Bankruptcy Trial

  • Day Three: Detroit’s Bankruptcy Trial

    See below for updates throughout the day. WDET’s Sandra Svoboda is in the federal courthouse following the proceedings. She’s also on Twitter @WDETSandra.

    Opening statements are stretching into a third day in Detroit’s bankruptcy trial, technically a confirmation hearing on the city’s Plan of Adjustment — the “blueprint” for how to restructure debt and reinvest in city services. Bankruptcy Judge Steven Rhodes is presiding over the hearing and will eventually confirm or reject the Plan.

    Most of the attorneys who have chosen to make opening statements have taken longer than they predicted to introduce the reasons they support or object to the bankruptcy restructuring plan. As the trial continues — it’s scheduled into October — the city, its supporters and creditors will put witnesses on the stand to help the judge decide if the plan is feasible, reasonable and not unfairly discriminatory to creditors. Those are standards used in bankruptcy law to decide if the plan to shed debt is adopted.

    4:37 p.m.

    Syncora attorney Douglas Smith continues to cross examine Detroit’s Chief Financial Officer John Hill, mainly by suggesting measures Detroit could take to increase revenues. A few of Smith’s latest ideas: implementing taxes on vacant and blighted properties. (This is done in Washington D.C. where Hill lives.)

    Hill tried to address the feasibility of such proposals. “You have to look at collectability,” Hill countered.

    Bond insurer Syncora stands to lose hundreds of millions of dollars in the bankruptcy restructuring. The city’s current Plan of Adjustment proposes paying the Bermuda-based company about 10 cents on the dollar.

    Through his questioning of Hill this afternoon, Smith is making a case to Judge Steven Rhodes that the city could 1) do more to increase its revenues 2) reduce its expenses 3) adjust its financial projections that would, on paper, show more available cash in the restructuring that could be paid to financial creditors such as Syncora.

    4:10 p.m.

    With testimony this afternoon largely focused on detailed financial charts on display in the courtroom, there have been some tedious discussions. City attorney Geoffrey Stewart wrapped up his questioning of Detroit Chief Financial Officer John Hill after about three hours, and now Syncora attorney Douglas Smith is cross examining him.

    Smith’s questions have so far focused on brightening the city’s financial picture. He’s asking about what revenue isn’t collected and when it might be. For example, “tens of millions” of dollars go unpaid on properties, Hill admitted under questioning. Grants could be better managed — funds have gone unspent and had to be returned in the past.

    Smith also turned to the question of how the city might better collect income taxes and asked about what initiatives are coming to ensure payments from “reverse commuters”: Detroit residents who work outside of the city and do not pay the income tax they owe.

    Hill says there is a plan in the works for “piggybacking” of the city’s income taxes with the state’s collection of its income taxes. An agreement is being discussed, he said, and it would increase collection rates. City residents pay 2.4 percent in income tax.

    The initiative could start in 2016 for collection of the 2015 tax year. “It has to be phased in because of the withholdings,” Hill said.

    Attorney Smith raised this issue with the trial’s first witness, Robert Cline, a financial advisory who appeared Aug. 18 because he took a new job in Europe and was available after that day. Incidentally, a Citizens Research Council of Michigan report cites a study that found $142.3 million of individual and corporate income taxes go uncollected by the city..

    12:02 p.m.

    Court is on lunch break. Here’s the last thing city CFO John Hill said on the witness stand: Of the $1.7 billion the city intends to put toward restructuring and service improvement, about $200 million will come from the loans. The rest will come from surpluses from the plan and from initiatives that decrease expenditures and increase revenues.

    11:57 a.m.

    Attorney question: How important are the restructuring initiatives to the success of Plan of Adjustment as the city exits bankruptcy?

    Detroit Chief Financial Officer John Hill: “I think they’re very important. What is also very important is improvement in the financial management systems which is one of the restructuring initiatives. Without that improvement, it would be very difficult for the city to get the kind of information it needs to operate. … I could not imagine some of these initiatives not being done and the city either improving its operations or its access to information or its ability to control its resources.”

    Attorney: Is there a master schedule anywhere for the restructuring initiatives?

    Hill: “We have a schedule that actually shows the restructuring initiatives that have been applied for funding.”

    Attorney: Who will ensure the initiatives are completed?

    “I believe the CFO, I’ve taken responsibility for that. I believe ultimately it’s a joint responsibility between the CFO and the mayor because these are restructuring initiatives that need to have operational oversight as well.”

    11:30 a.m.

    Here are some excerpts from the testimony of Detroit Chief Financial Officer John Hill. (More below!)

    On the Plan of Adjustment:

    “We definitely believe that the plan gives us a road map to how we should be operating.”

    On if the city could change provisions of the Plan of Adjustment:

    “There has to be approval for deviation from the plan by the Financial Review Commission, and so the plan really becomes a road map for how we would operate going forward.”

    On improvements being made to accountability within city government:

    “There have been issues in the past where people started contracts without approval but those holes are being plugged.”

    11:01 a.m.

    Detroit CFO John Hill’s testimony covered his relationship with the mayor, likely an effort by the city attorney to show that reforms in the Plan of Adjustment that are already underway would be supported by the city administration after the bankruptcy case is complete and Emergency Manager Kevyn Orr’s term ends.

    Hill has a direct-line reporting relationship with Orr and a dotted-line relationship with Mayor Mike Duggan, he testified.

    “But that’s not really the way we’ve operated,” Hill said. “The dotted line means the mayor has an interest in the work I’m doing but is not able to direct that work. … I’m in at least three meetings a week with the mayor, I have a one-on-one meeting with the mayor. All of the plans I want to implement I have detailed discussions with the mayor on those plans. The mayor is a part of the review process for determining the quality-o-life projects that move forward so we coordinate with the mayor on that. It’s pretty much the normal relationship you’d expect with the executive of a city.”

    Hill says he would “be upset” to leave some of the projects he’s started because he wants to see them through. And that could take a couple years.

    City attorney Geoffrey Stewart asked Hill if he’s had conversations with the mayor about staying on past the current contract time. Hill said the mayor asks him if he’s “bought a house yet.”

    Hill’s answer?

    “I’m more of a downtown condo guy,” he said.

    10:50 a.m.

    An attorney for the city is questioning Hill about how financial operations are being restructured (read: improved.)

    Hill described how property tax assessment capabilities are being improved with the help of helicopter- and street-level data collection.

    “We will have data verified for every property in the city,” he said. “We are right now going through the verification of that entire database.”

    Grants are being better managed, and new systems are being purchased, Hill testified.

    “We’re in the middle of a fast-track process to acquire a new financial management system,” Hill said, adding the city has two that it has two cloud-based system it is choosing from. “We are currently evaluating both systems with the help of a consultant and we believe we’ll have a selection by the end of September.

    The new system, he said, will allow better accounting, reporting, monitoring and reporting. Hill said the city did not close the books monthly and evaluating the yearly reports was challenging.

    “The annual statement took us a very, very long time to prepare and have audited,” Hill said. “We put a team in place to make sure the audit became a priority. The Emergency Manager and I wanted to make sure that we got the 2013 audit done, and it was, and we also have a team now that’s working on monthly closes for our financial statements. We’ve begun identifying all of the issues with those monthly closes and we’re working on those now.”

    10:30 a.m.

    The first witness is on the stand, city Chief Financial Officer John Hill. He’s being questioned first by city attorney Geoffrey Stewart, of the Jones Day firm. Here’s Hill’s expert report related to the Detroit bankruptcy case.

    J_HillHill was the executive director, the top staff member, of the Washington D.C. Control Board that worked to restructure that city’s financial and operational management systems. While there, he also worked with department heads to improve efficiency and with the mayor and city council to get them to support “necessary changes” including reductions in staff. There also were efforts to forecast revenues and expenditures. He also worked at Andersen where he was the partner in charge of state and local government-related work and now operates his own consulting company.

    At the invitation of Emergency Manager Kevyn Orr, Hill has been CFO in Detroit since November where he’s helped establish that office and “managed the consensus budget process” that is being put in place.

    He’s also working on grants management. Here is Orr’s order that established a Grants Management Department.

    Hill has a contract through September, though he expects that will be extended until a new CFO is appointed, per the new state law requiring such a position in the city. That measure was a condition of the city pensions receiving $195 million in state money as part of the “grand bargain.”

    9:44 a.m.

    AFSCME Council 25 is represented by Richard Mack, who concerns are similar to the UAW attorney. AFSCME represents employees whose pension and health care benefits are PAID for by a separate entity — the state, for example. But since those benefits are administered by the city, they are proposed for cuts in the Plan of Adjustment.

    “They’re impairing benefits that have already been paid for,” Mack said. “I think that’s an important point.”

    State law, Mack said, prevents the city from cutting contractual obligations. “We would simply ask that the plan not be confirmed unless those provisions are removed,” he said.

    9:39 a.m.

    UAW attorney Peter DeChiara objects to the plan because of cuts it makes to library employees’ and retirees’ pensions and health care benefits as well as its requirement for the recoupment of annuity savings funds.

    “The library is not a debtor in this case and the library’s obligation are not debts of the debtor that are subject to adjustment by this court,” he said. “(The library) engages independent of the city in collective bargaining with units that represent its employees, including the UAW. …It is the library not the city that pays out of its own fund the pension contributions for employees and retirees” and has done so since 1938.

    “It continues to make those contributions today,” he said. The benefits are administered by the city.

    9:31 a.m.

    Allan Brilliant, attorney for Macomb County, and Max Newman, attorney for Wayne County, both urged the judge to reject the Plan of Adjustment.

    They repeated some of Quadrozzi’s arguments related to DWSD, mainly the $428 million that the city intends to move out of the DWSD budget and partially into the citywide pension funding.

    “If we take money out of DWSD at this point, we are going to render it vulnerable to capital breakdown,” Newman said, adding he agreed that $4.5 billion should be a target for the amount of structural improvements to the system.

    9:01 a.m.

    Representing Oakland County, attorney Jaye Quadrozzi objected to the portions of the city’s Plan of Adjustment that involve the Detroit Water and Sewerage Department. She was critical of the city’s plan, in part, because of the financial projections it uses to calculate DWSD-related budget forecasts. She said the city’ plan would cause “untenable deficits and shortfalls” to DWSD budgets.

    She questioned the city’s plan to replace just 1.5 miles of the system each year, pointing out it would take 561 years to complete such a project. And what happened 561 years ago? “It was the end of the Middle Ages,” she told the judge. “DWSD clearly needs more than that.” Quadrozzi said Oakland County would like to see 8.5 miles replaced annually and she called for a $4.5 billion investment in the system for the work.

    The judge halted her statement.

    Judge: You can’t come to court and say the city needs to spend $4.5 billion on capital improvements without an answer to the question of where the money is going to come from.

    Quadrozzi: I believe the answer to that question lies in a number of legs of a DWSD table.

    She went on to say one leg is “keeping DWSD money inside DWSD.” Another leg is internal reforms to operations. “We would suggest that’s undergoing slower than Oakland County would want and I think slower than DWSD itself would want. … There is an effort to optimize within the organization.” The third leg, according to Quadrozzi, is “rightsizing.” She said, “DWSD has a huge service area, thousands of miles” and called for “an analysis for what can be done to shrink the system to provide the essential service that needs to be provided.” She described the fourth leg as raising rates.

    Judge Rhodes asked Quadrozzi several questions during her introductory argument, telling her “I raise these questions not because I have any preconceived notions about the answers, but now is the time to solve these problems. It’s not enough to just say we have problems.”

    8:30 a.m.

    Judge Steven Rhodes opens today’s proceedings. Jaye Quardrozzi, an attorney for Oakland County, has about 15 minutes left in her opening statements. She’s objecting to the plan because of the provisions related to pension funding and the Detroit Water and Sewerage Department. Oakland County has 62 municipalities that are part of the city system.

    Also expected this morning making opening statements objecting the plan are attorneys representing Macomb and Wayne counties, the UAW, which represents library employees, and AFSCME Council 25.

     

  • Day Two: Detroit’s Bankruptcy Trial

    The country’s biggest municipal bankruptcy trial enters its second day with opening statements continuing where they left off yesterday.

    5:09 p.m. Court is wrapped up for the day. Jaye Quadrozzi, attorney for Oakland County, will re-appear tomorrow morning as she did not finish her opening statement. One of her topics was an objection to the 6.75 percent presumed rate of return on pension investments the city has included in its plan. Here’s part of her exchange with the judge:

    Judge: It appears that accepted actuarial science and practice, if that’s what Gabriel Roeder (Smith & Company) and the plan followed, created a very large, somewhere between $1.5 billion and $3.5 billion UAAL (unfunded actuarial accrued liability). Yes?

    Jaye Quadrozzi: I believe so…

    Judge: Whatever the UAAL is, it occurred when this actuarial science that you are relying upon was used?

    JQ: That is correct

    Judge: Well, I hate to invoke my mother, but she used to say that just because everyone does it, doesn’t make it right.

    JQ: I’m all for mothers. However, the fact of the mater is, not that there is UAAL but that the city has proposed an UAAL that is overstated and nearly everyone you hear will testify to that.

    Judge: Using actuarial science that got us into the hole we’re in now.

    JQ: They’re not using actuarial science.

    Judge: What I’m asking is the experts you’re relying on to say that this rate of return, this .75 percent, is to low, are actuaries whose science got us into the hole we’re in in the first place.

    JQ: I would agree with you, but I think simply because an event or group of events happened that caused the UAAL to exist, that you don’t look t sound methods or practices to get out of that difficulty and the city did not do that, your Honor. I think in large measure because they have created a UAAL that is based upon incorrect assumptions, that hey put themselves in a position to propose a plan that does something that is prohibited by law. For that reason, Oakland County objects to that portion of the city’s plan.

    Judge: I guess the broader question I have is: if you have an investment enterprise, whether it is a pension plan or whatever it is, that has fiduciary obligations and is obligated to invest as a prudent person would invest, right, would that kind of investor on a long-range basis, which is I guess what we have to look at, be able or reasonably expect to achieve a 6.75 percent rate of return?

    JQ: Yes and more than that. We will present expert and fact witnesses that will testify to just that.

    4:26 p.m. Now up is Oakland County’s attorney, Jaye Quadrozzi. She says she’ll focus on the structure and legality of pension contributions from the Detroit Water and Sewerage Department that are part of the city’s restructuring plan.

    “DWSD is critical to the regional economy and quality of life in this area,” she said. “It’s one of the largest water and sewerage departments in the nation. … You can see why Oakland County is concerned.”

    The County is “party to contracts through which DWSD provides water and sewer” services to 62 townships and villages in Oakland County.

    “We understand that this is not a trial about DWSD or how to fix DWSD but the city’s plan imposes burdens that will have a significant impact on DWSD and DWSD is already in trouble and they have been for decades,” Quadrozzi said. “So to examine the effect that the city’s pla has and will have is important as to whether that plan can be confirmed.”

    She objects to making suburban residents pay for Detroit’s obligations.  “If the plan were to be confirmed it would force non Detroit residents … to fund the city’s retirement obligations,” she said.

    4:24 p.m. First opening statements by telephone. Kristin Going, representing Wilmington Trust, a COPs contract administrator, is on the line. She only took two minutes.

    4:05 p.m. Another attorney, another PowerPoint. Now Jonathan Wagner is arguing against the city’s Plan of Adjustment. He’s an attorney for the holders of the Certificates of Participation, the notes used in the 2005 deal to inject $1.5 billion into the city’s pension funds.

    TITLE: The Plan Unfairly Discriminate Against the COPs Class.

    On face of the plan, Pension Classes recover 59-60 %

    On face of the plan, COPs class recover 0 to 10 %

    City acknowledges that discrimination in excess of 50 percent is grossly disparate.

    Level of discrimination is actually far greater.

    3:55 p.m. Bond insurer FGIC’s attorney Alfredo Perez continues to make the case that some creditors in Detroit’s bankruptcy are getting unfair, undeserved treatment under the proposed debt restructuring plan.

    FGIC insured the famed “COPs” deal, the certificates of participation issued in 2005 to fund pension debt.

    “They’ve got a billion five of our cash, and we’re the bad guys. How could that be?” Perez said.

    3:54 p.m. As the FGIC attorney continues to make his case to sell pieces of the collection at the Detroit Institute of Arts, Judge Rhodes interrupted him and asked, “What about libraries, would you sell them too?”

    “I wouldn’t sell the libraries,” Perez said.

    “They are, what, more valuable, more significant than art?” the judge asked.

    “I don’t know what intrinsic value…”Perez started to answer.

    “What is if it had really valuable books in it?” Rhodes asked.

    “Then perhaps,” Perez said.

    3:40 p.m. FGIC’s attorney is using a PowerPoint presentation to guide arguments. Here’s what the first slide says:

    TITLE: Reasonableness of the DIA Settlement – Four Factors

    1)      What is the debtor’s probability of success in litigating the issues to be settled?

    2)      What difficulties, if any, would the debtor have in collecting any amounts that would be owed in the event of a successful litigation?

    3)      How complex are the issues being settled, and what expense, inconvenience and delay would necessarily result from litigating them, instead of settling?

    4)      Is the proposed settlement in the paramount interest of creditor, giving deference to the view of those creditors that would be adversely impacted by the settlement?

    3:20 p.m. Alfredo Perez for bond insurer Financial Guaranty Insurance Company is at the podium, making opening statements that so far are advocating for selling the artwork to pay creditors.

    FGIC’s CEO, Timothy Travers authored this op-ed piece in the Detroit Free Press today, titled “Why we creditors are fighting Detroit’s bankruptcy plan.”

    3:06 p.m. At the conclusion of his prepared statement, Syncora attorney Marc Kieselstein was questioned by Judge Rhodes who demanded to know what offer the bond insurer would accept from the city as a settlement on what it’s owed.

    “Something that’s within shouting distance of what the retirees are getting,” Kieselstein said at first.

    “I want a percentage and I want it now,” Judge Rhodes said.

    After more exchanges, including Kieselstein first saying he would have to consult with his client, he finally said,” 75 cents.”

    And Judge Rhodes asked him where that money would come from.

    “Through a combination of all the initiatives I’ve talked about,” Kieselstein said.

    “There’s the art,” Kieselstein continued. “You could sell one or two pieces. You could finance  a few pieces and you could get us to that number pretty quickly.”

    He also mentioned some kind of sharing in the revenue that could occur through revitalization of the city.

    2:59 p.m. Syncora attorney calls the statement “the city can’t be forced to sell the art” a “red herring” in the case.

    Marc Kieselstein has been making opening statements for more than two hours. He has challenged repeatedly how the city prepared its bankruptcy claim, including what work was done to determine the value of the collection at the Detroit Institute of Arts and spread such funds to creditors like bond insurer Syncora, to whom the city owes hundreds of millions of dollars.

    2:50 p.m. Here is the text of a slide the Syncora attorney is using in his opening arguments in the bankruptcy trial to criticize the city’s Plan of Adjustment.

    TITLE: PLAN IS NOT FAIR AND EQUITABLE

    SUBTITLE: Plan fails to live up to “all that the creditors could reasonably expect under the circumstances.”

    SLIDE TEXT Debtor has:

    Failed to explore potential benefits to new tax policy;

    Failed to explore monetizing art collection (or portion of art collection) before Grand Bargain;

    Failed to explore monetizing art collection (or portion of art collection) after Grand Bargain;

    Failed even to try to challenge alleged legal impediments to realizing art value.

    2:30 p.m. Syncora’s attorney also showed video of conflicting deposition testimony as to whether the city, in preparing its Plan of Adjustment, did any analysis of what would happen if taxes were raised. One consultant said yes, Robert Cline did such an analysis. But Cline said no, he didn’t.

    “We have asked ourselves a thousand times in recent weeks why the debtor left such a gaping hole in its confirmation case,” Kieselstein said, adding the city had the “mindset of using every short cut” and the city would have to “throw itself on the mercy of the court” during the confirmation hearing.

    (Cline, incidentally, was the trial’s first witness. He appeared Aug. 18. Here is a summary of his testimony.)

    2:20 p.m. In his arguments that the city did not meet its obligation to do a “best interest” test of the settlement’s effect on creditors, Syncora’s attorney wondered about the city’s lack of analysis of what would happen if the bankruptcy was dismissed.

    As part of his argument, Kieselstein first played video from Emergency Manager Kevyn Orr’s deposition in which Orr described a dismissal analysis done by one of the city’s consultants, Kenneth Buckfire, of the Miller Buckfire firm. Then Kieselstein played Buckfire’s deposition during which he said he never did such an analysis.

    “The debtor has no idea what would happen in dismissal,” Kieselstein said, adding the city’s attorneys “cannot do a stand-up analysis of the dismissal scenario from the podium. …

    “The debtor has dropped a big mess on your doorstep.”

    1:50 p.m. And we’re back!

    The schedule for the afternoon, as we know it, is for Syncora attorney Marc Kieselstein to finish his opening remarks. He’ll be followed by Alfredo Perez for bond insurer Financial Guaranty Insurance Company. Then UAW attorney Peter DeChiara  and Richard Mack for AFSCME Council 25 are scheduled.

    Attorneys for Macomb, Oakland and Wayne counties – not necessarily in that order – will follow.

    Will that take us to the 5 p.m. quit time or will we get a witness today?

    12:37 p.m. We’re on lunch break until 1:50 p.m. but here’s some catching up I needed to do from the Detroit Institute of Arts’ attorney’s statement: Arthur O’Reilly previewed some of the arguments witnesses will make later in the trial relevant to the grand bargain and the protection of the museum’s collection from sale to pay creditors.

    He described the museum’s relevance and importance to southeast Michigan – not just the city’s balance sheet – and said it has innovative programming to reach a large audience. O’Reilly also said, in his opinion, it is “one of the most accessible museums in the world.”

    “Despite population decline (in the city), the museum in recent years has attracted as many as 600,000 visitors a year,” he said. “Any sale of the collection would actually put the museum in jeopardy.”

    A few of O’Reilly’s points:

    The “great preponderance” of art was donated to the museum, not the city, and were made with restrictions on their use. “It’s held in trust and the public is the beneficiary,” he said. “This museum deserves to stay right where it is.”

    While the museum’s history dates back to the 19th century and the bulk of its collection was acquired through donations and purchases in the 20th century, the DIA’s importance in the 21st century endures. “The museum isn’t the glittering link to the history of the city” as creditors called it in some filings, O’Reilly said. “But it’s key to our present and our future.”

    Selling the art would “chill philanthropic giving in a city that needs charitable giving more than ever.” O’Reilly referred to the judge’s bus tour that city attorneys arranged. (More about that here) “You went through various parts of town. Some were blight. Some were in various forms of decay,” he said. But the tour also included the DIA and visits to some of the galleries. And although Rhodes entered the museum from a back door, O’Reilly said he hoped the judge saw the motto etched above the museum’s Woodward Avenue entrance: “Dedicated to the people of Detroit for the knowledge and enjoyment of art”

    “What would it mean if that statement of promise and ambition and hope were rendered a dead letter?” he (somewhat) rhetorically asked the judge. “What would charity mean if the creditors have their way?”

    12:15 p.m. The Syncora attorney, Marc Kieselstein, continues to argue that the city has failed to justify its ‘unfair discrimination” in paying different creditor groups different amounts relative to what they were owed. (Syncora stands to lose hundreds of millions of dollars in the bankruptcy restructuring plan, which calls for paying pennies on the dollar for what the bond insurer is owed.)

    The slide looks like this:

    TITLE: Discrimination is Not Supported by a Reasonable Basis

    SUBTITLE: Debtor’s Reply justified discrimination based on:

    1: Employee morale

    2: Settlement of eligibility litigation;

    3: Pensioners’ inadequate ability to protect themselves;

    4: The Grand Bargain proceeds are outside the Plan and shouldn’t be counted for discrimination purposes;

    5: And discrimination is minimal when OPEB (health care) and pension claim recoveries are viewed in the aggregate.

    Kieselstein said all of the above justifications for the discrimination fail to meet legal standards established in bankruptcy cases.

    11:49 a.m. Syncora attorney Marc Kieselstein in his opening arguments reviewed what Emergency Manager Kevyn Orr said during his deposition about how decisions were made about what amounts to pay different creditor classes.

    (He’s building a case that pensioners were treated much better than financial creditors and that such treatment is contrary to bankruptcy law.)

    At his July deposition, Orr was questioned by another Syncora attorney, Stephen Hackney, about what rationale could exist for the discrimination against certain creditors of the city. Orr said they were: the human dimension, the city’s covenant with retirees, the potential invalidity of COPs, and assets in retirement systems.

    “We all appreciate the human dimension, your Honor, but let’s remember the rule of law,” Kieselstein told Judge Rhodes. “The debtors’ decision to rely on the human dimension … is a legal nonstarter. That affects the whole legal discrimination analysis, it’s enough to sink the ship. It doesn’t matter what else the debtor says.”

    In other words: while the human dimension may be a sympathetic argument, it has no place in bankruptcy and doesn’t exist in bankruptcy law, Kieselstein argued.

    “Bankruptcy is the land of broken promises,” he said.

    11:35 a.m. Syncora attorney Marc Kieselstein, who is from the Kirkland & Ellis firm in Chicago, told Judge Rhodes he is being “asked by faith alone to find that the debtor has met its many burdens” and urged him to look more closely at bankruptcy law in deciding whether to confirm the city’s Plan of Adjustment.

    “This plan unfairly discriminates, fails the best interests tests and is not fair and equitable,” Kieselstein said.

    Kieselstein took aim squarely at the “grand bargain,” specifically how it has potentially resulted in money for a single creditor class – the pensioners — and took the “asset” of the Detroit Institute of Arts collection of the bargaining table “for a relative song.”

    Kieselstein said the city was enjoying the benefits of bankruptcy – automatic stays of payments, a “fresh start” – without adhering to certain principles of Chapter 9 filings.

    “The plan provides vastly disparate treatment for creditors,” Kieselstein said. “It cannot be confirmed without doing serious harm to the rule of law.”

    11:13 a.m. That concludes opening statements from the city and its supporters (at least for the purposes of the confirmation of the Plan of Adjutsmen): the Detroit Institute of Arts and the Official Committee of Retirees. Now we will have several attorneys representing creditors who oppose the city’s plan.

    First up: Marc Kieselstein who represents bond insurer Syncora, a staunch opponent to the city’s plan. He starts by saying it has “epic levels of discrimination” and says “discovery has revealed the the debtor in many instance gave itself a hall pass from even having to develop basic evidence.”

    11:06 a.m. Attorney Sam Alberts, of the Denton’s firm, represents the Official Committee of Retirees. (There’s a provision in bankruptcy law that provides for this committee that exists to protect the interests of all retirees. The committee has representatives from the various pensioner, employee and retiree groups.)

    Alberts opened his statement with a review of the importance of the city’s workforce, saying many of them had bypassed higher wages in the private sector for the promise of the public sector benefits including pensions and health care. In some cases, he said, they literally sacrificed “life and limb.”

    Alberts reviewed a few of the provisions in the Plan of Adjustment and how they affect pensioners. These include a 4.5 percent reduction to the general service retirees along with a loss of cost-of-living increases. Alberts said the cuts to those increases will save the city $700 million.

    In addition, he said, “Thousands of these general service workers will have their pensions reduced further to cover alleged interest overpayments … to annuity savings funds. I say alleged because … these payment were determined without any of their input and were made with respect to contracts and city ordinance.”

    Here’s some background on the “annuity clawback” that also will be addressed by individual pensioners Judge Rhodes will allow to testify during the trial.

    Under the proposed Voluntary Employee Benefits Association, a replacement to city-funded health care, pensioners will assume a far greater share of their own medical insurance and direct costs. “As you get older, it’s a much more challenging request,” Albert said. “These retirees are more than just pensioners. They received a promise of valuable health care benefits going forward.”

    10:45 a.m. Now up: Sam Alberts, who represents the Official Committee of Retirees.

    (You can listen to Sam Alberts on WDET here.)

    10:26 a.m. DIA attorney Arthur O’Reilly says his opening statement will focus on “respecting charitable donations and respecting the people’s right to arts and culture.”

    10:20 a.m. First up to support the city in urging Judge Steven Rhodes to confirm the city’s Plan of Adjustment is Arthur O’Reilly, who represents the Detroit Institute of Arts. Some of the city’s creditors have had an intense focus on the value of the museum’s collection and advocated that it be sold to pay debts to ALL creditors, not just used as leverage to raise money for pensions, as the “Grand Bargain” did.

    10:12 a.m. City attorney Bruce Bennett, of the Jones Day firm, concluded his three-hour opening statement. Throughout his time at the podium, Bennett asserted that the Plan of Adjustment was proposed in good faith, that the plan meets the “best interest of creditors” test under bankruptcy law, and that the plan discrimination against different classes of creditors is not unfair.

    “We couldn’t do any better for the creditors. The numbers show that,” he told Judge Steven Rhodes.

    As for the testimony that will come about the feasibility of the plan’s success, Bennett called it “an intensely and unavoidable factual determination.”

    “There is not much law that is going to frame that discussion,” Bennett said. He described some of the conclusions the city’s expert witnesses will make about the feasibility of the Plan of Adjustment:

    “The projections are sound. They were prepared by a team.” (Bennett showed a chart with witnesses on two sides: revenues and expenditures. The city’s CFO Jon Hill and Ernst & Young expert Gaurav Malhotra are at the top.)

    “There’s also the reality that in the future, things will happen that we haven’t planned for. Unexpected things will most certainly happen, and other people, not necessarily the emergency manager and not necessarily the team that put this together are going to have to adjust to the future over time. We expect those adjustments. We expect those changes. They are impossible to predict and nail down,” Bennett said. “It is therefore important to remember while hearing the testimony that the focus is whether it’s more likely than not, more than a reasonable but a probable chance that everything that’s been put in place under the plan will achieve its intended result.”

    Bennett says the city’s witnesses will say, “We think this is the city’s last best chance and that it’s going to work.”

    In concluding his nearly three-hour statement, Bennett told the judge “Detroit has a better future after Chapter 9 … Detroit has earned this Court’s help in escaping from its current distressed state. … The Plan will succeed.”

    9:25 a.m. City attorney Bruce Bennett is going through a chart titled “Pension Recovery Using Legally-Cognizable (sic) Standards” to show the judge, in part, a “lack of discrimination” in calculating the returns on pension investments. Feels like half the media covering trial have used the phrase “deep in the weeds” to describe the last half hour of courtroom “action.”

    9:07 a.m.  Some of Detroit’s best journalist are covering this trial. Follow them live at these blogs and Twitter feeds:

    The Detroit Free Press live blog, where you can give a letter grade to the city’s opening statements.

    Freep Reporters tweet at @MattHelms and @NathanBomey on Twitter

    Detroit News Reporters tweet at @RobertSnell_DN and @ChristineFerretti_DN

    WDIV’s Rod Meloni is blogging here.

    8:55 a.m. Early in his statement today, city attorney Bruce Bennett referred back to the months immediately after the Chapter 9 case was filed and he described conversations with opposing counsel.

    “For several months whenever I spoke to a creditor, that creditor said, ‘Detroit is in a very unfortunate, difficult economic situation but we should be paid 100 cents (on the dollar) and here are all the reasons we should be paid 100 cents,’” Bennett said. “Your Honor saw that played out in the courtroom.”

    He summarized some of those legal maneuvers and arguments:

    Retirees argued the Michigan Constitution protected pensions.

    UTGO holders “said among other things that … we have a lien on certain revenues collected by the city.”

    LTGO noteholders argued “they had a superior position.”

    Bennett also challenged the notion that the case should be dismissed and sent to the state courts. He summarized the potential scenarios, relating back to the early disputes and assertions from creditors:

    “There is no reason why all of that wouldn’t happen again. There is every reason to expect that all of that would happen again in state courts but with a very important difference: state court judges would not have the supremacy clause and ordering principles that happen under the U.S. Bankruptcy Code, in particular, that deal with all of the conflicts ad all of the priorities that are being asserted. Instead, you would have stat courts having to give credit to all of these laws, there being no federal law, reason not to, and then having to reconcile all of them.

    “Whether there is a race to the courthouse, or courthouses, or a mob scene at the courthouse, there is not going to be a single line where everybody agrees what their rights are and settled for some treatment that arises out of a pro rata assessment where everyone expects it will be fully paid and the allocation scheme from which it occurs are not quite clear under the law. .. It’s a further demonstration that dismissal scenario is not good for creditors generally.”

    8:30 a.m. Jones Day attorney Bruce Bennett is back at the podium for the city of Detroit.

    He’s continuing his introductory statements in favor of the city’s Plan of Adjustment. Two other attorneys also plan to make opening statements in support of the restructuring plan: Arthur O’Reilly, who represents the Detroit Institute of Arts, and Sam Alberts, who represents the Official Committee of Retirees.

    (You can listen to Sam Alberts on WDET here.)

    Several creditor attorneys say they will counter the city and its supporters with opening statements objecting to the plan as it now stands. They’re expected to present some arguments about why Judge Steven Rhodes should not approve the Plan. They include lawyers for bond insurers Syncora and FGIC, as well as counsel for the UAW, AFSCME and Macomb, Oakland and Wayne counties.

  • Day One: Detroit’s Bankruptcy Trial

    The country’s largest municipal bankruptcy trial begins today in Detroit. WDET’s Sandra Svoboda is in the courthouse and will update this blog throughout the day…and continue doing so throughout the trial.

    Here, she and WDET’s Pat Batcheller discuss what to expect during the trial, which is technically a “confirmation hearing” on the city’s Plan of Adjustment. Ultimately, the judge will determine if the city’s plan is feasible and reasonable to creditors.

     

    4:54 City attorney Bruce Bennett has finished for the day. He says he have about another hour tomorrow morning. Attorneys for the Detroit Institute of Arts and the Official Committee of Retirees say they each will have about 30 minutes of arguments supporting the city.

    Attorneys for creditors who object – including Syncora, FGC, the UAW, AFSCME and Macomb, Oakland and Wayne counties – will follow.

    4:40 Bruce Bennett’s opening arguments in the Detroit bankruptcy case first reviewed why the Detroit Institute of Arts collection shouldn’t be sold to pay creditors. Now he’s moved on to a discussion of what additional revenues could be available. Read: taxes.

    He’s currently discussing why no additional monies are available from property owners, residents or workers in the city.

    “Raising taxes now is not compatible with the goal of saving the city,” Bennett said. “Raising taxes could cause the city or any municipality to go into a state of decline it can’t escape from.”

    4:17 Opening arguments continue to focus on what started as “the DIA Settlement” that became the “Grand Bargain” when the state got involved, as described by city attorney Bruce Bennett.

    Not only is the museum an asset, it’s one that could be used to help lure residents back to the city, Bennett argued. But he continues to insist the art, by law, does not need to be sold to pay debt.

    “I don’t think any of the donors thought the art would be or could be sold to fill potholes, pay for the collection of garbage, or pay for any city services…” he said.

    The donated art, he said, went to the DIA Corp., not the city.

    3:58 The Grand Bargain is being outlined, specifically the transference of the art to a new nonprofit, and the legality of it. Attorney Bruce Bennett reviewed Michigan Attorney General Bill Schuette’s opinion (found here) related to whether the city needed to sell the art to pay creditors.

    Bennett is now dismissing why a loan secured by the artwork is not a good idea. Creditors last week proposed such a plan.

    He also says the conditions of the foundation money toward the grand bargain were keeping the art secure and the conditions attached to the state money included the prohibition on litigation. (Recall: pensioners waived their rights to sue the state related to emergency manager law or constitutional protection of pensions with their favorable vote on the city’s Plan of Adjustment.)

    3:41 City attorney Bruce Bennett got right to addressing the issue of whether the collection at the Detroit Institute of Arts can be sold to pay creditors in the city’s bankruptcy case:

    “An unsecured creditor doesn’t have a general claim against all property of a Michigan municipality. … What the objectors have done is cited basically five cases where the proposition that something about the “best-interest” test requires the use of city-owned assets to provide recovery.  … We’ve just seen that there’s nothing in Michigan law that supports that conclusion or supports that argument. So what is it about Chapter 9, if anything, that expands the rights of an unsecured creditor in a bankruptcy? … the answer: nothing. There are, of course, provisions of Chapter 9 that reduce or limit creditors’ rights.”

    3:33 More from Bruce Bennett’s opening arguments:

    “We are here today finally to obtain that help and the purpose is no less than to save the city of Detroit. The city needs more net revenue than it has to provide adequate services and service legacy debs.  … Detroit’s won’t survive if it isn’t done.

    The proposed Plan of Adjustment eliminates $7 billion of the city’s $18 billion of debt and provides for $1.7 billion in investments over the next decade.

    “The city believes the investment will be sufficient to address the city’s most pressing needs. … The city believes the planned investment will be sufficient to rehabilitate the city.”

    3:30 City attorney Bruce Bennett began opening arguments at 3:20 p.m.. He started with listing some of the reasons for and results of the city’s bankruptcy: depopulation, blight, a deterioration of the quality of life.

    “The city no longer has the resources to provide its residents with the basic services,” he said.

    He called the city’s operations “wasteful and inefficient” and described “much of” the city’s police and fire equipment and technology as “obsolete.”

    The Chapter 9 reorganization, Bennett said, can help reverse the decline, attract new residents and businesses and “reinvigorate” Detroit.

    “The city needs help,” he said. “During the roughly past year, progress has been made.”

    3:15 Judge Rhodes denies all of the motions except the one seeking to prevent the testimony of city attorney Evan Miller.

    The Court is on break until 2:10 p.m. when Judge Rhodes will hear one more pretrial motion and issue his decision on all of the other ones argued today. Then opening arguments will start.

    12:43 Judge Rhodes moves on to issue of whether city attorney Evan Miller, of Jones Day, can be a witness in the case. The UAW, which represents library employees, listed him on its witness list.

    UAW attorney Peter DeChiara says Miller “is THE most knowledge person” on pensions and benefits and how the bankruptcy might affect the pensions and health care benefits for the Detroit Public Library. “We do not seek privileged information from him,” DeChiara said.

    (The UAW represents library employees and is seeking to determine the library’s long-term obligations to pension and benefits funding.)

    “It’s not the lawyer’s’ job to testify in support of the plan,” Judge Rhodes told him.

    “I agree with you in general, however in this case, the individual who represents the city and has the knowledge to answer the questions that are relevant to the UAW’s case happens to be with Jones Day,” DeChiara said.

    12:19 Judge Rhodes asks who else wants to be heard on any of the pretrial motions.

    First, Robert Gordon, attorney for the city’s retirement system, said the city was able to assess the impact of the plan on retirees.

    Barbara Patek, attorney for the Detroit Police Officers Association, used the phrase “business justification” for plan confirmation, though she was addressing the human dimension of bankruptcy and its affect on pensioners and employees. Neither she nor the judge could come up with a better term than “business justification.” Patek said because this is a municipal bankruptcy case, assets cannot just be divvied up – city services need to continue.

    11:54 FGIC Attorney Ed Soto is now arguing that the city should not be allowed to present testimony and evidence about the validity of the $1.4 billion pension funding deal from 2005, also known as the Certificates of Participation claims. Here is the motion filed on the issue.

    (For background, a succinct history of the COPs deal — and a description of some of the surrounding legal issues — can be found here. The city has a pending lawsuit challenging the legality of the COPs deal.)

    Soto also argued the city should not be allowed to present evidence that would show the potential hardships that would be suffered by pensioners. Here is the motion on that issue. A few months ago, Judge Steven Rhodes declined to allow Syncora access to information about individual pensioners’ financial information and assets.

    11:32 Ed Soto, an attorney for bond insurer Financial Guaranty Insurance Company is critical of the court’s mediation order, claiming it has been too broadly interpreted and has prevented discovery by creditors in pre-trial preparations.

    Syncora originally challenged the order in this motion, which the judge is being asked to rule on today in advance of the trial.

    The court’s mediation order has been unsuccessfully challenged by some creditors, including FGIC and Syncora, who wanted documents and witness testimony about how they grand bargain came about. They were unable to get it because the mediation order (ensuring confidentiality related to the negotiations) prevented their release.

    Soto described how Rip Rapson and Dan Gilbert have given contradictory statements — both publicly and in depositions — and creditors’ attorneys could not question them about the discrepancies because of the mediation order. Rapson is the president of the Kresge Foundation, a donor to the grand bargain, while Gilbert is chairman and founder of Rock Ventures and Quicken Loans.

    Soto contended the lack of discovery prejudiced some parties as they attempted to prepare for trial and argue that the city’s PLan of Adjustment unfairly discriminates against some creditors, which could be grounds for the judge to reject its confirmation. “No one group should be allowed to benefit from (the mediation order),” Soto said. “These are issues that have handicapped us.”

    “Your argument assumes that the reasonableness of some other plan is before the court, it’s not,” Judge Rhodes said at one point.

    “My argument goes to whether there is sufficient discovery that would allow evidence that but for this money going toward the pensioners, (the grand bargain) would not have happened,” Soto said.

    Syncora attorney Stephen Hackney called it a “fundamental due process order” and argued for the mediation order to be lifted.

    In response, city attorney Greg Shumaker said Emergency Manager Kevyn Orr would testify about what came out of the mediation, specifically the grand bargain, not what happened in the mediations or what was said to the foundations during the process. Shumaker said, contrary to what Syncora and FGIC attorneys said, the city is not selectively using the mediation privilege.

    10:59 Internet Service Interruption in the Media Room….but here’s what’s been happening:

    Stephen Hackney, attorney for bond insurer Syncora, is arguing a motion previously filed that would preclude the city from introducing evidence related to how much less pensioners would receive if the “grand bargain” funding was not included. The grand bargain is the agreement to bring $660 million of state, private, foundation and corporate money to pension funds so that retirees suffer smaller cuts to their monthly payments. “These are recoveries under the Plan,” Hackney says.

    Syncora stands to lose hundreds of millions of dollars in the bankruptcy case, as the Plan of Adjustment now stands. The Bermuda-based company’s attorneys have consistently argued that they are experiencing “unfair discrimination” under the plan, in part, because the grand bargain monies only benefit pensioners, not financial creditors. Syncora also wants Detroit Institute of Arts’ holdings to be sold to pay creditors.

    City attorney Greg Shumaker. of Jones Day, is reviewing the state contribution agreement ($98 million to the General Retirement System and $96 million to Police and Fire Retirement System) and making other legal arguments related to procedure and what will be introduced.

    “It’s really tough to tell what Syncora wants to prevent the city from putting on,” he says. “It’ a legal issue but in fact, there’s no doubt that there’s a lot of evidence that’s going to be put on related to the grand bargain. … ”

    10:38 The city is represented by several attorneys who are up front in the courtroom today. Among them (linked to their bios):

    Greg Shumaker, Geoff Irwin, Robert Hertzberg, Bruce Bennett, Geoffrey Stewart

    10:30 While the attorneys are still dealing with pre-trial issues, here are a few live blogs to follow. They’re all done by reporters who have been here for the duration of the case. (Let’s just say there are a lot of new faces in and around the media room today)

    Detroit Free Press

    Detroit News

    WDIV’s Rod Meloni

    WXYZ’s Jim Kiertzner

    10:27 Tweeting from court today (going counterclockwise around the media room) are @WDETSandra, @NathanBomey, @MattHelms, @ChadLivengood, @CharlieLangton. @RobertSnell and @RoopRajFox2 are elsewhere in the federal courthouse.

    10:05 Attorneys for the city and creditors are discussing witnesses, exhibits and other items related to procedures at trial, which will begin later today. Most witnesses will be sequestered.

    8:30 a.m. For more than an hour, Judge Steven Rhodes heard arguments for and against issuing a temporary restraining order that would halt water shutoffs in the city. A summary is here.