Emergency Manager Kevyn Orr, Bankruptcy Judge Steven Rhodes and Chief U.S. District Judge Gerald Rosen appeared together to receive awards from Goodwill Industries. The nonprofit agency also honored the 12 foundations that chipped in for the grand bargain. As the men were honored at the lunchtime event, held at the Detroit Athletic Club, they made brief remarks. Here are the highlights:
Orr drew a standing ovation as he took the podium.
“The 21 months that it took us to get through the emergency manager’s term was at times both tumultuous, exulting and, finally, exceptionally rewarding. As I look through the room I see the real, shall we say, heroes of Detroit. It was the people of Detroit that soldiered through a tumultuous and somewhat destabilizing time as we went through the bankruptcy to the end,” Orr said.
Rhodes recognized the team effort involved in the complicated case.
The now-retired judge said he was accepting Goodwill’s award not only for himself, but for all the professionals who acted as a team to move the case, “in 17 months, from its chaotic beginning to its successful conclusion.” He said the smartest thing he did was appoint Rosen as chief mediator, who now “deserves the mass majority of credit for the ultimate success of the case.” After quipping about the moments of tension that they shared during the trial, Rhodes thanked Orr for handling the political and personal challenges of the Grand Bargain with “grace, competence and success.” “As I go around the country and speak about Detroit, people are enthusiastic about its future and rooting for the city,” said Rhodes.
He said unlike most stories, which require heroes and villains, the bankruptcy case only has heroes and heroines. Calling it “one of the most remarkable experiences” of his career, Rosen also said the bankruptcy case was like the “big bang theory” in that it “brought together unrelated people and events colliding to form a great universe that brought new hope to a great city and its people.”
The “grand bargain” doodle will be on display on the DIA. The feds report on poor management of grants in Detroit. Jones Day opens a permanent office in Detroit. Here’s catching up on some Detroit bankruptcy tidbits.
Chief Judge becomes “honorary artist” at DIA
Gerald Rosen, considered the architect of the “grand bargain” can add “artwork on display at the Detroit Institute of Arts” to his resume.
The museum will enshrine the famous doodle Rosen drew up on the back of a legal pad which laid the groundwork for the grand bargain. As part of the overall bankruptcy settlement, the grand bargain secured funding for the DIA from foundations, corporations, individual donors, the state of Michigan and DIA fundraisers to prevent the sale of the museum’s city-owned collection and protect it from sale to pay off creditors. Rosen is set to be the guest of honor at a private event on April 10, honoring his efforts in preserving the museum.
Museum board director Gene Gargario has said that the doodle will hang “somewhere in its offices,” according to an interview with the Detroit Free Press.
Feds looking for Detroit funds
A recent study released by the U.S. Government Accountability Office shows that inefficiencies in Detroit’s bureaucracy led to a mismanagement of hundreds of millions of dollars in federal grants. Through a combination of inconsistent internal policies, outdated technology and bookkeeping systems, and layoffs during the fiscal crisis, deficiencies in handling government aid through eight federal grant programs put significant strain on the city’s finances even before the bankruptcy hit.
The report, instituted by U.S. Rep. John Conyers (D-Detroit) and Senator Gary Peters (D), was launched to assess how federal aid is handled during fiscal crises. The report not only looked at Detroit but also at Flint, Michigan; Stockton, California; and Camden, New Jersey and found that the limited capacity of the cities in question severely restricted their ability to manage federal funds properly.
Jones Day, the law firm that represented Detroit during its bankruptcy case, is set to open a permanent office in the city some time in July. The Detroit office will be the firm’s 17th office in the U.S. And 42nd in the world. Timothy Melton, a 1987 graduate of Wayne State University Law School, will be partner-in-charge of the office and is set to employ half a dozen lawyers plus support staff. According to Jones Day, the Detroit office will be connected to the firm’s network of 2,400 lawyers across 19 countries to act as a single worldwide firm, the firm said.
“The DIA spent much of the last two years under threat as its owner, the city of Detroit, looked for ways to emerge from bankruptcy,” NPR reports in a segment that aired on “All Things Considered” this week. As the exhibition “Diego Rivera and Frida Kahlo in Detroit” attracts visitors, NPR finds the famed murals and the couple’s historic legacy now has much more to do with a resilient city’s future following its bankruptcy case.
All through the Detroit bankruptcy trial, the spotlight has been fixed on the Detroit Institute of Arts, as the appraisals of the museum’s collection have been wildly different. Beverly Jacoby is a noted art valuation expert and founder and president of BSJ Fine Art in New York. She spoke with our Detroit Journalism Cooperative partner Michigan Radio about why there are wildly different values assigned to the art.
Jacoby says there are several reasons for the wildly different values.
The day began with Michael Plummer’s return to the witness stand. The founder of Artvest, Plummer authored a study assessing the value of the entire collection at the Detroit Institute of Arts. Here’s some of what he had to say yesterday. He was followed by Annmarie Erickson, the chief operating officer of the Detroit Institute of Arts, and John Satter, a real estate appraiser who valued the museum’s physical property.
Judge Steven Rhodes interrupted Allan Brilliant, who represents the Macomb Interceptor Drain Drainage District, while he was questioning a real estate expert about what the Detroit Institute of Arts building and land are worth.
Rhodes asked Brilliant what HE thought the property is worth.
$200 million, Brilliant said.
Other information from the testimony of John Satter, the Midwest region managing director at Hilco Real Estate Appraisal:
The DIA sits on 14 acres. The property is worth $500,000 an acre. So Satter concluded the property alone is worth $7 million.
The fair market value of the property and the building is about $43 million.
But that is if it was sold to someone who wanted the property for an “institutional use.” Satter also appraised the property as if it was sold to an investor who would need to make substantial changes to the site.
In that case, Satter estimated the sale price at $18.5 million.
But Jones Day attorney Geoff Irwin, working for the city, asked about taxes the DIA property and building would generate if purchased by an investor for commercial purposes. Satter said it could generate $1.5 million annually in taxes.
But he also cautioned about its marketability to investors.
“It’s a beautiful building. It’s got wide halls and nice spaces but it would be a real challenge to repurpose that. There’s a lot of question marks and some caution. It’s in a historic district, and what allowable uses remain would be answered by the city,” Satter said.
Under cross examining by Allan Brilliant, who represents the Macomb Interceptor Drain Drainage District, which has a $26 million claim in the case, Satter admitted he has done 6 real estate appraisals in Michigan.
One was in Detroit. It was of a fast-food restaurant.
The first – and possibly only – afternoon witness is John Satter, the Midwest region managing director at Hilco Real Estate Appraisal. He appraised the real estate holdings of the Detroit Institute of Arts for Jones Day law firm on behalf of the city.
His conclusion: “The market value of the property in question falls somewhere between $18,500,000 and $43,000,000, depending on the circumstances of the sale.”
At the end of Annmarie Erickson’s direct and cross examination by attorneys, Judge Steven Rhodes had some questions of his own. Here are a few of their exchanges.
Judge: What is your opinion on what the value of the museum is to the 60,000 school children who you said came there in the past year?
AE: I think the museum is of tremendous value to those children. It gives them an opportunity, first of all, to get out of the classroom and do something different and learn something different and look at the world in a different lens than they might in their classroom. …. I think that’s really valuable and if I could tell you a small anecdote: last spring when we were very full of schoolchildren, there were two little boys walking together. One of them looked at the other and said, ‘This is way cooler than I thought it would be.’ I think that kind of thing happens every day in the museum.
Judge: What is the value to the children of participating in the programming that the museum offers apart from just the opportunity to see the art?
AE: The museum uses a teaching method called Visual Teaching Strategies (VTS) and all of our school tours are based on VTS. … What we find is that kids who go though VTS in the art museum begin to develop skills in terms of critical thinking, in terms of being able to articulate their thoughts better … and sometimes, if we do a writing program with them, improve their writing. We also have literally a thousand comments from teachers … that talk to us about happened with their students when they were at the museum. It really does sharpen their curiosity in ways that one wouldn’t necessarily expect.
Judge: Families go to the museum.
AE: They do.
Judge: What is the value to families when parents take school-age children to the museum?
AE: I think the museum is a great social place for people. They can come in. They can feel very comfortable and they can engage in ways with each other they certainly wouldn’t do in front of a television. I think it promotes conversations. … Parents can actually feel smart, and that’s an important concept. Because if a parent doesn’t feel smart, they’re not comfortable talking to their child. … We don’t want a silent art museum at the DIA. Our mission statement actually says that we create experiences that help people have personal experiences with art. … That’s what we believe art is about.
Judge: What is the value of going through the art museum for adults who go…? Why do adults go to the DIA?
AE: I think that adults go, and I can put myself among that because I do go to the museum and I go to other museums, I think that adults go as a reminder of possibilities. The museum reminds us all that we can be creative problem solves because in the end, that’s what artists do: they solve problems. So I think adults, although they may not identify it as that, they go for inspiration. Certainly they will tell you they go to be educated. … They go to be educated. They go to be inspired. They go to see something different. It takes them out of everyday life in a way that is satisfying.
Selling the art would not only decimate the museum collection, it would sacrifice the tri-county millage and donor gifts, according to DIA COO Annmarie Erickson who testified this morning.
“We have heard public statements from the county executives in Oakland and Macomb counties that they would stop millage payments if anything was sold. I have personally had conversations … that the millage would be stopped,” she said. “It would have a tremendously chilling effect on donors. … We can’t raise money while our future is in question. A sale of the art would be even worse. We would not longer get gifts or art because they would be subject to sale.”
Another effect: “We would be persona non grata in the museum world,” she said.
Erickson learned during the Spring 2013 that the city was considering the possible liquidation of the art collection to pay creditors. Museum executives made their opinions known.
“We affirmed that we hold the collection in trust for the public. We believe the city is a partner in holding that collection in trust and we would defend the collection as needed,” she said. “We made many public statements. It was reported in any number of media outlets. It was reported in our board minutes. We were very public about it.”
The Detroit Institute of Arts chief operating officer, Annmarie Erickson, is convinced the museum will meet its commitment in the “Grand Bargain.”
That’s the deal that has foundations contributing $366 million to Detroit’s pensions systems and the state providing $195 million. Among the conditions: The DIA raises $100 million and no artwork is sold.
“It’s not easy but we’re doing very well. We have approximately $85 million committed to that and we have multiple asks that are still out there. I am completely confident that we will do it,” Erickson said while testifying in the city’s bankruptcy case.
If there was to be a sale of the art, the museum would fight.
“We would be in litigation to protect the collection. We hold the collection in trust and we consider that to be an obligation we cannot shirk and if it means fighting legally for it, we would,” she said.
A few quotes from Annmarie Erickson, the chief operating officer of the Detroit Institute of Arts:
“The Rivera murals are probably what the museum is best known for,” Erickson said. “Rivera considered them to be one of his finest works of art, and we really consider them to be the heart of the museum. I don’t know that there is another piece that speaks so deeply to what a city is.”
“It’s the core of what we do: hold our collections in trust for the public. When the DIA was facing dire circumstances, we never considered selling our collection,” she said. “Everything we do is really for the public’s use of the museum.”
A few things she’s mentioned:
*The museum considers itself one of the top six in the country, and is the largest museum in Michigan. The DIA makes loans from its collection to smaller museums in the state and develop professional development seminars.
*There were about 610,000 museum visitors last year. “We are actually on track to do better than that this year,” she said.
*The DIA counts 30,000 members. “They’re absolutely critical to us,” she said. “They are our closest family.”
*About 700 volunteers are “active”, staffing the information desks, supporting security guards by walking through galleries, conducting public tours, dusting the art. “It is not an exaggeration to say we could not operate without our volunteers,” Erickson said.
*Full- and part-time employees number 300.
*The museum is conscious of the needs of Detroit, working with the veteran’s hospital, Children’s Hospital of Michigan, The Children’s Center, recovery programs and other social service providers and nonprofits. “By our very existence we provide benefits to the community,” she said, citing several educational, social service and professional programs.
*The InsideOut program temporarily installs high-quality reproductions of pieces in “unexpected places” in Detroit and suburban communities: parks, walls, alleys, “just places where you wouldn’t expect to see a beautifully framed piece of art.,” she said. “We’re now in our 5th year and we show no signs of slowing down.”
*The annual budget this fiscal year is $32 million. A tri-country property tax currently raises $22 million. “The other $10 million is fundraised,” Erickson said. “We go out and raise funds from individuals, corporations, and foundations to support the museum operations. There’s a very small revenue-generating line as well. …It’s less than 3 percent of the budget.” The city provides no operational funding.
Soto’s client, known as FGIC, commissioned a study of the Detroit Institute of Arts collection and found “likely buyers” who would spend up to about $2 billion for parts of the collection.
Plummer’s report, on behalf of the city and the DIA, valued the collection at between $2.8 billion and $4.6 billion but said that could drop as low as $1.1 billion if actually sold.
Soto questioned Plummer about his earlier statements about how much lower the collection would sell for as part of the bankruptcy and challenged his assertions that all works would be discounted.
“You might be able to sell ‘The Wedding Dance’ but there is an enormous collection at the DIA and I don’t believe there are enough buyers for that out there right now,” Plummer said.
Plummer is founder of Artvest, the New York art investment firm that evaluated the Detroit Institute of Arts collection for sale. He’s testifying as a city witness in support of the Plan of Adjustment during the bankruptcy trial.
Officials at the Delaware museum decided to sell William Holman Hunt’s “Isabella and the Pot of Basil,” and other works to raise money toward a nearly $20 million debt from a facilities expansion and to shore up the museum’s endowment.
Before the sale, Christie’s auction house estimated the 1868 piece would sell for $8.4 million. The actual going price? Just $4.25 million.
“It was the taint around that picture and the bad publicity around it,” Plummer said, “that resulted in a discount of 50 percent. It sold for half of what it was expected to sell for.”
The same scenario could follow any DIA liquidation sale, he said.
“There was an aura around that auction that related to her personality, her life, her mystique,” said Michael Plummer, as he testified in the bankruptcy trial. “The sale of the DIA would not be a celebratory event.”
Any sale of the DIA works to raise money to pay the city’s creditors would be met with resistance from the established auction house and art collector communities, Plummer said. That would lower prices.
“It would be considered to be a tragic event. It would not be sold in a celebratory fashion. It would not be marketed in a glamourous way. It would have to be sold in a discrete way and it would have an aura that was negative not positive,” he said.
Another problem with selling the DIA collection, Plummer said, would be the time it would take: years to catalog the pieces, several more years to sell it because dumping it all onto the market would be more than the high-end art market could bear.
“That would flood the market so if you had an orderly liquidation you can plan to mete out the property in batches that would ensure the market was not flooded,” Plummer testified.
Just storing the art before such a sale would cost $6 million, Plummer testified, and even when it was auctioned, up to 40 percent of it would likely go unsold.
One of the city’s actuaries, Alan Perry, is back on the witness stand, discussing pension fund forecasting. The next witnesses, according to attorneys yesterday, are Vanessa Fusco, who works at Christie’s and will testify about art valuation, and Kim Nicholl, an actuary with Segal’s Chicago office.
After hours of testimony by two actuaries, let’s review the main issue:
The city puts the unfunded liability for the two pension funds for 2014 at about $3.4 billion. Creditors have questioned the accuracy of that amount. If the debt is less, the city can set aside less for pensioners, leaving more for other creditors.
Attorneys for some of the creditors are challenging actuaries who support the city’s plan and the actuarial assumptions that it’s based on, especially the 6.75 percent rate of return presumed for pension fund investments. Two witnesses today said they supported the city’s assumption that pension investments will yield a 6.75 percent return. But they also testified that amount is less than almost every other large public pension system in the United States.
Certainly those calling the shots in Detroit’s bankruptcy case have plenty of reasons to err on the side of conservative in the presumed returns on investments for the pension funds: prudence and history.
Kim Nicholl, an actuary with Segal, the actuarial firm used by the Official Committee of Retirees, testified today about the amount of cuts pensioners in the General Retirement System will face under the city’s Plan of Adjustment:
Reduction Number of Pensioners
5-10 percent 1,864
10-15 percent 2,910
15-20 percent 3,155
20-25 percent 1,627
25-30 percent 989
30-35 percent 1,083
35-40 percent 366
40-45 percent 16
We’re stopped for lunch, but not before we got a few minutes of testimony from Kim Nicholl, an actuary with Segal’s Chicago office who worked with the Official Committee of Retirees. Her resume is entered into evidence. See you at 1:30 p.m.
The two highest valued pieces of art in the Christie’s appraisal were Pieter Bruegel the Elder’s “The Wedding Dance” and Vincent van Gogh’s “Self Portrait.” Here’s what Vanessa Fusco said about them in her testimony.
The Wedding Dance:
This piece was valued in the appraisal at $100 million to $200 million.
“There are so few works by the artist, so you can’t rely upon market activity, trading works by this artist. So you have to look more broadly to 16th century Flemish artists. Of this quality, very little actually comes to the market. Most are in public collections,” Fusco said.
A work the team used to compare to “The Wedding Dance” was Peter Paul Rubens’ “Massacre of the Innocent,” which sold in 2002 for $77 million, Fusco testified. “Adjust for inflation and arrive at the lower end of our valuation range,” for “The Wedding Dance,” she said.
“We think if this work were to be sold, it would break all records,” Fusco said of “The Wedding Dance.”
The Self Portrait:
Valued in the appraisal at $80 million to $150 million
“Here we actually have more direct comparables to work from,” Fusco said, adding another van Gogh self portrait sold for about $26 million in 1990 and a second that went for $75 million in 1998. “If you adjust those for inflation, you’re at sort of the upper and lower end.”
She said the DIA van Gogh “Self Portrait” is worth less than those two because it is smaller and from earlier in his career. The Dutch artist painted them in 1888 and 1889, and “1888 is actually a pivotal point in the artist’s career where his style changed dramatically,” Fusco said. “Later van Goghs are more highly valued.”
She said that “trophy hunters” would likely be very interested in purchasing the DIA’s van Gogh “Self Portrait.”
“This is an iconic piece,” she said.
“It’s a spectacular and world class collection. I had been to the DIA before (twice) and was extremely impressed,” she said. She mentioned the Diego Rivera frescoes, the impressionist, modern and European collection and the Dodge and Scripps collections as particularly notable.
Like many museums, Fusco said, the DIA most valuable and notable work is on permanent display. She called the museum’s collection encyclopedic and said the city-owned work “covers a wide range of art history”
“Generally a museum will put its most important work on view for the public and that can also translate into the most commercially valuable work,” she said.
According to Fusco’s testimony, when the Christie’s team of 65 specialists started the appraisal, they believed they would review about 3,500 works that had been purchased by the city but that number fell to about 2,700 because several of the pieces were no longer in the collection or had been incorrectly counted. For example, a teapot and lid has been listed as two item when they are, by art collection standards, just one.
It’s not unusual for such lists to be revised during an appraisal, Fusco said.
The team also found about a third of the city-owned art at the DIA has “incredible minimal commercial value.”
Irwin asked her why.
“Museum collections tend to be very uneven valuewise. Very simply: not ever work of art in a museum is a masterpiece. That’s not unusual at all and the way museums, in this country in particular accept their collections, they were accepting large gifts, estates, so not every work that gets gifted to a museum is going to be of tremendous value,” Fusco testified.
She described the DIA staff as being “very cooperative” with the Christie’s team doing the appraisal and could not think of “any impediments that the DIA staff threw up for your work,” when Irwin asked.
The city interrupted its actuarial and pension witnesses and called Vanessa Fusco to the stand. She’s the vice president and associate director of the museum services department at Christie’s.
Fusco also was the project manager for the fair market appraisal done last year for a portion of the Detroit Institute of Arts collection at the city’s request. Since then, there have been “competing” appraisals of the collection by creditors and the museum.
City attorney Geoff Irwin, of the Jones Day law firm, questioned her.
As you can see from this Michigan Radio timeline produced earlier this year, the city and the museum have had complicated and unique relationship.
Various attorneys spent a few hours questioning Alan Perry about the appropriateness of the 6.75 percent assumed investment return rate for Detroit’s pension funds and how it compared to other public funds. Then Judge Steven Rhodes asked a few questions, ending with this telling exchange.
Judge Rhodes: Are you telling me that given Detroit’s insolvency, is it your view that prudence would suggest an even lower rate?
Perry: Yes, that might be true.
Judge Rhodes: No further questions.
Jonathan Wagner, an attorney for the holders of the Certificates of Participation (pension debt), questioned Alan Perry, an actuary with Milliman’s, the city’s actuarial firm, about interest rate assumptions used for pension fund forecasting.
In the Plan of Adjustment, the city and creditors agreed to an assumed 6.75 percent interest rate for the two funds – one for police and fire and another for general service retirees.
Wagner reviewed with Perry several other Milliman forecasts for public pension funds that are higher than Detroit’s. Several of the exhibits, entered with the court, were taken from Milliman’s 2013 Pension Funding Study. In the study, one chart showed that the interest rate assumption for public funds ranged from 6.4 to 8.5 percent. Perry testified that 95 percent of public pension fnds have a 7 percent or higher interest rate assumption.
The discussion over whether the DIA can and should be forced to sell its collection to help offset Detroit’s insolvency has been one of the most hotly debated issues of the bankruptcy. DIA director Graham Beal recently wrote a letter that was published in the museum’s newsletter and then posted on Deadline Detroit under the headline “Museums Should Step Very Carefully ‘In Times Of Crisis.’” He discusses it on Stateside.
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?
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.