The “1983” refers to the Civil Rights Act, and the creditors include litigants who have lawsuits against the city relating to, for example, police misconduct and wrongful convictions.

Here’s some background about those cases:

Bankruptcy v. The Constitution? Detroit attorney argues for civil rights creditors

Civil Rights on Credit: Beyond the bankruptcy’s biggest headlines

11:16 a.m.

The presumed interest rate for pension investments was an often-visited topic during witness testimony during the bankruptcy trial, and Bennett re-visited it during his closing statements.

(The Plan of Adjustment sets the presumed rate of return at 6.75 percent, which is at the low end of large public pension funds nationally.)

Bennett said in his closing arguments that the interest rate should be considered a reflection of how much risk the city is taking, and given the city’s situation, having low risk is the “reasonable” approach.

10:47 a.m.

Bennett made an economic, cause-and-effect argument against the city raising taxes to pay debt, as some creditors had suggested during the trial.

“Municipalities in today’s world are really competitors with other municipalities,” Bennett said. “It’s happening every day when people are deciding where they are going to live. … It’s important: what does the community offer and what does it cost to live there.”

He recounted Mayor Mike Duggan’s testimony, who said the city is just “10 percent” of where it needs to be in terms of providing city serices.

“He started talking about the fact that people are going to compare us with what’s going on in the suburbs,” Bennett said. “Your Honor … in many places we have shown you that Detroit’s taxes are the highest of any city in Michigan and in places we’ve shown you and the record has shown you that our services are not. … Far from it, unfortunately. Hopefully we’ll get there.”

Raising taxes would only drive away residents, Bennett said, and existing ones may choose to not pay any more.

“We already have a delinquency problem. It would only get worse,” he said.

10:31 a.m.

Raising taxes to generate more income is “not sensible” for Detroit, city attorney Bruce Bennett said.

He reviewed testimony that the Michigan Legislature is not likely to pass measures that would allow Detroit to raise taxes, a necessary provision because the city is near its taxing limits under state law.

“I think we all know that to be right,” Bennett said.

10:27 a.m.

The city did “extensive” work to determine how to monetize its assets to reduce debts, sometimes paying creditors, sometimes creating other deals, city attorney Bruce Bennett, of Jones Day.

One example: “The entire cost of Belle Isle came off the city’s books. Therefore, money was saved … and generated to be used for other purposes,” Bennett said.

He also discussed the creation of the regional water authority, the Great Lakes Water Authority, which was a product of bankruptcy-related negotiations about the future of the Detroit Water and Sewerage Department (DWSD).

“The city looked at DWSD from a variety of different perspectives,” Bennett said, with a focus on raising money for the city’s general fund.

“Certainly the city did tons of work in this area. Others, of course, had very strong views about whether DWSD or any part of DWSD’s value could ultimately make it to the general fund because of its special status essentially as a utility that performs work for fees.”

But not every city asset was part of a settlement in the case, Bennett pointed out. He cited the Coleman A. Young International Airport, commonly known as City Airport.

“There really isn’t an immediately available alternative but it has to be kept alive for other good reasons. So that’s a failure, couldn’t accomplish anything significant there but it wasn’t for lack of trying,” Bennett says.

10:15 a.m.

City attorney Bruce Bennett, of Jones Day, is addressing the reasons why the Detroit Institute of Arts collection does not need to be sold to pay debt. He recounted what some of the witnesses said when they testified earlier in the trial.

“There really isn’t a dispute that the DIA is a nationally recognized cultural institution that contributes to the city. It contributes to the image of the city. It contributes to the city’s rehabilitation. It might even contribute to bringing residents back,” Bennett said. “It is most assuredly a reasonable decision for Detroit to make to keep a world class art museum.”

Judge Rhodes interrupted Bennett’s statement to pose a question.

“What do we say to the pension claimant whose pension is impaired as a result of that decision?” the judge asked.

“We say to pension claimants in this what we say to other creditors,” Bennett said. “There’s no law that says a pension creditor has to be paid by causing a city to sell its assets.”

9:41 a.m.

Judge Rhodes has taken a break to take a phone call. He also requested a meeting in the jury room with city attorney Thomas Cullen, of Jones Day, and a representative from the city law department.

He’ll resume closing arguments at 10 a.m.

9:35 a.m.

When city attorney Bruce Bennett, of Jones Day, said no one was continuing to object to the protection from sale of the Detroit Institute of Arts collection, the judge interrupted him.

“I think many of our pro se objectors do object to the DIA settlement in the way that it protects the art in this context, in this bankruptcy, from their pension claims,” Rhodes said.

“I’m going to cover it. We’ll cover it very thoroughly,” Bennett said.

9:30 a.m.

City attorney Bruce Bennett told Judge Rhodes that the Detroit bankruptcy case proves that municipal bankruptcy is not about simply distributing city assets to pay claims. Bennett praised the settlements the city’s reached with creditors – totally about $7 billion of the city’s $18 billion in debt – because they don’t sell off the assets.

“Instead they are deployed in a way they are used only in the context that the creditor receiving the asset is going to have to invest money, participate in the city’s rehabilitation in order to extract assets,” Bennett said.

For example, the FGIC settlement includes the bond insurer, or its development partner, receiving the land where the Joe Louis Arena currently sits, with the provision they will develop the site as a hotel, office and retail space and condos.

9:22 a.m.

City attorney Bruce Bennett, of Jones Day, began his closing argument by pointing out how quickly the Detroit Chapter 9 case moved from filing to trial conclusion … and why the speedy schedule is good for the city.

“Few if any press accounts about this case, and frankly even every article about the city of Detroit published outside the city of Detroit, refers to the fact that the city is in bankruptcy case,” Bennett said. “This isn’t good. It isn’t helping. It doesn’t do much to attract residents and business to the city, which as we’ll see later is extremely important to the city’s overall recovery.”

Finishing the bankruptcy trial is important for the city’s image, Bennett said.

“Even today many people who read articles which have reported the parade of settlements, … don’t fully understand the extent of progress already made or fully understand that the end really is in sight,” Bennett.

He repeatedly praised the relatively short time frame from filing to today’s closing arguments.

“It was a priority very early on for the debtor, the emergency manager, the entire professional team that we were going to put his case on a fast track,” Bennett said. “We think we’ve succeeded in this regard with your help. … The fact that we’re going to have an ultimate conclusion in this kind of time frame is terrific.”

The Plan of Adjustment now is “very broadly consensual” Bennett said, with all major financial creditors supporting it.

“Of course the case did not start out that way. It’s hard to think of any major constituency that was not involved in major litigation concerning some aspects of its rights with the city,” Bennett said.

9:09 a.m.

Before closing arguments began, attorneys for bond insurer Financial Guaranty Insurance Co. and holders of some pension debt reported they had finalized a settlement with the city.

“Just in the nick of time we’ve resolved each and every one of the pending issues. We, did reach agreement on language that reservation of rights language, that would go into the confirmation order,” said Alfredo Perez, FGIC attorney from the Weil Gotshal & Manges firm.

FGIC also filed an updated term sheet, which was read into the record.

Department of Financial Services waived notice period so FGIC has the ability to enter into the settlement, Perez said.

Jonathan Wagner, of Kramer Levin, who represents holders of about $1 billion in pension debt through the Certificates of Participation, said his clients also were now supporting the city’s Plan of Adjustment.

“I don’t think there’s any suspense here but i’m happy to report that we’r withdrawing our objection,” Wagner said. “My two-hour statement is now reduced to zero.”