Assuming that Detroit’s Plan of Adjustment is approved by Judge Rhodes, will this revenue be enough for the city to pay the bills? Bridge Magazines’s Mike Wilkinson wrote in his piece, “Revenues alone do not a budget make.” Hear him discuss related issues on Michigan Radio’s Stateside program.
Judge Steven Rhodes today changed the way he’ll hear from individual creditors without attorneys during Detroit’s bankruptcy trial.
He’s delaying their appearances from their previously scheduled, dedicated Aug. 29 hearing to times and dates to be determined. Rhodes decided to have the attorneys for the city and creditors present their evidence in support of and in opposition to the Plan of Adjustment and allow the unrepresented individuals to attend the testimony of other witnesses and examine them as they appear. Both the city and creditors will make opening statements on Tuesday, Sept. 2.
“The Court finds that it would be more appropriate to schedule the presentation of evidence by these (unrepresented) parties after the represented parties have presented their cases-in-chief,” the judge wrote in an order.
According to court records, some 36 motions were filed by people who want to participate at the confirmation hearing. Judge Rhodes denied 23 of them, but he agreed to allow eight of the individuals to question witnesses who will be called by other creditors, including Emergency Manager Kevyn Orr. Eight individuals also will be permitted to present witnesses in support of their objections to confirmation.
Here is his Order Regarding Testimony
One of the most outspoken, visible and controversial creditors in the city’s bankruptcy case is bond insurer Syncora. They’ve objected at seemingly every chance, arguing to Judge Steven Rhodes that the Detroit Institute of Arts collection should be sold to pay debt, pensioners are unfairly getting much better of a deal than financial creditors and that at least one of the city’s settlement agreements violates state law.
In court today, one of Syncora’s attorneys argued that one of the city’s deals with other creditors violates Michigan law. During the ongoing negotiations to reduce$18 billion of debt, attorneys for the city of Detroit are striking deals with creditors. One of those agreements is for the refinancing of almost $400 million of bonds approved by voters and backed by property taxes. As part of that deal, some bondholders would receive about three-quarters of their value. The remaining bonds would go to the city’s pension systems, which could use taxes to pay off the debt.
Ryan Bennett, representing Syncora, argued against the deal in front of Rhodes. “If the plan is confirmed, your Honor, the city will be permitted in fact required to unlawfully tax its property tax payers where such taxation would not be permitted under Michigan law,” he said.
An attorney for the city says only the state can challenge the deal. An attorney from the state told the judge he supports the settlement. Judge Rhodes did not immediately rule on Syncora’s objection.
Syncora also has filed legal documents alleging bias of the case’s mediators.
Earlier, WDET’s Quinn Klinefelter spoke with one of Syncora’s attorneys, James Sprayregen, who is a restructuring partner in the Chicago and New York offices of Kirkland & Ellis law firm.
Here’s a transcript of that full conversation:
James Sprayregen: We do want to make it clear, we wish the city of Detroit well. We wish all of its employees and former employees well and we have no beef whatsoever with the pensioners. We were involved with a transaction that put $1.4 billion into the city’s pension funds because those funds were underfunded and we actually helped make those pension funds much better funded. Then the city turns around and says that that transaction was illegal and they want to keep the money and not pay us anything back. We believe under the bankruptcy code that we are very similarly situated with the pensioners and should be treated in a similar way rather than under the current plan where we’re getting virtually zero and the pensioners, after you adjust for all the actuarial calculations, are recovering nearly 100 cents on the dollar. Now we’re sympathetic to one dollar in cuts to any pensioner’s check and we understand that that can be difficult for anybody but under the bankruptcy code, we and the pensioners need to be treated similarly.
QK: In fact to an extent you’re charging that the mediators that are in this case are biased to an extent, correct?
JS: Yes, we didn’t charge that, we just quoted what they said publicly. And look, understandably they’re from the city of Detroit. They have great sympathy as do we for the claims of the pensioners. They have a love of the art museum and the assets there. We have no problem with any of that. It’s just when a city goes bankrupt, it has to comply with Chapter 9 in the way it distributes its assets, and you can’t take assets that are of very substantial value to the city, like the art, and sell it at a fire-sale price to a private foundation. You have an asset of the city that has been valued at anywhere from $800 million to $8 billion.
QK: The art at the Detroit Institute of Art museum.
JS: Exactly, and so that art is being transferred out of the city’s coffers not only to our detriment but to the great detriment of all of the city’s creditors for a price that is far below anything anybody has valued this art at.
QK: You’ve mentioned the municipal bond deal that helped shore up the pension system back in 2005. The city has argued that that deal was illegal and should not count. The judge even from the bench has said he was iffy about it, that maybe Detroit should sue over it and they might win. I’m very much a lay person, but in your experience, is that unusual to have a judge from the bench argue in that kind of way?
JS: Yes, we found that to be unusual. Our point on that was we were asked to help the city out of a pension jam which we did. We don’t think that transaction was illegal but it put $1.4 billion into the pension fund so if somebody thinks it’s illegal and they want to unwind the transaction, they can’t just say ‘Thank you for the money’ and keep the money, unwind the transaction and get the money back. I think anybody who is putting money into municipalities needs to be looking at the Detroit case very closely to determine whether the rule of law is going to apply here. We are in the United State of America and we do believe that ultimately the rule of law is going to be vindicated. But if it turns out that we can put $1.4 billion into a pension fund and then be told we have no claim, that will definitely impact the willingness of financial creditors to help out pensioners in the future.
QK: You’ve mentioned in some other reports as well that it’s seems almost as if the city is setting up kind of unfair Detroit v. Wall Street scenario, that the whole situation is in effect being politicized. Why do you argue that?
JS: Because we think that’s exactly what’s happened. Unfortunately it’s been set up like that and again, we think it’s very inaccurate and very unfair. Again, the money that caused us to be a creditor went to the pensioners and we think appropriately so. For whatever reason, Kevyn Orr when he came into his position called us and others ‘the Huns of Wall Street’ and started out the process that way. Obviously the state of Michigan, Judge Rosen himself and Kevn Orr have made number of public statements that are not friendly to financial creditors and we think that’s unfortunate because we think there’s a partnership amongst financial creditors, city, municipalities, workers in order to help bring Detroit back.
QK: Are you getting any, I don’t know if feedback is the right word, but a sense from some of these people, “gee, why are you guys arguing about this, you’re standing in the way.’ This bankruptcy seems to be moving fairly fast for bankruptcy cases. They’ve set up these deals with pensioners, etc., getting all these people in line as they go through to argue the Plan of Adjustment and then here’s Syncora of Financial Guaranty and you’re the obstacles holding the whole process up. Why not just play ball and get out of the way?
JS: That’s definitely the way it’s being attempted to be portrayed. All we’re asking for is that we be treated fairly, just like the other creditors are being treated fairly and if that happens we could have a consensual resolution this afternoon, and our door is wide open to do that and we’re still hopeful that that can occur.
QK: How far is Syncora prepared to go if the judge would approve Detroit’s Plan of Adjustment. Can you appeal it to other courts?
JS: We’re hopeful the judge will see this plan is not confirmable and send the city and Kevyn Orr back to discussions with us to reach a consensual resolution. But if not, and he were to confirm the plan, yes, we can appeal it to the district court and if we lose there we can appeal to the Sixth Circuit and if we were going to lose there, we could appeal to the U.S. Supreme Court. This is the largest municipal bankruptcy in United States history, and we believe it deserves the scrutiny a case of this size should get and we intend to go all the way to protect our rights.
QK: Do you think Syncora would be a little bit reluctant to try to look at municipal bonds in the future now after all this?
JS: The unfortunate thing here is there have been some people who have said, ‘Syncora, what were you thinking? You knew Detroit was in trouble and they were potentially going bankruptcy. Why did you do this transaction in the first place?’ I don’t think the type of conduct we want to encourage in America is to say that financial players should not be helpful to cities in trouble, and if you help a city in trouble, that’s your fault because then you’re just going to cause people to stay away from helping cities in trouble and you’re going to cause more municipal bankruptcies. I think we actually want to encourage financial creditors to be helpful in difficult situations and the way to do that is to have the rule of law apply.
A group of Detroit workers and pensioners are calling on Judge Steven Rhodes to deny the city’s plan to exit bankruptcy. While some creditors argue the city’s Plan of Adjustment is too generous to pensioners, the Detroit Active and Retired Employees Association says otherwise. The group charges that pensioners are having so much taken from them that the bankruptcy judge should deny Detroit’s plan of adjustment. WDET’s Quinn Klinefelter talked with members of the Association and has this report.
WDET’s Bankruptcy Reporter and Next Chapter Detroit Blogger Sandra Svoboda joins Detroit Today co-hosts Laura and Saeed to discuss the latest in Detroit’s bankruptcy trial, what might be next and who has “bankruptcy fatigue.” Give a listen.
In a 60-page briefing filed this afternoon, bond insurer Syncora called the Detroit bankruptcy’s grand bargain “fraudulent,” and attacked the court mediators who helped craft it, including Chief U.S. District Court Judge Gerald Rosen.
The grand bargain, Syncora argues, gives illegal, favorable treatment to one group of the city’s creditors — the pensioners — as they are the only creditors who benefit from the grand bargain’s $660 million in state and private money. Syncora also objects to the city retaining the Detroit Institute of Art collection instead of selling it to pay at least part of its $18 billion debt.
“The plain truth is that the mediators in this case acted improperly by orchestrating a settlement that alienates the City’s most valuable assets for the sole benefit of one creditor group,” Syncora attorneys write. “Moreover, if approved, the DIA Settlement will in essence give rise to a judicially sanctioned, fraudulent transfer.”
Syncora stands to lose about $400 million in the bankruptcy case, and has objected at many turns of the 13-month-old case. (Incidentally, Syncora’s latest objection cites as a source a NextChapterDetroit.com post, “Detroit’s Chief Mediator: Judge Gerald Rosen speaks about the bankruptcy process:.)
Detroit Free Press reporters Nathan Bomey and Matt Helms discuss the latest with WDET’s Bankruptcy Reporter and Next Chapter Detroit Blogger Sandra Svoboda. They cover the Detroit Water and Sewerage Department bond exchange deal, what questions Judge Steven Rhodes is asking based on his expert witness’s report, and what to watch for in advance of the city’s trial, now just two weeks away.
The Detroit Water and Sewerage Department today approved a deal to allow the re-financing of about $5.2 billion in debt.
After weeks of confidential mediation sessions, the city and its water department bond holders and insurers reached the agreement. It allows the city to buy back existing bonds and then re-sell them at a lower rate to pay off old debt. Commissioners for the Detroit Water and Sewerage Department say the deal will save customers money and reduce some operating costs for the department.
Here’s what was presented to commissioners at a meeting today.
The move could speed up the city’s exit from bankruptcy. Water department creditors voted against the Plan of Adjustment but the new deal has them giving up that opposition if they take the voluntary debt trade.
“We think this opportunity provides benefits to the DWSD system and our customers,” Jim Fausone, chair of the board of water commissioners, said in a statement. “Our action today represents the first step towards a potential amicable resolution that is good for the customers, bondholders, the City, the financial industry and for the system.”
The city has not provided an estimate of the savings on its debt it could realize as part of the agreement.
The city filed an updated Plan of Adjustment this week, and it reflects the myriad happenings since the previous version was entered into the court record in early May:
The Michigan Legislature passed and Gov. Rick Snyder signed a package of bills providing $195 million for pension funding as well as oversight of the city’s finances. Part of the so-called “Grand Bargain,” the arrangement also protects the collection of the Detroit Institute of Arts from sale and creates a new, separate entity to operate the museum.
Creditors, including 32,000 pensioners had a chance to vote on the plan. About half the pensioners eligible returned their ballots, overwhelmingly approving cuts to their pension payments, cost-of-living increases and health care benefits and waiving current and future suits involving the Michigan Constitution’s provision protecting pensions and PA 436, the emergency manager law.
The city has reached agreements with several creditors, and how those affect ongoing city operations are outlined, to some extent.
Below is the “red-lined” version of the latest Plan of Adjustment, showing changes from the previous version. Judge Steven Rhodes will consider the plan at the confirmation hearing, now scheduled to begin Aug. 21.
Detroit is known by its most unwelcome attributes: It has one of the highest murder and violent crime rates in the country. And it currently is known as the most populous U.S. city to ever seek bankruptcy protection. Can it also enjoy the biggest recovery? In a comprehensive piece, Bridge’s Mike Wilkinson answers questions about the city’s recent past to get a hint at its future: Does the city generate enough money to fix what ails Detroit if billions in debt are cut? Are the city’s costs too high? Does it pay its workers too much? Are pensions too generous? Can the city endure a reduction in both spending and revenue and revive what is by most measures the most dysfunctional large city in America?