Legal Challenges

  • They voted, now what? Looking forward to the bankruptcy trial

    Now that pensioners have voted in favor of the city’s bankruptcy restructuring plan, attorneys will use the results in the case’s confirmation hearing. WDET’s Sandra Svoboda spoke with Wayne State Law Professor Laura Bartell about what the balloting means and what the next steps are in the historical case.

    Sandra Svoboda: As you look at the vote from the pensioners on the Plan of Adjustment, what strikes you about the results?

    Laura Bartell: It was overwhelming support, which, in fact, was a little surprising I think most people thought they would support it but perhaps not by such a large margin.

    SS: What does the city do with the results now?

    LB: This is only one step that the city has to take to get its Plan of Adjustment confirmed. It now will have a trial in the bankruptcy court where it will argue to Judge Rhodes that all of the requirements of Chapter 9 for confirmation of a Plan of Adjustment have been satisfied.

    SS: What do we expect the creditors to say about that?

    LB: The creditors who voted no will argue that the plan does not satisfy the requirements for a “cramdown” under the bankruptcy code in that they will argue that the plan discriminated unfairly against them and is not fair and equitable to them, both standards that must be satisfied to confirm.

    SS: Explain what the “cramdown” means exactly.

    LB: Cramdown is simply a plan that is confirmed over the objection of one of more classes of impaired claims. You always have to have at least one class of impaired claims voting yes in order to confirm a plan.

    SS: What recourse do the financial creditors have who are really going to be taking pennies on the dollar compared to the pensioners.

    LB: Their argument is that the plan cannot be confirmed. If Judge Rhodes nevertheless confirms the plan, their only recourse is appeal.

    SS: Do we have any indication of what the judge will think of this or how he’ll use the results going forward?

    LB: The judge has always shown great sympathy to the pensioners. I do not believe that he will conclude that the plan unfairly discriminates in favor of the pension or is not fair and equitable to all creditors. My best guess, under the circumstances that he will confirm.

    SS: Of everything that’s surrounded this case, the pensioners really had the most emotional, maybe, element to them. Does this vote remove that at all?

    LB: Oh no, obviously, they are being hurt. Bankruptcy hurts people and in this case it hurts real people in Detroit and around the country who were relying on those pensions to live. That’s emotional, confirmation or no.

    SS: The favorable vote from the two classes of pensioners, police and fire in one group and the non-uniform workers and retirees in another, brings the grand bargain into play. How unique is this outside funding in bankruptcy cases?

    LB: It is unique as you say. It has never been accomplished before in any other bankruptcy and I doubt it will ever be replicated.

    SS: In the future when other municipalities are maybe in the situation of considering bankruptcy, what do they take away from the vote this week in informing their own case?

    LB: They will certainly see that it is possible to get a favorable vote from pensioners whose pensions are being cut. Now in other cases they’re not likely to have the grand bargain funds to sweeten the pot for those pensioners so they will have to allocate the funds they do have available in such a way as to encourage a favorable vote by those pensioners.

    SS: Between now and trial what should we look for developing in the case?

    LB: The bond insurer Syncora has argued consistently that it was entitled to Detroit’s casino revenues. The bankruptcy judge and the district court have now ruled against Syncora allowing those funds to become part of the bankruptcy estate and therefore allocated to other creditors. Syncora has appealed that decision to the Sixth Circuit. The Sixth Circuit has scheduled a hearing on that appeal at the end of July. That will be a major decision that could affect the ability to confirm the Plan of Adjustment.

  • On The Craig Fahle Show: Discussion of vote results, next steps in case

    Detroit Free Press reporter Matt Helms joins Next Chapter Detroit’s Sandra Svoboda to review the results of voting on the Plan of Adjustment  by creditors and pensioners. Detroit retirees voted to accept the pension cuts, and with “yes” votes from the majority of both classes of pensioners, the city is one step closer to solidifying a potential restructuring plan.

  • One Year In: Today marks one year since Detroit bankruptcy petition was filed

    At exactly 4:06:22 p.m. today, Detroit’s bankruptcy hits the one-year mark. Detroit News business columnist Daniel Howes said it well:

    “There will be no celebrations at 4:06 p.m. Friday, only quiet acknowledgment that the largest municipal bankruptcy in American history is marking its first year.”

    The Detroit Free Press marked the anniversary with a package of stories last weekend that explored the year in court, the effect in the communities and the new political structure at city hall. Later this week, the Freep published a report predicting a population decline that will make the future even more challenging.

    The costs of this municipal bankruptcy itself are high, to be sure, the highest in history. As of June, the city had been billed $75 million by 19 law firms and financial consultants involved in the case, Crain’s Detroit Business reported.

    While not everyone likes the negotiated terms that are emerging in the settlement, there is no doubt Detroit’s bankruptcy is moving toward resolution faster than anyone could have expected a year ago. It still faces a confirmation hearing, scheduled to begin Aug. 14, and Judge Steven Rhodes will undoubtedly see in the mirror the proverbial King Solomon as he tries to find the fairness and reasonableness to creditors, including city retirees, in the plan. He also knows he’ll be setting legal precedent as he crafts the settlements and restructuring plans, which will be used in future municipal bankruptcy cases across the country.

    We can describe with relative certainty a few elements of the next stage of this case: The pensioners will take cuts to their monthly checks and pay hundreds of dollars more out of pocket for health care. International media will print, broadcast and post more photos of blight juxtaposed against the RenCen as they try to chronicle the decline and possible resurgence thanks to bankruptcy of this city. Courts will decide the legality of the state’s emergency manager law, the remaining pre-trial issues in the Chapter 9 case and future appeals. Lawyers will make more money. Mayor Mike Duggan and the city council will eventually assume control of the city’s departments with “clean” balance sheets and a responsibility to all the city’s neighborhoods, residents, business owners, investors and oversight committees created by the state in the terms of the $195 million pension contributions.

    Whether we see real improvements in access to jobs, quality education for children and adequate public safety for everyone remains to be seen. Lansing, quick to congratulate itself for the package of bills providing money and oversight, could do more and should be pressured to do so. What could possibly be on that agenda? How about statewide reform to municipal finance and a re-examination of revenue sharing, regional transit to help Detroiters get to jobs in the suburbs and help with collecting income tax from Detroiters who work outside of the city. Those three elements would be a start but the governor and the Legislature have been silent on those issues.

    Many of us will continue to frame the city’s bankruptcy with the competing if extreme truths that “there will be a course change to reroute Detroit’s economic decline, failure of public institutions and creating protections against corruption” and “the bankruptcy is undermining unions, codifying the legality of slashing public benefits and creating huge billing tallies for silk-stocking law firms.” Hopefully how we define the bankruptcy’s causes will not limit our ability to emerge from it and restore city services, improve life for residents, ensure fiscal stability and make countless other improvements.

    As for the Emergency Manager’s future plans when his term expires later this year? He told WWJ radio’s City Beat Reporter Vickie Thomas that he’ll “leave quietly,” saying he was surprised by the level of public scrutiny the case brought to him and the city.

    “I think it’s appropriate for me, when this does come to an end, to exit quietly — I’m off the stage — and let the regular order return and let the city’s sort of healing process take; and let the patient recover on their own,” Orr told Thomas.

    7.18.13Bankruptcy Petition by WDET 101.9 FM

  • Bankruptcy and the U.S. Constitution: AG Holder to weigh in on claims

    The judge overseeing Detroit’s bankruptcy case has invited U.S. Attorney General Eric Holder to file a brief in the case, involving two constitutional issues that will be discussed in bankruptcy court today.

    Here’s why:

    Among the city’s tens of thousands of creditors with financial claims are a handful of who say in their cases, bankruptcy law conflicts with the U.S. Constitution. Two of the men making such arguments were wrongfully convicted and imprisoned for decades: Walter Swift and Dwayne Provience. Prior to the bankruptcy, they sued the city for damages.

    But their lawsuits were put on hold when the city filed for bankruptcy. In court filings, the two Detroit men and a few other creditors have argued that their claims involve constitutionally guaranteed rights and the U.S. Constitution trumps bankruptcy law.

    No attorneys involved in the bankruptcy case have what’s called the “standing” to weigh in on such constitutional issues. So last week Judge Steven Rhodes asked Holder to file a brief. The judge wants Holder to weigh in on the question of the bankruptcy code’s constitutionality as related to these creditors’ claims.

    Judge Rhodes requested Holder file it by Aug. 13, the day before the bankruptcy trial is scheduled to begin.

    The U.S. Attorney’s office in Washington D.C. had no immediate comment on the request. But a spokesperson did say, prior to the Detroit bankruptcy, the last time the U.S. government briefed a constitutionality issue in a Chapter 9 case was in 1938. This is the second issue the U.S. Attorney General may weigh in on in Detroit. Last year, the office filed briefs arguing against the American Federation of State, County and Municipal Workers’ claim that the bankruptcy was unconstitutional.

    Rhodes ruled in December the city was eligible for bankruptcy. Two weeks ago, the U.S. Sixth Circuit Court of Appeals in Cincinnati scheduled arguments for July 3 on an appeal of that ruling.

    7.11.14 Request to USAG

  • Fire Fighters in bankruptcy court today WITH AUDIO

    The union representing Detroit firefighters is the only major employee group without an agreement as part of the city’s bankruptcy proceedings. The Detroit Fire Fighters Association also does not support the city’s Plan of Adjustment. Attorneys representing the union will be in court today arguing against certain provisions in the plan, specifically its 10-year provisions for pensions. The fire fighters and their attorneys maintain this violates collective bargaining rights.

    WDET’ Next Chapter Detroit Bankruptcy Blogger Sandra Svoboda talked about the union’s objections with Jeffrey Pegg, president of the Detroit Fire Fighters Association.

    Here’s the audio of that conversation, which is transcribed below.

    Sandra Svoboda: Can you give me a summary of the Detroit Fire Fighters Association’s involvement with the bankruptcy case so far?

    Jeffrey Pegg: As it pertains to mediation we are constantly trying to negotiate a collective bargaining agreement, but for the last year it’s been very difficult. We have been close several times only later to have the rug pulled out from underneath us and say that what we discussed can’t be done now so it’s been very frustrating as someone that’s used to collective bargaining.

    SS: Your 850 members are currently working with an expired contact but you’re also negotiating with Jones Day and the city right now as part the bankruptcy proceedings, and is the main issue there future pensions?

    JP: It’s future pensions, it’s retiree health care, yes.

    SS: One of your objections to the Plan of Adjustment is that it contains ten years of information about contracts, employee costs and also pensions. Can you explain to me a little more on the basis of that objections?

    JP: The pension part of it, the hybrid plan, that they put in the POA is for ten years and our objection is that you cannot put a mandatory subject to collective bargaining in bankruptcy pleading for more than the term of the bankruptcy, and that it’s also not a debt of the city currently that they are deciding. It’s a going-forward cost so how can you put in this plan, a going-forward cost that is a mandatory subject to collective bargaining. I believe it’s a really good argument that we have that we’re hopefully successful on.

    SS: Why is the fire fighters association the last remaining group to reach some sort of agreement with the city?

    JP: Well, in my opinion, the Detroit Fire Fighters Association has been the strongest union in the city since we started. We are not difficult to deal with. We are very reasonable people but we are not just going not just sit there and lay down and agree to terms that disagree with us wholeheartedly. We understand that the current situation in the city and the temperature is that they easily could impose terms on us and that our backs are really against the wall but we have to make sure that we get the best that we can for our members. So that’s my opinion about why we’re last, is that really we are the strongest union in the city and it really I think that’s one of the main reasons why.


  • On The Craig Fahle Show: Reviewing the (almost) year of Detroit’s bankruptcy

    WDET’s bankruptcy reporter and Next Chapter Detroit blogger Sandra Svoboda and Detroit Free Press reporter Matt Helms join Craig to discuss Detroit’s financial crisis. Sandra and Matt agree that the bankruptcy is still very much a court operation. But as the city continues through the process, some of the real changes could begin to become apparent by this fall. Here’s their segment.

  • Bankruptcy balloting deadline reached

    Today was the deadline for Detroit retirees to vote on the city’s bankruptcy restructuring plan, known formally as a “plan of adjustment.” The California firm tallying the votes had to receive them by today. All creditors get to vote on the plan of adjustment. But pensioners’ votes are particularly key—especially when it comes to the future of the “grand bargain.” Michigan Radio’s Sarah Cwiek explains why.

  • Another Syncora setback

    Detroit’s casino tax revenue will remain protected from creditors during the bankruptcy process, a federal judge ruled today.

    U.S. District Judge Bernard Friedman’s order denies a request from a Bermuda-based company that insured some controversial pension debt that was backed by the gaming money. His ruling also complies with an order from the Sixth Circuit Court of Appeals, which said last week that Friedman had to rule by Monday on Syncora’s request.

    The issue involves a part of the city’s complicated loan deal to fund pensions. As part of the 2009 financing arrangement, the city deposited payments on pension debt into one account while the casino tax revenue went into a separate, third-party, custodial “lockbox” account. When the city’s debt payment was received by creditors, the casino taxes were released back to the city.

    But the city stopped making the debt payments more than a year ago and Syncora, prior to the city’s bankruptcy, had asked a federal court to force the city to release the roughly $15 million it collected monthly from the casinos and make debt payments. The casino monies are the third largest source of city revenue, behind income and property taxes.

    After the city filed for Chapter 9, the dispute moved to bankruptcy court. In August, bankruptcy Judge Steven Rhodes ruled that the “lockbox” arrangement kept the casino taxes as a collateral agreement with the financial institutions and the money was not part of the city’s assets. Therefore, his ruling meant, the casino taxes were protected from being paid to creditors during the bankruptcy case.

    Syncora appealed Rhodes’s ruling to Friedman, who stayed the issue until last week’s appellate court order that forced today’s ruling:

    7.11.14 Friedman’s Order

  • On The Craig Fahle Show: The past and future for Michigan’s EM law

    What happens after Detroit Emergency Manager Kevyn Orr leaves the city? Who should be involved in the transition, and how should it be handled? Two local emergency managers join WDET guest hosts Christy McDonald, from DPTV, and Chastity Pratt Dawsey, from Bridge Magazine, to discuss how the city may transition back to a traditional governing structure and other issues. The guests are Joyce Parker, the current emergency manager of Allen Park, and Lou Schimmel, the former emergency manager for Ecorse, Hamtramck and Pontiac and currently on the transition advisory board in Pontiac.

  • On Michigan Radio: A deep dive into Michigan’s emergency manager law

    Three years ago, only a half-dozen cities and school districts in Michigan were being run by state-appointed emergency managers. Today, 17 are in some phase of receivership. Detroit Emergency Manager Kevyn Orr filed for bankruptcy, history’s largest for a municipality. Bridge magazine writer Chastity Pratt Dawsey examines the effectiveness of the emergency manager law and how it measures up to similar laws in other states in a report for the magazine’s latest issue. She joined Michigan Radio’s Stateside program.