Feature

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

    In Detroit’s bankruptcy trial, it’s mainly financial creditors challenging the city’s restructuring plan. But another, smaller group of people say they’re owed money and want their claims to be allowed to proceed. WDET’s Sandra Svoboda spoke with Attorney Bill Goodman about his clients, their civil rights lawsuits against the city, and how they are tied up in the bankruptcy case.

    Here is the audio of their conversation. The full transcript appears below.

    Here is the lawsuit Katie Williams’ estate filed.

    Here is the lawsuit Walter Swift filed.

    Bill Goodman: I represent Walter Swift, a man who was wrongfully and falsely convicted of rape and went to prison for 26, 27 years until he was exonerated and is now free and suffering from the effects of the fact that his life has been stolen from him. I represent Katie Williams, a victim of domestic violence who also happened to be a Detroit police officer whose husband and violator was also a Detroit cop and whom the Detroit police department and other police departments let get away with murder. Literally.

    Sandra Svoboda: What kind of lawsuits have they filed?

    BG: They have filed actions against individual police officers and the city of Detroit under a federal statute known as the Civil Rights Act of 1875 which actually goes back to 1866, which was passed in conjunction with the 14th Amendment to the United States Constitution. They’re asking for damages. They’re asking for punitive damages and they’re asking for attorneys’ fees, all of which they’re entitled to under section 1983 of the Civil Rights Act.

    SS: And what’s happened to their cases during the bankruptcy?

    BG: They have been sadly and tragically stayed. They haven’t been able to take the depositions that they need to take. They haven’t been able to get the documents they need to get. They haven’t been able to proceed with their cases because of bankruptcy.

    SS: Why?

    BG: Because Judge Rhodes entered an order staying all proceedings in these cases, which he’s entitled, theoretically, entitled to do under Chapter 9 of the Bankruptcy Code, which we say violates their rights under the Constitution of the United States.

    SS: So your clients, and of course there’s a handful of others with similar claims, basically we’re seeing their Constitutional rights, their civil rights claims clashing with the bankruptcy law in the proceedings. Is that an oversimplification?

    BG: No. I don’t think it’s an oversimplification. It’s true but actually their rights are not merely clashing with the bankruptcy code or the rights of the city of Detroit and others under the bankruptcy code, their rights have been virtually eliminated by the bankruptcy code and they’re entitled to 10 cents on the dollar or whatever pathetic sum creditors are entitled to now, unliquidated creditors.

    SS: Have we see civil rights claims like this in other municipal bankruptcies?

    BG: Yes, but the issue of whether it is Constitutional for a court to diminish people’s rights under the civil rights laws has never been decided. It’s been raised for the first time by my clients and others following my clients’ lead.

    SS: Judge Rhodes, of course, asked for and got a ruling from the U.S. Attorney General about where the civil rights issue stands in relation to bankruptcy and constitutional claims. As I remember you weren’t too happy when the Attorney General’s opinion came out.

    BG: The Attorney General’s opinion, which was really an opinion from the Solicitor General under the Attorney General, said that we’re not entitled to any different treatment than any other unliquidated creditor, not withstanding the fact that we brought a claim under the United States Constitution. This was bad. This was false, it was wrongheaded, and it was a disgrace for the United States Department of Justice to file such a brief.

    SS: What are your clients seeking?

    BG: They’re seeking full compensation. If you’ve been in prison for 27 years for a crime you didn’t commit and everyone knows that it was a crime you didn’t commit and you’ve been exonerated, and the police officer who arrested you has filed an affidavit that said you didn’t do this crime, you were wrongfully convicted, you should be compensated. People in other states against other systems are averaging a million dollars a year for these wrongful convictions. Walter Swift by that analysis is entitled to 10 cents on the dollar at most and not until 10 years from now.

    SS: Because of the bankruptcy case?

    BG: That’s right. Because of the alleged constraints of Chapter 9 in the bankruptcy code.

    SS: Why is he different than any other financial creditor with a claim against the city?

    BG: Because his rights have been brought under the Constitution of the United States. That means that to deprive him of those rights deprives him of constitutional rights and it’s an unconstitutional action. Whether it’s an action by Judge Rhodes or by the City of Detroit, it violates his constitutional rights and cannot be accepted.

    SS: Where do things stand now and what do you think will happen to resolve your case?

    BG: We have an objection filed in front of Judge Rhodes, which he has to decide, which says we want him to say, “That’s right. Your clients’ rights, Mr. Swift’s rights are protected by the Constitution and I cannot in a bankruptcy court, cannot interfere with them, diminish them in any way.” That’s where it stands right now, and we hope and expect and fully anticipate that we will be vindicated and Judge Rhodes will rule with us on this.

     

    8.12.14 US Attorney General Response by WDET 101.9 FM

    By in Bankruptcy Court, Feature, WDET
  • Water Shutoffs Hearing: Day Two

    The hearing to help Judge Steven Rhodes decide whether to place a six-month moratorium on residential water shutoffs in Detroit is stretching into a second day. A group of welfare rights advocates, lawyers and 10 customers are asking the judge to order a halt to service interruptions.

    Their witnesses testified yesterday about problems with customers getting on payment plans. A nurse described diseases that can thrive when people don’t have water, and a public utilities expert said Mayor Mike Duggan’s 10-point plan to help people pay water bills won’t work because it increases the amount of money customers owe if they miss a payment.

    But the city’s first witness says the deal for the new regional water authority will fall apart if the shutoffs are halted. Consultant Eric Rothstein was paid by the state to help form the new Great Lakes Water Authority as part of the bankruptcy negotiations. The Chicago-based Rothstein says if people won’t have their service shut off, some just won’t pay their water bills. And he says if those funds are not coming in, the financial projections for the new authority won’t be accurate and the deal will “essentially collapse.”

    We’ll have updates until the hearing ends.

    3:45 p.m.

    After an afternoon of law school-like discussions, Judge Steven Rhodes says he’ll issue his ruling at 8:30 a.m. Monday when the city’s bankruptcy trial resumes.

    11:57 a.m.

    From the testimony of Darryl Latimer,the deputy director and chief customer service officer at the Detroit Water and Sewerage Department.:

    *The number of water service shutoffs this year is about the same as last. What’s the difference? “One of the biggest things is publicity. We always, year after year, always execute shutoffs and never really talked about it,” Latimer said. “This year there was a concerted effort to publicize and get work out to the public before we started. … We wanted customers to be proactive with their accounts … You’re hoping customers come in (and pay) so it decreases shutoffs.

    *Latimer said there was an increase in bill collections after the publicity about the shutoffs began. “Once there was an awareness of what was actually going to take place and also customers started to get an understanding of if they receive a shutoff notice, now they’re actually coming out. In the past, they didn’t believe we would come,” he said.

    *Of the roughly 24,000 shutoffs this year, as many as 15,000 have been restored, according to Latimer. City attorney Sonal Mithani, of the Miller Canfield firm, asked him why the remaining customers did not have service restored.

    “It’s a combination of vacant homes, a combination of illegal usage. We have a high rate of illegal usage, and there’s possibly some folks that have chosen to not have their water restored. We don’t know exactly the numbers,” Latimer answered.

    *Typically, Latimer said, about 60 percent of the city’s water and sewerage customers are paying bills on time and are not delinquent.

    *Typically DWSD turns off service to between 70 and 90 homes each week.

    * “The Mayor’s 10-Point Plan was designed to give a clear pathway and what you should if you’re having affordability issues, issues with contacting the department, and make a clear pathway for paying the department or getting assistance or getting your service restored,” Latimer said.

    11:45 a.m.

    Current Witness: Darryl Latimer is the deputy director and chief customer service officer at the Detroit Water and Sewerage Department. The latter position he began this year.

    Prior to the filing of this lawsuit to halt the shutoffs, Latimer said the policy was customers who were 60 days past due with bills of $150 or greater were given a 10-day warning prior to shutoff.

    But the city couldn’t turn off service to all customers in that category, Latimer testified. “We had so many customers who were in shutoff status, you couldn’t go after all the accounts,” he said.

    Since the lawsuit was filed, the city has implemented a payment plan: the 10-30-50 plan. “The plan today is to try to execute all shutoffs when any customer reaches shutoff status,” Latimer said. But customers are notified about the scheduled shutoff, including receiving a door hanger at their home.

    10:40 a.m.

    The next witness for the city was Nicolette Bateson, the chief financial officer of the Detroit Water and Sewerage Department. City attorney Tom O’Brien, of the Miller Canfield law firm, questioned her about how the department’s rates are set (they’re based on revenue needs) and how expenditures are projected.

    O’Brien asked Bateson about how customers who pay their water bills are funding those who aren’t.

    “For every $100 they pay in their bill, it means $11 is going to bad debt expenses,” Bateson said. “I would like to close that gap so that everybody who is paying their bill is not going to something that is inefficient in the system.”

    Bateson said she was familiar with the request for the six-month moratorium on shutoffs for past-due customers that Judge Rhodes is considering at this hearing.

    “The impact is trying to understand the extent to which it creates more uncertainty in the ability to collect revenues going forward,” Bateson said. “Shutoffs is a tool in the collection tool box.”

    O’Brien asked Bateson about what happened to bill paying during the roughly one-month halt on shutoffs last summer.

    “For the short time there was a moratorium, there was a reduction in cash flow,” Bateson said.

    10:23 a.m.

    When the attorneys finished questioning Detroit Chief of Staff Alexis Wiley, Judge Steven Rhodes had his own questions. Here are a few, with Wiley’s answers.

    Judge Rhodes: How many customers did you speak to about their difficulty in paying their water bills?

    Wiley: Me personally, probably about six or seven that I met at the centers.

    Judge Rhodes: Among those customers, what were the two or three most prevalent reasons why these customers told you they were having difficulty paying their water bills?

    Wiley: … I would say that they just, some hadn’t paid their bill, they maybe hadn’t received a bill. There were some who were like, “I’m on a tight budget and I wasn’t able to pay my bill.”

    Judge Rhodes: So some people for whatever reason had sufficient resources to pay but didn’t.

    Wiley: That’s absolutely true.

    Judge Rhodes: Some people just didn’t have other income or assets to pay the bills?

    Wiley: That’s true.

    Judge Rhodes: In that second group, were there some people for whom that inability was temporary and others for whom that inability was more long term?

    Wiley: When I spoke with people what they reflected to me things like, “I lost my job,” or “I’m going to start a new job really soon,” or “I was sick.” They all pointed to a temporary situation but they may have been more long term but the pointed to things like that.

    10:05 a.m.

    Attorney Alice Jennings cross examined Alexis Wiley, the chief of staff for Mayor Mike Duggan who helped craft the 10-point Plan to improve payment rates for the city’s water customers. Jennings represents the group asking for the six-month moratorium on shutoffs to past due customers.

    Here’s a portion of their exchange:

    Attorney Alice Jennings: How many people are living in Detroit without water in their homes, Ms. Wiley?

    Alexis Wiley: I couldn’t say exactly.

    Jennings: You don’t know do you?

    Wiley: I don’t know the number

    Jennings: And you don’t know how many people are children, do you, that are living in homes without water?

    Wiley: No.

    Jennings: There’s been no assessment by the mayor or DWSD to make that determination has there?

    Wiley: Not directly.

    Jennings: Or indirectly?

    Wiley: We rely on our partners who do their own analysis of the community who are social service agencies.

    Jennings: How many future shutoffs are planned in the next year?

    Wiley: That’s all based on how many people pay their bills and how many homes are vacated.

    Jennings also asked about the proposed six-month moratorium on shutoffs for past-due customers, beyond the roughly one-month halt to the shutoffs last summer.

    Wiley: We would not consider an extension. Considering Detroiters are the ones who have to pay for the ones who are not paying their bills, we can’t saddle them with that.

    9:52 a.m.

    After receiving about 1,000 calls in August, a United Way assistance telephone line has had about 300 calls this month, according to Alexis Wiley, chief of staff for Mayor Mike Duggan.

    “That means that we’re reaching people, that they understand that there’s assistance and that we changed our model so that we have system in place to really help our citizens. … and keep their water on. That’s all we’ve wanted to do since the beginning,” Wiley said.

    She also testified that after the city developed, unveiled and promoted its “10-point” plan to assist customers enter payment plans for their water bills, about 30,000 customers enrolled. More than 300 people have received assistance through the Detroit Water Fund, according to Wiley.

    In a meeting with the People’s Water Board, Wiley asked that a group of people come to the water fair in August to get assistance and she offered to organize “enough staff” at a customer service center to assist a group the Board would bring.

    “I never got anything,” Wiley said. “We need our customers to come forward: tell us that you have a situation. Tell us that you have a problem. We need our advocacy groups to actually bring people.”

    9:37 a.m.

    City attorneys are questioning Alexis Wiley, Mayor Mike Duggan’s chief of staff, who helped design the Detroit Water and Sewerage Department’s new “10-point plan” to address payment problems and assist customers. The plan has been posted online, distributed at customer service centers and sent to customers, Wiley said.

    In developing the plan, Wiley described how the city team first did some research, talking to customers about what problems they were having getting bills paid.

    Some said they were trying to pay and couldn’t. “You often need more than just an ID. You needed more documentation,” Wiley said, adding sometimes family members wanted to make payments for elderly relatives and couldn’t because of the rules.

    “We took everything that we learned and used that to formulate a plan,” Wiley said. “We built the 10-point plan. We said if you want to come in and pay responsibility for a bill, all you need to do is bring in a valid ID. Then we said we were really cutting red tape and we expanded hours at our service centers.”

    The department hired staff as clerks and put more experienced DWSD staff in position to deal directly with the customers.

    “We knew there were complicated situations,” Wiley said. “And people didn’t have a clear understanding of what it took to enter into a payment plan.”

    The city was asking for 30 percent down, but found that was too much for many people, Wiley testified, so the plan dropped it to 10 percent.

    “We really did some analysis in terms of the financial data and we figured out the average arrearage is about $550. We knew that 10 percent was more approachable for people,” Wiley said. Staff talked with customers in the services centers and heard 10 percent was do-able.

    The city also worked with social service agencies and Wayne County to inform the plan and build the Detroit Water Fund, which currently has about $1.7 million available, funded by multiple sources including the United Way, the General Motors Foundation and the Michigan Health Endowment Fund.

    “The end goal is to really help the customer,” Wiley said.

    9:27 a.m.

    Under cross examination by attorney Kurt Thornbladh, Rothstein continued his assertions that a moratorium on shutoffs for past due customers “would cause more problems than it would solve.”

    Here is one of his responses to a question about halting service.

    “In some cases a pause or deferral is one option to look at. I think there are others. While you’re still providing for shutoffs that are to customers that are demonstrably in a position to pay and thereby don’t have a systemwide moratorium, I think you could look toward trying to address some of those logistical challenges and making it easier for those custom who do face affordability concerns to be able to enroll and access assistance without necessary declaring a systemwide moratorium on shutoffs,” Thornbladh said.

    By in Bankruptcy Court, DWSD, Feature
  • Day 11: Detroit’s Bankruptcy Trial

    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.

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    3:35 p.m.

    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.

    2:31 p.m.

    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.

    2:07 p.m.

    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.”

    His full report is here.

    1:18 p.m.

    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.

    11:59 a.m.

    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.”

    11:26 a.m.

    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.

    10:53 a.m.

    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.”

    10:32 a.m.

    Annmarie Erickson, chief operating officer of the Detroit Institute of Arts, is on the witness stand. Museum attorney, Arthur O’Reilly, of Honigman, is questioning her.

    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.

    9:52 a.m.

    Ed Soto, attorney for bond insurer Financial Guaranty Insurance Company cross examined art expert Michael Plummer for 24 minutes.

    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.

    9:33 a.m.

    Michael Plummer recounted the story of the Delaware Art Museum’s sale of a treasured work in its collection to pay debt as a warning for Detroit.

    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.

    9:12 a.m.

    Drop the comparisons between a hypothetical sale of the Detroit Institute of Arts collection and the Sotheby’s sale of Jackie Onassis’s estate, an art industry expert testified today.

    “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.

    Plummer, the founder of Artvest, is the author of the report commissioned by the DIA and the city to assess the issues involved in selling the collection as creditors have argued should be done.

    He began testifying yesterday and returned to the stand today, questioned on direct examination by city attorney Geoff Irwin, of the Jones Day law firm.

    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.

     

     

    By in Bankruptcy Trial, DIA, Feature
  • Day 10: Detroit’s Bankruptcy Trial

    The lineup today includes witnesses Ron Bloom, Sue McCormick, Suzanne Taranto and Michael Plummer.

    Bloom, who works for the investment banking firm Lazard Ltd., was the lead adviser to the Official Committee of Retirees in the Detroit bankruptcy case. He served as  “auto czar” on the White House Auto Task Force that constructed the General Motors and Chrysler bailouts four years ago.

    McCormick is the director of the Detroit Water and Sewerage Department. Taranto is an actuarial consultant who worked on retiree health care costs for the city. Plummer works at Artvest Partners and assessed the Detroit Institute of Arts collection earlier this year. More on that here.

    The hearing is scheduled to begin at 8:30 a.m. and run until 5 p.m. We’ll have updates of the testimony throughout the day.

    5:05 p.m.

    Michael Plummer described the dynamics of the Detroit Institute of Arts in the bankruptcy case as unique in the art world.

    City attorney Geoff Irwin questioned him about whether a large museum’s collection has ever been sold or auctioned. “I had never heard of anything remotely close to this ever happening,” he said.

    Irwin also asked him about his report, evaluating and valuing the entire collection’s worth.

    “Such an evaluation has never been done before of this magnitude,” Plummer said.

    Plummer did not finish his testimony today, but he’ll be back on the stand tomorrow. Also scheduled, Annmarie Erickson, the chief operating officer of the museum.

    3:48 p.m.

    The next witness of the afternoon is Michael Plummer, the founder of Artvest Partners. The New York firm was hired by the city and the Detroit Institute of Arts to “assess the viability and practicality of selling art or otherwise monetizing the collection,” as described last summer by Bill Nowling, spokesperson for Detroit Emergency Manager Kevyn Orr.

    Here is the report Plummer authored for the Detroit Institute of Arts.

    Plummer is being questioned by city attorney Geoff Irwin, of the Jones Day firm. So far, they’re covering Plummer’s resume.

    2:25 p.m.

    After the lunch break, Detroit Water and Sewerage Director Sue McCormick answered a few more questions from attorneys about financial projections, the 4 percent maximum annual rate increases and plans to upgrade the system.

    Judge Steven Rhodes asked his own questions as well. He asked her about the new Great Lakes Water Authority and its impact on the department’s operation “especially as it relates to continued feasibility to provide water service for our area.”

    She replied, “I generally see it as a positive. …. It would allay many of our concerns about access to affordable capital. I also believe based on the structure of the memo of understanding that the ability to help support some of the infrastructure renewals that are required in the city of Detroit without that being an impact on the customers.”

    The new authority, for example, will use part of the planned rate increases to pay for capital improvements. Currently, the department borrows money for the entire cost of such projects.

    When he asked her about the biggest challenges for DWSD, she said, “Unknowns. The things we don’t know.”

    And , she admitted the new Great Lakes Water Authority is going to be a culture change for the department.

    McCormick said it will be a “big shift” …with different metro area communities working together for the benefit of one system. The new authority will require what she calls regional planning terms … and she says there is a significant amount of work to be done regarding permits, the system, people and financial planning.

    The new authority, for example, will use part of the planned rate increases to pay for capital improvements. Currently, the department borrows money for the entrie cost of such projects.

    McCormick also admitted the department has an “undeniable history” but says “substantial progress and trust” has emerged. The new authority, she says is in the best interest of the system, the city and the region.

    11:45 a.m.

    The current witness is Suzanne Taranto, an actuarial consultant for Milliman who analyzed health care costs for the city’s retirees (and dependents.) Milliman began working for the city in June 2012.

    Taranto will be back on the stand after lunch and will continue her testimony. But here’s a bit of what she said this morning, while questioned by city attorney Evan Miller, of Jones Day:

    *In 2012, the city had about 17,000 retirees. Of those, about 11,000 were Medicare eligible. The city also covered 8,500 spouses and dependents.

    *The city had 24 different health plans for retirees: 10 for Medicare eligible beneficiaries and 14 for those who were not.

    *The current liability for retiree health care is about $7.1 billion: about $3.5 billion for general service retirees and about $4.1 billion for police and fire.

    11:28 a.m.

    The director of the Detroit water department, Sue McCormick spend more than an hour on the witness stand. But there was no discussion of the controversial shut offs. No questions from the city attorney who questioned her, Robert Hamilton, of Jones Day. No questions from any of the creditor attorneys.

    A few things of interest from her testimony:

    * The City of Detroit and Detroit Public Schools owe millions of dollars in overdue water and sewerage bills. “The city made little to no payment of their utility bills for the year preceding bankruptcy, and they had made, until recently little to no payment on their bill during bankruptcy,” McCormick said. “The school system has been struggling for a couple of years. A year ago, they were $10  million behind…They did enter into a payment. … We still have a bad debt remaining of over $5 million.”

    * DWSD’s total budget is about $405 million.

    * The Plan of Adjustment provide “adequate levels of funding” to protect the system from a “material risk of failure,” McCormick testified. “Like any system, I think we will almost certainly have failures. We will have water mains break. We will have sanitary sewers fail in very specific areas impacting customers. But a fail for the system overall and its ability to service customers? No, I don’t think so.”

    10:36 a.m.

    Also related to the bankruptcy case, Judge Steven Rhodes will hold an evidentiary hearing on Monday about whether he will temporarily halt the shutoffs of water service for Detroit residents with unpaid bills. He previously ordered parties to mediation in the dispute.

    In March, the Detroit Water and Sewerage Department began shutting off service to customers — eventually about 15,000. The shutoffs were halted for a month during the summer while the department informed customers about payment plan options.

    Other than the water-related hearing, bankruptcy court will be postponed next week so creditors can respond to the new Plan of Adjustment, filed this week, the Syncora settlement and the formation of the Great Lakes Water Authority as part of the restructuring of the water department.

    9:50 a.m.

    Early in the negotiations, Bloom testified, the Official Committee of Retirees (OCR) determined that pensions would be the priority over health care, partly because of legal arguments, partly because of the emotion attached, Bloom said. “Our initial position as the pension should remain untouched in its entirety but pretty early on we signaled that we could see compromise in the OPEB (other post-employment benefits), the health care,” Bloom said.

    Barnowski also asked Bloom about how interested the OCR was in the overall revitalization of the city.

    “We were relying on the city of Detroit to be there to honor these promises out into the future,” Bloom said. “The reality is as we observed, when you get yourself in bankruptcy, bad things happen. So we were, whether we liked it or not, betting on the city. The revised promises the city would make, whatever they would be, would pay out very time. We had to have belief that revitalization would occur.”

    Bloom also said the political dimension of the bankruptcy has been apparent throughout his work with the case, and all parties have been keenly interested in the city’s long-term revitalization.

    “This is a political environment. The city is a political entity. There are many stakeholders who are political entities who were involved in this case, whether that being the other counties, the state of Michigan itself and our perception, the committee’s perception, was that they had a keen interest in revitalization as well,” Bloom said.

    9:30 a.m.

    As the first witness on Day 10 of the city’s bankruptcy trial, Bloom is being questioned by Dan Barnowski, an attorney for the Official Committee of Retirees (OCR), a bankruptcy court group, separate from other employee or retiree associations, labor unions or pensions systems.

    Bloom described his work on the auto task force as involving a high ratio of retirees to active workers. For General Motors, Bloom said, there were roughly 10 retirees for each active member while at Chrysler it was 6 or 8 to one. The City of Detroit currently has about double the number of retirees for each active worker.

    The OCR, Bloom testified, took its role very seriously as it members and their claims for pensions and lifetime health care costs represented a large amount of the city’ $18 billion debt.

    “We viewed ourselves as representing by far and away the largest creditor interest … roughly 80 percent of the claim amount of the total unsecured claims amount in the city,” Bloom said. “We viewed ourself as a very significant stakeholder in the matter and an important creditor and we believed that we have very valid and important claims. Relative to our claims, I think in general our relationship with the city was professional.”

    Before the bankruptcy petition was filed in July 2013, Bloom said the committee representatives objected to what the city had in its early plans for the case.

    “The plan was not something we thought was remotely fair to the retirees, and so we had a pretty vigorous disagreement about how we thought the case should go. We took the position that the city didn’t belong in the bankruptcy court at all. We took the position that the pensions were constitutionally protected. We took the position that when the city tried to manipulate .. the retiree health care, that that was inappropriate and not consistent with the law.  … We had a pretty serious disagreement at least from where the city started and from where we started.”

    But the months of negotiations and Judge Rhodes’s ruling that the pensions are not constitutionally protected in bankruptcy led to movement on both sides, Bloom said.

    Barnowski asked Bloom if he thought the city had shown favoritism to the retirees as compared to other creditors. Bloom replied no.

    “We felt like we had very significant claims her both legal and political. We felt we were 80 percent of the claim amount and that justified a significant, some tension to our concerns,” Bloom testified. “We felt we had very strong legal arguments as the other protection of our position. We had been ruled against on that but we were appealing. We felt like we got the best we could get but in no sense did we view that as favoritism.”

    By in Bankruptcy Trial, DWSD, Feature
  • Day Nine: Detroit’s Bankruptcy Trial

    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.

    4:24 p.m.

    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.

    3:12 p.m.

    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

    Noon

    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.

    11:43 a.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.

    11:05 a.m.

    When Vanessa Fusco, of Christie’s, came to appraise the Detroit Institute of Arts collection for Emergency Manager Kevyn Orr, it wasn’t her first visit to the museum.

    “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.

    OLYMPUS DIGITAL CAMERALike 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.

    10:21 a.m.

    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.

    Here’s her expert report in the case.

    As you can see from this Michigan Radio timeline produced earlier this year, the city and the museum have had complicated and unique relationship.

    9:55 a.m.

    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.

    9:15 a.m.

    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.

     

     

    By in Bankruptcy Trial, DIA, Feature
  • The 8th Plan of Adjustment

    UPDATE: Here are a few corrections the city filed for the Plan.

    Filed early this morning, here is the city’s 8th Plan of Adjustment in the bankruptcy case. This is the “redlined” version, and it shows changes from previous versions. The biggest of those: the settlement reached with Syncora.

    The city also filed all 1,000-plus pages. Here are two sections that may be of particular interest:

    Table of Contents, Definitions, Claims

    Settlements for 36th District Court, Certificates of Participation, VEBAs, DIA, DWSD and LTGOs

    8th Plan of Adjustment – Redlined Version

    By in Bankruptcy Court, Feature
  • Day Eight: Detroit’s Bankruptcy Trial

    After a three-day postponement so the city and some of its creditors could negotiate, Judge Steven Rhodes is back on the bench. Here’s what’s happening in the courtroom today:

    4:05 p.m.

    Another actuary is on the witness stand. It’s Alan Perry, from Milliman, the city’s actuary firm that analyzes pension financing. He’s being questioned by city attorney Evan Miller, who works out of Jones Day’s Washington D.C. office.

    4 p.m.

    Most of the day in court was, well, not the most headline-generating. But here are a couple other media reports about what happened earlier to catch you up.

    First, the day opened with Syncora confirming it had reached a settlement with the city and reviewing some of the details of the deal. Bloomberg Reporter Steven Church wrote this piece, which ran on the Washington Post’s website.

    Throughout the day, the Detroit Free Press live blog is updated constantly, in a Twitter-like fashion but with longer posts, and can be found here. Reporter Matt Helms will answer your questions too if you post. From The Detroit News, the latest stories and Tweets from Robert Snell and other reporters can be found here.

    3:13 p.m.

    Kopacz’s task was to determine the feasibility of the city’s Plan of Adjustment. But first, she testified, she developed a definition for “feasibility” for this case.

    “Is it likely that the city of Detroit, after confirmation of the Plan of Adjustment, will be able to sustainably provide basic municipal services to the citizens of Detroit and meet the obligations in the plan without the probability of a significant default?” she said.

    She based her analysis of the plan on that….and she’ll update her expert report after the city files its next Plan of Adjustment, expected later today.

    2:44 p.m.

    Before the trial witnesses resumed testifying this afternoon, Martha Kopacz took the stand. She’s the court-appointed expert witness hired by Judge Steven Rhodes to help him determine whether the city’s Plan of Adjustment is feasible and what challenges it might present. Here is Judge Rhodes’s order appointing her. Kopacz works for Phoenix Management, a Boston-based restructuring firm. To day, Judge Rhodes has authorized about $1.2 million in consulting fees and expenses for Kopacz and her team.

    Today’s hearing was needed to address motions made by creditors challenging some of her credentials as an expert witness and seeking to exclude portions of her testimony. Two bond insurers previously had challenged Kopacz’s qualifications and expertise but they dropped them after Syncora reached a tentative settlement with the city.

    UPDATE: Here’s what the judge eventually decided.

    The city’s pension systems continue objecting to her testimony as it related to pension issues. “It exceeds the scope of her engagement under the Appointing Order,” attorneys for the pension system wrote, “Kopacz admits that she lacks special knowledge, training or education regarding public pensions.”

    Judge Rhodes spent nearly an hour reviewing her background and experience. He also asked her about her understanding of today’s hearing.

    “We’re here today because the retirement systems have an objection, and I don’t mean that in a legal sense, but there are a couple paragraphs in my report that they really don’t like,” Kopacz said. “This is not my testimony as to my opinion. In terms of what I did or didn’t do, I know there were objections raise as to not doing enough or doing too much or something like that.”

    He also asked her about her experience with public pensions.

    “I will never say that I like it but you can put your head in it and you can understand it when you have to,” she said. “There are some things that are very complicated about it but at the end of the day, it’s about obligations. It’s about investments. It’s about finance, and that can be understood by most people as long as someone is willing to teach you about it.”

    Kopacz said today she “ultimately” got what she needed from the city but didn’t get all the documents or information she wanted. “I can’t even count how many documents we looked at,” Kopacz said.

    In May, her attorney filed a letter with the court stating, in part, that the city’s accounting firm, Ernst & Young, was not providing her with complete financial information about the city. Kopacz wanted the information on which the city is relying to make multi-year financial projections.

    12:15 p.m.

    One of the actuarial consultants, Glenn Bowen,  who reviewed the city’s pension fund performances and forecasts spent nearly two hours on the witness stand. At the end of questioning by city and creditor attorneys, Judge Steven Rhodes had some questions of his own. Here are a few and Bowen’s response.

    Judge: Addressing the investment return assumption, is there one correct assumption that should be applied like everywhere or is it fair to say that there is an acceptable range of such interest rate assumptions?

    GB: To specifically answer the first part, there is definitely not one assumption and to the second part, we believe there is a range of reasonable assumptions but it is not an absolute range. It varies by plan.

    Judge: What are the factors that impact where within a range a pension plan would choose its investment return assumption?

    GB: … The concept is when the actuary gets done or the actuary gets done with doing their mechanics … we should recommend a range in which the rate of return is more likely than not to fall. … We recommend to the sponsor that is our expected range based on your particular asset allocation. Where the plan sponsor decides to fall within that range depends upon their tolerance for risk.

    Judge: That issue, the issue of the sponsor’s tolerance for risk, is that something that the actuary makes a recommendation on or actually gets involved in helping the client to assess?

    GB: That’s not something that the actuary recommends and from the standpoint of assessing … The lower investment return you assume you’re going to have over time, the more cash you’re going to put in up front.

    Judge: Is it the role of an actuary for a plan sponsor ever to say to the sponsor, “Under the guidelines that we as actuaries use, you should not use the investment return assumption that you have chosen to use”?

    GB: I would say it’s close to that, not exactly. … The trustees for the system, are free to choose their rate of return. … To the extent we feel it’s outside of the range of responsibility, we have a duty to disclose it.

    Judge: Did you ever say to the city here that the city and this pension plan should not chose 6.75 percent?

    GB: We did not.

    10:16 a.m.

    The resumed making its case to Judge Rhodes about why the Plan of Adjustment should be confirmed. The first witness of the week is Glenn Bowen, a principal and consulting actuary with Milliman, the actuarial firm the city used to evaluate the Police and Fire Retirement System and the General Retirement System.

    (As will come up in later testimony, the systems also had an actuarial firm, and the Official Committee of Retirees, the group mandated by bankruptcy law, used a third firm to evaluate pension system investments, forecasts, funding needs and other issues.)

    10:04 a.m.

    Judge Rhodes concluded that creditors who want a delay in the trial to respond to the Syncora settlement deserve some time to prepare. But he left it to attorneys to determine how much and we’ll find out this afternoon what they come up with.

    Here’s what the Judge said:

    As the Court discerns the motion for adjournment here, there are three relatively distinct grounds for it, and the issue before the Court is whether these grounds constitute extraordinary cause of the delay or continuance that is sought here. The three are that the Syncora withdrawal from the defense of the city’s case causes FGIC and the other objecting parties, mainly the Macomb Drainage District, to take over those parts of the defense that (Syncora) had taken responsibility for in the division of labor. The second is the strong potential for FGIC to need  to retain experts that Syncora had retained or maybe it’s only one. So that it can properly pursue its defense of the city’s case in the absence of Syncora and its experts and the third is the potential need to file supplemental objections to what will be the 7th amended plan to be filed here promptly along with any potential need for additional discovery relating to those supplemental objections to the amendments in the plan.

    The Court must conclude that the first two of those asserted grounds do not constitute extraordinary cause for any adjournment and to the extent the motion is based on those two grounds, it is denied. There is merit in the city’s position that Syncora’s negotiations with the city over the past several weeks have been well known, and in those circumstances it seems to the court that it was incumbent upon all of these parties, consistent with their obligations to their clients, to prepare for the contingency that in fact Syncora might settle at some point, and that preparation would have include necessarily preparation to take over for the examination of the witnesses that Syncora was going to cover and, absent of an agreement regarding experts, locating experts.

    In this regard the court will also note parenthetically but importantly that nothing in FGIC’s motion or its presentation today identified any steps that FGIC took in regard to cross examination preparation or locating and preparing an expert since the agreement in principle was announced last Tuesday night or addressed how those five days was insufficient to meet its preparation needs. On the other hand, the Court must conclude that the city’s filing of an amended Plan (of Adjustment) incorporating its settlement with Syncora does require the court to accommodate the interests of FGIC and the Macomb Drainage District and other objecting parties to have an opportunity to examine that plan or the amendment to it and to file supplemental objections to that plan as they deem appropriate, to take discovery as necessary in relation to that and to prepare to address the Syncora settlement as part of this confirmation hearing. Having said that, however it’s less clear to the court how the details of that should play out and so accordingly I’m going to ask counsel for FGIC and Macomb and any other objecting creditors to meet and confer with counsel of the city to see if you can come to some agreed upon schedule or plan that will accommodate the interest of the city in the prompt as possible resolution here and in the objecting parties interest in adequate opportunity to address the news plan and perhaps we can do that over the lunch hour and let the court know where you stand at that time.

    I think that’s as much as we can do on that now and I will ask the city to proceed with its case.

    9:38 a.m.

    Before the confirmation hearing continues, attorneys for the city presented terms of their deal with bond insurer Syncora, first reported last week.  It includes a fractional payment of what the insurer is owed for a pension financing deal, leases on parking lots and the Detroit Windsor Tunnel and credits toward future purchases of property from the city.

    The deal also will require the city to file a new Plan of Adjustment, which attorneys say will be done today. Two creditors, bond insurer Financial Guaranty Insurance Company and Macomb County, asked the judge to delay the trial.

    FGIC attorney Alfredo Perez said the bond insurer needs time to prepare an objection to the new plan as well as an additional expert report. He also said “one or two depositions” would be needed. “We really wanted to ask for two weeks in our motion last night but we decided that probably wasn’t do-able,” Perez said.

    “There’s a new, very complicated deal that Syncora has entered into, which needs to be analyzed by all the parties to determine what objections they may have,” said Allan Brilliant, attorney for Macomb County.

    Several creditors filed a motion Sunday evening asking for a delay in the trial.

    Judge Rhodes is deciding whether to grant the delay request.

    By in Bankruptcy Trial, Feature
  • Day Seven and Trial Postponed: Syncora settlement causes delay until Monday

    Detroit’s bankruptcy trial is postponed until Monday because of a tentative agreement between the city and one of its biggest creditors: bond insurer Syncora.

    During a 10-minute hearing this morning, attorneys for the city and the Bermuda-based company told Judge Steven Rhodes they need a few days to finish details of their new agreement. They filed a joint motion Tuesday evening asking for today’s hearing.

    They asked for a postponement of the trial until they can finish terms of the deal. Syncora would no longer be objecting to the city’s restructuring plan, which could significantly shorten the trial, currently scheduled into October.

    “There are other factors with the settlement that would have to be put into the plan,” said city attorney Heather Lennox, of the Jones Day firm. “We are in the process of redrafting the plan. There are a few mechanical issues that need to be worked out.”

    Emergency Manager Kevyn Orr gave a copy of the preliminary terms to the city council last night. They include Syncora receiving some cash, a lease to operate the Detroit-Windsor Tunnel and a downtown parking garage as well as credit toward purchase of future assets the city might sell.

    Ryan Bennett, a Syncora attorney, told the judge the agreement requires two banks, UBS and Bank of America, to release Syncora from its insurance obligations related to a pension financing deal. The banks in April settled with the city as part of the case for $85 million on about $280 million of debt.

    “This intended result is not just a partnership for the plan but a partnership for the future of Detroit,” Bennett said.

    After the hearing Bennett said other riverfront property might become part of the deal, which would also include Syncora withdrawing its current appeals in the case.

    In court, attorneys representing other creditors in the case, including retirees, told Judge Rhodes they weren’t yet sure if they would object to the deal because they haven’t had time to review it.

    Alfredo Perez, who represents another bond insurer, Financial Guaranty Insurance Co. (FGIC),  told the judge he learned about the agreement the night before and had seen some documents related to it but he hadn’t had time to analyze it or talk to his client about its effect on their case.

    “We would request that the trial be continued until Monday. At that time we’ll be able to assess what we’re going to tell you,” he said. “I’ve read it twice and I’m still having a hard time understanding it. … We don’t have any values. We’re trying to figure out what the values are.”

    Claude Montgomery, who represents the Official Committee of Retirees, said the Syncora agreement COULD negate the committee’s support of the Plan of Adjustment.

    “We are, as you know, a plan supporter,” Montgomery told the judge. “We do not know what our positions are with respect to this document that circulated last night.”

    Rhodes granted their request for a postponement of the bankruptcy trial until Monday so the city and Syncora can continue to negotiate … and everyone else can determine what the deal means to the historic bankruptcy case.

    Syncora Settlement_KDO Memo to CC

    By in Bankruptcy Trial, Feature, WDET
  • In Bankruptcy Court: The water deal…and what they said about it in court

    photo (22)Because of the deal announced earlier today for a new regional water authority, attorneys for Oakland and Wayne counties said they would withdraw their objections to the Plan of Adjustment this afternoon. Macomb County will not.

    That’s because it’s actually the Public Works Commissioner, Anthony Marrocco, who is objecting to the Plan of Adjustment…and it was County Executive Mark Hackel who signed off on the water deal.

    Here’s the Detroit Free Press FAQ about the agreement.

    “We are not prepared to waive our objections to the plan. We are having talks with the city,” said Allan Brilliant, an attorney for Macomb County. “We’re trying to resolve our remaining DWSD objections and we’re hopeful that will lead to a resolution of our issues. In the meantime we’re evaluating the Memo of Understanding which as (city attorney Heather) Lennox says has a lot of contingency that have to be resolved before it goes into effect and what effect it might have on our objections.”

    Judge Steven Rhodes was clearly not happy.

    “I’m not going to resolve any turf battles between the county commissioner and the county executive. I’ve got enough to do in this case,” Rhodes says.

    Meanwhile, he lauded both Oakland and Wayne counties for agreeing to the formation of the Great Lakes Water Authority.

    photo (21)Wayne County’s attorney, Max Newman, of the Butzel Long law firm, thanked Judge Rhodes for sending the issue to mediation.

    “It was extremely beneficial in bringing about this historical settlement,” Newman said. “We truly appreciate it.”

    The judge was complimentary back.

    “Let me take this opportunity to thank you and especially your client for the hard work that went into reaching this settlement and for bring the motion that led to the order for mediation,” Rhodes said.

    Jaye Quadrozzi, attorney for Oakland County, extended her gratitude to the judge and his team.

    “You and your staff have devoted and enormous amount of resources and it’s impressive to watch how hard and how diligent everyone in this courtroom has worked,” she said.

    Lennox said while the “framework” for the authority is in place, “there is still a lot of work to be done” including some documentation, governmental consents, permits and getting the consent of creditors and bondholders.

    “While this is really a momentous step, there is still an amount of work to be done,” she said.

    Here is what the city filed with the court today about the deal, including the Memo of Understanding.

    Here is the city’s news release about the agreement.

     

    9.9.14 Notice of Executive of Framework

    By in Bankruptcy Trial, DWSD, Feature
  • Day Six: Detroit’s Bankruptcy Trial

    The afternoon court session started with attorneys for Oakland and Wayne County telling Judge Steven Rhodes they would drop their objections to the city’s Plan of Adjustment. Macomb County will not. Here’s why.

    Meanwhile, Terri Renshaw is on the witness stand. She’s a former city staff attorney and a member of the Official Retirees Committee in the bankruptcy case.

    This morning, researcher Caroline Sallee finished her testimony. As a manager in Ernst & Young’s Quantitative Economics & Statistics practice Sallee was responsible for creating the City’s 10- and 40-year property tax and state revenue sharing projections. Here is her report. She was followed by Fire Commissioner Ed Jenkins and Police Chief James Craig. (See below for their testimony.)

    2:30 p.m.

    After discussions about the regional water deal, Terri Renshaw took the witness stand. She’s a former city law clerk and a member of the Official Retirees Committee in the bankruptcy case. She’s being questioned by Claude Montgomery, one of the attorneys for the committee.

    More about the committee is here and in this Detroit Free Press article.

    11:49 a.m.

    The first creditor attorney to question Chief Craig is Barbara Patek. Her bio is here. She represents the Detroit Police Officers Association. She asked him about leadership, the union and restructuring the department. Craig said there was not always agreement between the department and the DPOA, but “was always a willingness” to talk.

    The second creditor attorney to question Chief Craig was William Arnault. His bio is here. He represents bond insurer Syncora. He started with questions about what factors related to the bankruptcy affected morale within the department and about the department’s ability to recruit new officers.

    11:34 a.m.

    Detroit Police Chief James Craig has been outspoken about the need to place civilian employees in some of the roles sworn officers are currently holding.  For example: “Dispatchers have been sworn police officers,” he said. “In most departments today, dispatch functions are performed by civilian staff.” He also said vehicle maintenance officers would be changed to civilian employees.

    And what will happen to the sworn officer currently serving in those positions? Hertzberg asked.

    “They’ll be deployed to the field,” Craig said.

    11:28 a.m.

    Under questioning from city attorney Robert Hertzberg, the Detroit Police Chief said there were many workplace issues causing some officers to leave.

    “Pay, benefits … working conditions,” Craig said. “They just felt like with everything the city has faced over recent years, they were concerned about the future of staying.”

    Related to working conditions, the department has cameras in some police cars, but Craig said they are dated and need replacing. Radios have sporadic outages. “Certainly that’s a core issue for officer safety,” he said. “It puts them at risk.”

    But Craig also identified recent improvements: detectives are posted in all 12 precincts, crime is down by 19 percent.

    10:57 a.m.

    Shortly after James Craig became Detroit’s police chief in July 2013, he saw what he thought was a beat up taxi cab on the street.

    “I found out it was actually a police vehicle that was in service,” he said. “When I took a closer look I found out that the department’s fleet was certainly in need of replacement.”

    Craig is on the witness stand, being questioned on direct examination by city attorney Robert Hertzberg. Craig started 37 years ago as a Detroit police officer. He left the department, one of 1,500 officers laid off, and he went to Los Angeles in 1981 where he started as an officer and rose through the ranks. He ultimately retired as a “Captain 3.”

    Hertzberg asked him more questions about what it was like when he came to Detroit last year.

    “It was very clear that the morale was at the very bottom for rank and file officers. It was also in my judgment that the department lacked leadership and accountability and lastly something that became obvious was the fact that the department had no credibility with the community it served. The local community and surrounding communities,” he said.

    Here’s Craig’s bio on the city’s website.

    10:24 a.m.

    At the end of Jenkins’ testimony, Judge Steven Rhodes had a few questions. Here’s one of the exchanges:

    Judge Rhodes: You were asked whether the investments the city foresees for the fire department will permit the department to meet the standards of the National Fire Protection Association, and you said you thought it would come close. In what respect will it not meet those standards?

    Jenkins: We can always use more money but in terms of those standards, 49 companies is great. When I came on, we had 82 companies and we were able to respond to multiple large-scale fires. …I believe $158 million will do a great deal to help the fire department but we’re about four years behind in terms of training and equipment. … If we get this money, it’s going to be spent wisely. I can’t say it will be perfect but it will be very close.

    10:17 a.m.

    Macomb County’s attorney, Debra O’Gorman, who is from New York, also cross examined Ed Jenkins, the city’s fire commissioner. She’s pointing out that any testimony he gives about fire fighters is not based on any systematic study “Just some anecdotal converseations with a few people?” she asked.

    “Yes,” Jenkins said.

    10:15 a.m.

    The first attorney to cross examine the fire commissioner is Stephen Hackney who represents bond insurer Syncora. He’s asked questions about the effect of the bankruptcy on fire fighter morale and discussed the dynamics of any citywide revitalization on the department’s work.

    For example, Hackney raised the earlier statistic of how many runs are made to vacant buildings, presuming those runs wouldn’t have to be made after the city’s blight removal efforts.

    “A healthy city doesn’t burn,” Jenkins said.

    9:46 a.m.

    Jenkins said the fire department plans to build seven or eight new “super stations” in locations throughout the city. Older stations would be “shuttered and closed.”

    fire station weddingNo testimony on what would happen to them…but here’s a photo from a lovely wedding I went to last weekend in a former station on West Lafayette Boulevard. The property has been sold and turned into a charming event space

     

    9:35 a.m.

    Fire commissioner Ed Jenkins’ testimony is contradicting, slightly, some previous testimony in the city’s case. For example, restructuring expert Charles Moore testified that fire department response times were 9 minutes while Jenkins said 7 to 8 minutes was the norm. There as also the exchange about the pop cans serving as alerts for faxes for run notification. (See below.)

    9:25 a.m.

    A few more tidbits from Detroit fire commissioner Ed Jenkins’ testimony:

    *The Plan of Adjustment provides for $158 million in improvements for the department.

    *About 1,150 people currently work in the department. About 770 are fire fighters, but 1,019 are needed. About 220 are Emergency Medical Services technicians, but 260 are needed.

    *The department makes about 30,000 runs annually. About 70 percent are to vacant homes.

    *The average age of a fire station is 90-100 years old. Many of of them have had to be shored up to support modern fire fighting equipment.

    *At one point, the department only had four ambulances operating for the entire city.

    *In an answer to Hertzberg’s question about why vacant buildings burn, Jenkins said, “I know pigeons don’t smoke so I know there are some unscrupulous individuals that purposefully set fire to these buildings.”

    *EMS handles up to 110,000 runs a year.

     

    9:19 a.m.

    Ed Jenkins is on the witness stand, called by the city’s attorneys. He’s the city’s Executive Fire Commissioners, a post he’s held since April. He’s being questioned by city attorney, Robert Hertzberg, who’s with the Southfield firm Pepper Hamilton. Jenkins’ career also includes work as a Detroit fire fighter and lieutenant. He’s also a Certified Public Accountant and worked at Coopers & Lybrand and Delphi Corp.,

    The city’s Plan of Adjustment contemplates some $158 million in upgrades and improvements for the fire department. According to the city’s Chief Financial Officer, John Hill, who testified at the bankruptcy trial last week, about $59 million is to be spent on the department’s fleet, including the replacement of vehicles. The city also would invest $71 million in capital improvements, including the repair and replacement of several fire stations. Another $20 million would go toward equipment.

    Under questioning, Jenkins attempted to debunk the pop-can-on-the-fax-machine story, saying it dated back to the 1980s when a device was put on printers as a “convenience” alert in case the person in charge of answering the phone walked away. Last week, one of the city’s witnesses testified that instead of having modern alert systems, fire stations were receiving faxes to notify them of calls and addresses. In order to ensure they would hear the alerts, fire fighters placed pop cans on the fax machines so they would fall off when a fax came in. The noise would alert them to the call.

    Here is the Detroit Free Press story about the device.

     

    By in Bankruptcy Trial, Feature