Pensions

  • In Bridge: Individual objectors in bankruptcy court

    Most were retired Detroit workers. A few have law degrees. One is a former city councilwoman. They’re 15 “pro se” objectors in the city’s bankruptcy case, individuals without attorneys whom U.S. Bankruptcy Judge Steven Rhodes has allowed to testify, present evidence and question witnesses during the city’s ongoing bankruptcy trial. Here’s Bridge Magazine’s piece about them and what they said in court.

  • Day 19: Detroit’s Bankruptcy Trial

    It’s fewer attorneys and more pensioners today in bankruptcy court. Judge Steven Rhodes has scheduled several “pro se” objectors who will testify and question witnesses. Pro se objectors are individuals without attorneys, and today’s hearing will include their opposition to parts of the Plan of Adjustment.

    One of them already appeared: Estella Ball questioned Detroit Emergency Manager Kevyn Orr on Day 16 of the confirmation hearing.

    10:22 a.m.

    After she questioned Emergency Manager Kevyn Orr and city attorney Heather Lennox, of Jones Day (see below), city retiree Wanda Jan Hill had a few minutes to testify.

    She told Judge Steven Rhodes that he should “strike the 6.75 percent interest rate from the clawback” of annuity payments some general service retirees will make as part of the bankruptcy settlement.

    “Just as deals or adjustments were made for Syncora and FGIC and I can sort of say the police and fire, Id’ like for you to strike a moderate deal with the retirees. I’d like for you to allow Mr. Orr or someone in his camp to provide us with information about the makeup of this clawback. … There are a lot of questions that are not answered that we need to know. “

    Here is Hill’s objection filed last summer against the city’s Plan of Adjustment.

    10:05 a.m.

    With city attorney Heather Lennox on the witness stand, retiree Wanda Jan Hill continued her questioning about if and how retirees were notified about the 6.75 percent interest rate attached to retirees’ annuity savings fund recoupments before they voted on the Plan of Adjustment earlier this year.

    According to Hill, the ballots relied on the term “other factors” and did not disclose a 6.75 interest rate would be part of retirees’ payback of some of their annuity savings funds to the city. After Emergency Manager Kevyn Orr couldn’t sufficiently answer Hill’s questions (see below), Lennox took the stand to discuss the issues Hill raised about the interest rate on the “clawbacks.”

    Here are some excerpts of their exchanges.

    Hill to Lennox: “What did you know and when did you know it?”

    Lennox responded by recounting the development of what attorneys called the “plain language statement” that was include with pensioners’ ballots. “We reached stipulation with the Retirees Committee,” Lennox said. “In that stipulation that was filed with the court on June 4th, we did specifically include that interest percentage because people had been asking about it. It was also in a letter dated June 4th that went out to retirees who were affected by the correction and the recoupment.”

    Hill: “You said it was not exact. Nowhere in those documents did it tell you there was a 6.75 percent interest tacked on to the ASF recoupment amount so it was not exact. That’s one of the reasons I’m standing here. It was not exact. … That plain language document was, in my view, the ideal document for you to spell everything out, the 6.75 percent. The ‘other factor’ phrase should have fallen by the wayside. … Since it was a plain language document, it should have been plainly explained to us what the clawback was. I think that has a lot of retirees, including myself, all up in arms because you’re taking money away from us but you’re not giving us the right to know what is all the money going for?  … I stil say that “other factors” was used as a ruse to allow you to come back at some other time to say, ‘oh, that was easy. Let’s try to get that money from them on “other factors.” ‘ “

    Hill: “Who came up with the word phrase ‘other factors?’ Who’s responsible for that?”

    Lennox: “The language that was included in all of the documents that you received was drafted initially by the city but it was heavily, heavily reviewed and edited by many, many people who represent the retirees such as the Retirement Systems counsel, the Retirees Committee counsel. We had counsel for the two largest retirees associations in the city that reviewed and comment on that. We also had counsel for the public safety unions, for AFSCME and for the UAW … I would say that those word phrases were the combination for very, very many people who were trying to make things clear and simple for the retirees.

    Hill: “So you don’t know who came up with the word phrase “other factors” therefore you don’t know what “other factors” entails?”

    Lennox: “No ma’am. I said that working was … a very collaborative process to put that language you refer to in those document. I think many people had a hand in that.”

    9:45 a.m.

    The first pro se objector was Wanda Jan Hill, who criticized the lack of communication between the city and retirees about the 6.75 percent interest attached to the recoupment of some annuity savings fund monies.

    Hill wanted to question Heather Lennox, a Jones Day attorney working for the city. City attorneys objected, and Judge Steven Rhodes first had her question Emergency Manager Kevyn Orr.

    Here are excerpts of that exchange.

    Hill: “My motion was relevant to the nondisclosure of the 6.75 percent (interest rate attached to the “clawback” of Annuity Funds from some general service retirees). I don’t know how much of the workings you were involved with that information not being disclosed, but can you explain to me and the court how much involvement did you have with the 6.75 percent interest not being provided in the relevant documents that Class 11 in particular needed in order to make a sound decision?”

    Orr: “I was involved in that process.”

    Hill: “To what extent, relevant to it being a nondisclosure issue?”

    Orr: “I don’t want to mislead you. I don’t look at it as a nondisclosure issue. Without getting into the discussions that occurred between counsel, between the retirement committee (during) the mediation process in terms of getting to that number. I think what I can say is there was no affirmative decision made not to include it in the Disclosure Statement. The concept was there was going to be communication with the Retirees Committee, which we asked this court to empanel, so there would be a conduit of information going back and forth to retirees. My understanding is that information was provided in at least one slide deck that the committee put out to retirees. There were a number of other fliers and communications that went out to retirees prior to the deadline for voting … In addition, I understand there were special discussions with members of that committee as well as members of other groups to try and explain that process. I don’t think there was an intent necessarily not to include it in the Disclosure Statement.”

    Hill: “I beg to differ. In my research I found that the phrase “other factors” was used instead of being forthright and putting all the cards on the table therefor that gave me the impression that it’s something that you don’t want us to know. So when “other factors” was used in at least 10 different documents, it raised a red flag.”

    Then Hill presented a chart of various documents the city filed in the case. She highlighted when the phrase “other factors” was used and when the 6.75 interest rate was specifically mentioned.

    “It was under the guise of ‘other factors,’” she said. “The 6.75 percent interest was a very important number. … this report shows the research that I did relative to life expectancy and ‘other factors.’ …. Every time it was mentioned in a document, this was the phrase that was used. “

    Hill: There was enough space and enough room to break down “other factors” I have a real problem with the fact that ”other factors” was not explained.

    She directed Orr to the April 17 document that corrected how voting by pensioners on the Plan of Adjustment would occur.

    “You can let me know: was the information relevant to the clawback and the ASF … was that known at that time? Did you know you were going to do the clawback?” she asked Orr.

    He replied, “Ma’am. Sitting here right now, I can’t recall. I’d have to look at my notes.”

    Hill: “I’m going to assume you had some idea of what you were going to take from the retirees.”

    Orr: “There were general discussions that I think are covered by the mediation order (preventing public discussion about them), but I think it’s fair to say around that time there were discussions going back and forth.

    Hill: “So the money was an issue at that time.”

    Orr: “I believe there were discussions being had.”

    Hill: There was enough space and enough room to break down “other factors” I have a real problem with the fact that ”other factors” was not explained.

    She directed Orr to the April 17 document that corrected how voting by pensioners on the Plan of Adjustment would occur.

    “You can let me know: was the information relevant to the clawback and the ASF … was that known at that time? Did you know you were going to do the clawback?” she asked Orr.

    He replied, “Ma’am. Sitting here right now, I can’t recall. I’d have to look at my notes.”

    Hill: “I’m going to assume you had some idea of what you were going to take from the retirees.”

    Orr: “There were general discussions that I think are covered by the mediation order (preventing public discussion about them), but I think it’s fair to say around that time there were discussions going back and forth.

    Hill: “So the money was an issue at that time.”

    Orr: “I believe there were discussions being had.”

    Hill: “I think so too because the media talked a lot about what they were going to take from us. … There was an idea of how much money was going to be needed. … By the time we got to Plan of Adjustment Three, you knew that other factors were going to be an issue. I don’t think you would have included ‘other factors’ if you didn’t think it was going to be an issue.”

    Then the judge interrupted.

    “I think what Miss Hill is trying to get to here is whether any of the city’s filed documents specifically disclosed that there was a 6.75 interest rate associated with the ASF recoupment or clawback,” Rhodes explained to Orr.

    Orr: “What I recall, your Honor, is I don’t think it was include with th Disclosure Statement. … There were other documents included on the city’s website. I don’t know if the fliers” and other information provided to retirees included the number.

    “In the circumstances, I think we have to have Miss Lennox testify to the extent to which she can fill in what Mr. Orr doesn’t know.”

  • Q: Who are bankruptcy’s Pro Se Objectors? A: Real people

    As part of the bankruptcy trial, Judge Steven Rhodes is including a handful of individual objectors – people who don’t have attorneys – called “pro se” objectors.

    One of them already questioned Emergency Manager Kevyn Orr and then testified herself. But most of them are expected to begin testifying Wednesday and will cover a variety of topics including: the “clawback” of the annuity savings fund; the voting procedure by various creditor classes (including pensioners) on the Plan of Adjustment; interest rates being used to calculate investment returns.

    Last summer, Rhodes invited 80 individuals to testify about their objections. Here’s a report of that day in court. Some of those are returning during the trial phase. We spoke with Gloria Williams and Steven Wojtowicz in advance of their testimony about their objections and what they’re expecting in court.

    We also interviewed Laura Bartell, professor of law at Wayne State University, about the inclusion of these individuals in the bankruptcy proceeding. She says it’s “not normal.”

    Here’s a transcript of that conversation:

    Sandra Svoboda: Why is the judge including these pro se objectors in the trial?

    Laura Bartell: An objector doesn’t lose the right to object merely because he or she does not have counsel. So if an objector has something relevant to bring before the court, the objector should have an opportunity to stand up in court and make his or her point.

    SS: What role do these objectors play in the bankruptcy trial?

    LB: These particular objectors do not have any dramatic points to make. Most of them are asking for an opportunity to question witnesses about the treatment of their pension claims, about the clawbacks, that sort of thing. We’ve already had one pro se litigant cross examine one of the city’s witnesses on feasibility but they have minor issues about whether the plan is fair and equitable, whether it’s feasible and the judge is going to allow them to question witnesses or present witnesses as they wish to make their points on those issues.

    SS: Is this a normal part of bankruptcy procedure?

    LB: It’s not normal to have pro se objectors. It’s only an unusual situation where you would have individuals not represented by counsel who were objecting to a plan either in Chapter 9 or in Chapter 11.

    SS: Does Judge Rhodes allowing these objectors shed any insight into his thoughts and his handling of this bankruptcy case?

    LB: This is consistent with his solicitude for the individuals who are being affected by the bankruptcy case. He wants to give them every opportunity to make their points publicly because part of that is an emotional resolution. If you can have the sense that you have made your point, it has been heard by the authority figure, that is Judge Rhodes, then even if he overrules your objection you at least feel you’ve gotten a fair shake.

  • A Retiree’s View of Bankruptcy: Previewing her testimony in court

    Retiree Gloria Williams is the former director of elections for the city of Detroit, where she also was a manager of computer applications. She filed this objection and is scheduled to testify during the confirmation hearing. She spoke with Sandra Svoboda, bankruptcy reporter and blogger for WDET and Next Chapter Detroit. Here’s that interview, with a transcript below.

    Sandra Svoboda: Why did you file an objection in the bankruptcy case?

    Gloria Williams: Because of the inconsistencies in the way the balloting took place. First they sent us two ballots. Then they said they made a mistake and they sent us more ballots and it wasn’t clear as to which ballots should be returned, what was going to happen if you’d already returned your ballot and then you send your new ballot in. It wasn’t really clear as to what was going to happen to all of those ballots. Why I was really concerned was there wasn’t an accounting in the final documents as to what happened to the ballots and there’s no audit of the balloting process.

    SS: You’re referring to of course, the voting on the Plan of Adjustment that was done by the different classes of creditors, yours being the retirees or pensioners.

    GW: Correct. You have to understand that there are thousands of retirees who are out there who are in their 70s, 80s, 90s who would be totally confused with how the balloting took place.

    SS: Did you raise these concerns before or during the voting process?

    GW: Well, I wasn’t concerned until the results came back and I read through the results and didn’t see where they accounted for those ballots. They didn’t say how many they had received that were invalid, how many were duplicates and those ballots were never accounted for plus in every election, I don’t care what kind of election it is, that election is supposed to be audited by some independent agency and it wasn’t.

    SS: Have you received notice as to when you’ll be testifying during the confirmation process? What are you anticipating that will be like?

    GW: They did send me documentation and they said I would have to interview the balloting company over the phone because they weren’t coming. (laughs) And I thought that was disrespectful if nothing else.

    SS: What do you plan on telling the judge about your objection?

    GW: I really don’t want to reveal that right now because I don’t want them to be prepared for the answer. (laughs) So I would rather do that when I get to court, that way they will, you know, won’t have time to research and find this case and that case against what I’m proposing. It’s just that after there were so many questions about the balloting process, they should have volunteered to have someone else, some other company review what they did just to validate their process.. So I thought that was odd that they didn’t do that.

  • From a Pro Se Objector: A preview of bankruptcy case testimony

    Steven Wojtowicz retired from the Detroit Water and Sewerage Department after 31 years of work. He’s one of the “pro se” or individual objectors Judge Steven Rhodes is allowing to testify or question witnesses as part of the city’s bankruptcy trial.

    In advance of this testimony this week, he spoke with WDET/Next Chapter Detroit’s Sandra Svoboda. Here’s the document he filed with the court requesting time during the trial.

    Here’s a transcript of that conversation:

    Sandra Svoboda: Why file an objection in the bankruptcy case?

    SW: My original objection was that obviously I thought the recoupment was unfair, the ASF recoupment was unfair but adding on the interest rate wasn’t in the documentations and during the negotiations for the pensions the 6.75 percent was never brought up. It wasn’t brought out, up until the ballots were sent out that people, some people knew about the 6.75 percent if they attended the presentations or received the revised ballot or talked to someone about the 6.75 percent. That was my biggest objection that you know adding on that interest doubles the recoupment amount.

    SS: What have you seen as some of the big issues in the trial so far?

    SW: It seems like they’re just interviewing people I don’t see any big changes other than doing some negotiations with some of the banks and some of the insurance companies. I don’t see much changing I guess for the bankruptcy. Everything just seems to be what it is is going to be what it is, what they decided before the confirmation hearing. I’m not sure if Rhodes is going to bring up anything about our annuity and the interest rate. I’m not sure. I haven’t heard anything positive about that.

    SS: What are you anticipating your testimony will be like?

    SW: In the docket that they came out with response to my objection, a couple of things that they mentioned now here, one things, the 6.75 percent what they said is they clarified the 6.75 percent and added it into the bankruptcy documents but my other questions was the recoupment with interest never ends. It’s a lifetime annuity. But they responded back in that latest docket that no, this ends after you pay back your recoupment. It stops. But in the ballot and in their presentation it says that this goes on for a lifetime. I asked to get a clarification of that. That’s going to be one of my questions.

    SS: Do you feel like your testimony made that change happen?

    SW: I think so because that’s the only place I see it is in their response to my objection. So I would think so. I get a clarification like again, I can’t find it in the bankruptcy documents but it’s in that one docket from the attorneys from the city. So I’ve got to get a clarification on that.

  • What They Said: Bankruptcy in the governor candidates’ town hall

    At 22:10 of the town hall face off last night, moderator Stephen Henderson, Detroit Free Press Editorial Page Editor, asked the candidates about Detroit’s bankruptcy and the emergency manager. Here is a transcription of the questions, the answers and the follow up from Republican candidate Gov. Rick Snyder and the Democratic challenger Mark Schauer.

    Freep columnist Nancy Kaffer weighed in on the topic in this piece today, and moderator Christy McDonald, from our Detroit Journalism Cooperative partner Detroit Public Television, reviewed the town hall today on WDET’s Detroit Today.

    STEPHEN HENDERSON: Detroit, the city of Detroit, has an emergency manager and is trying to get through a complicated bankruptcy. Is this the right policy, the right approach to the relationship between cities and states? Is there more the state needs to do to prevent cities from falling into those financial problems? And what do they need to do to help them out on the back end?

    GOV. RICK SNYDER: That was a big question, Stephen. Let me start the other way with actually what we’re doing now is we’re working on an early warning system to help communities because I never want to appoint an emergency manager, and it’s not a subjective process folks. It’s an objective process. I don’t simply decide that. Certain conditions in terms of a financial emergency have to exist first.

    With respect to Detroit I went through that in a very systematic way. Tring to work with the prior administration in Detroit to say “Let’s just work together.” That didn’t work. We did a consent agreement to say the city needed to do certain thing to get the city out of trouble. Those things weren’t done. So then it came to an emergency manager. So I appointed an emergency manager. And then it came to the question of actually putting Detroit in bankruptcy. That was one of the toughest decisions to be made in the United States. It was the right decision to make.

    Look at where we are today. We’re within a month to two months most likely of coming out of bankruptcy. We would have shed $9 billion of liabilities. If we hadn’t done this, the operating budget for the city of Detroit, more than 60 percent would go to paying past debts. There would be no money for services. In the meantime while this has been going on, what’s been happening? Streetlights have been going up. Trash is being picked up. Public safety is improving. Violent crime is down in double digit percentages in the city of Detroit. All these good things are going on and now we’ve transitioned back out because my goal is to have the emergency manger come in, do their job, get out, be done and get it back to the community with good oversight though so it doesn’t fall backwards. Stop and think: Have you ever thought you’d see Detroit as well poised for a bright future as you see today?

    HENDERSON: Congressman. You have opposed the emergency manager legislation, how would you handle all of this differently?

    SCHAUER: Well, first I believe in democracy. The people voted in 2012 to overturn that law. As governor, placing myself becoming governor in 2011, I would have abided by the will of the voters. What I would have done is personally led. As governor, I will be in Detroit. I will work out of the office on Cadillac Place and be a full partner with Mayor Duggan for the comeback of Detroit. Mayor Duggan is supporting me because he knows that I will be a strong and active partner. We need good jobs in our communities, but what I will do as governor, in addition to personally lead, is put together financial transition teams where we can be proactive. What our current governor has done, two things, is engaging in a strategy of fighting fires, fighting crises. Of course a $69 million revenue-sharing cut for police and fire in the city of Detroit didn’t help. But after cities get into financial crisis and school districts get into financial crisis, they assign emergency managers.

    The second thing, quickly, is I never would have cut retiree pensions. Our constitution is clear: pensions are guaranteed. Again, on top of the pension tax, cutting pensions through the emergency manager, as governor himself, is wrong. It’s hurting people. It’s no way to build a strong economy.

    HENDERSON: Governor, I want to give you a chance to respond to the question about democracy. You’re suspending local democracy when you send in an emergency manager. People in the state voted not to have emergency managers. How do you address that?

    SNYDER: No, what they said is, we’ve had EM going back to Gov. Blanchard in 1988. There have been a lot of EM before I stated this process. In fact, I inherited a number of them. What we did was enhance their skill set so they could do their job and get out. There was a ballot proposal that said certain aspects of it people didn’t like. We listened to that. We didn’t do those things. We put something back in place so we could move forward.

    Think about this: traditionally emergency managers were there way to long. So Detroit, other than the bankruptcy, the city is now running the city of Detroit. We have an emergency manager that now has left in Pontiac, Benton Harbor, Allen Park, Ecorse. It’s working, folks. We’re getting thee cities back on their feet that didn’t have an opportunity to before. Because we know how big the messes were.

    I’ve asked the Congressman. If you’re not going to do things like looking at bankruptcy, a very last resort. And again, it is constitutional. A federal judge said that. I’ve asked the question is, what are you going to do to pay those $9 billion in liabilities? How are you going to have a budget where you have 60 percent going to liability costs?

    HENDERSON: Very quickly, Congressman.

    SCHAUER: We’ll go back to a hypothetical if I had been governor without an emergency manager, that would not have changed the books for the city of Detroit. I’m not questioning whether the city of Detroit needed to go bankrupt but I would have personally led rather than having an unelected, unaccountable person do it and I would never have thrown Detroit city pensioners, police officers, firefighters under the bus. That hurts them.

    SNYDER: We didn’t leave them under the bus. We did the grand bargain, and I want to thank the bipartisan support of the Legislature to work with the foundation community. Retirees did take cuts but we minimized them. I appreciate them. They ended up supporting the agreement and I respect them for their great role in this settlement.

  • Day Two: Detroit’s Bankruptcy Trial

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

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

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

    Jaye Quadrozzi: I believe so…

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

    JQ: That is correct

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

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

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

    JQ: They’re not using actuarial science.

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

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

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

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

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

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

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

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

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

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

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

    TITLE: The Plan Unfairly Discriminate Against the COPs Class.

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

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

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

    Level of discrimination is actually far greater.

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

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

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

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

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

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

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

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

    “Then perhaps,” Perez said.

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

    TITLE: Reasonableness of the DIA Settlement – Four Factors

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    TITLE: PLAN IS NOT FAIR AND EQUITABLE

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

    SLIDE TEXT Debtor has:

    Failed to explore potential benefits to new tax policy;

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

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

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

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

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

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

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

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

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

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

    1:50 p.m. And we’re back!

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

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

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

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

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

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

    A few of O’Reilly’s points:

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

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

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

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

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

    The slide looks like this:

    TITLE: Discrimination is Not Supported by a Reasonable Basis

    SUBTITLE: Debtor’s Reply justified discrimination based on:

    1: Employee morale

    2: Settlement of eligibility litigation;

    3: Pensioners’ inadequate ability to protect themselves;

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Freep Reporters tweet at @MattHelms and @NathanBomey on Twitter

    Detroit News Reporters tweet at @RobertSnell_DN and @ChristineFerretti_DN

    WDIV’s Rod Meloni is blogging here.

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

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

    He summarized some of those legal maneuvers and arguments:

    Retirees argued the Michigan Constitution protected pensions.

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

    LTGO noteholders argued “they had a superior position.”

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

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

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

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

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

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

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

  • Judge tosses Syncora’s objection, considers sanctions

    The judge overseeing Detroit’s historic bankruptcy case removed from the record Syncora’s “personal attack” on the case’s chief mediator and gave the bond insurer’s attorneys until Sept. 12 to explain why they shouldn’t face sanctions.

    Earlier this month, Syncora’s attorneys in a court filing criticized  Chief U.S. District Judge Gerald Rosen for showing “naked favoritism” toward pensioners while leading negotiations between the city and the creditors. Syncora has argued for months that the Detroit Institute of Arts collection should be monetized to pay all creditors, not protected as it is in the “grand bargain” which also brings outside funding to the city’s pension funds.

    Syncora accused Rosen and an additional mediator, Eugene Driker, of being “agenda driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors.”  The city asked the judge to strike Syncora’s filing from the record and to sanction the creditors’ attorneys. 

    On Monday, attorneys for the two sides argued in front of Rhodes, and Syncora’s attorney asked the judge to end the preferential treatment pensioners have received throughout the negotiations.

    In his response issued late Thursday, Rhodes rejected Syncora’s claims and ordered the creditor’s objection be struck from the case docket. “Syncora’s highly personal attack on Chief Judge Rosen in the objection was legally and factually unwarranted, unprofessional and unjust,” Rhodes wrote. “Justice requires the court to strike the attack from its record.”

    As part of the 22-page order, Rhodes wrote that he considered Syncora’s objection an end of what had been “professionalism and civility” in the case.

    Syncora’s attorneys, who are from the Chicago firm Kirkland & Ellis, have until Sept. 12 to respond in writing with evidence as to why they shouldn’t face sanctions.

    As an insurer in the 2005 “Certificates of Participation” deal that injected $1.4 billion into Detroit’s pensions, Syncora stands to lose hundreds of millions of dollars as the city’s Plan of Adjustment now stands and has objected at seemingly every step of the proceedings to date. 

    The trial is scheduled to begin Tuesday.

    8.28.14 Order Granting Motion to Strike

  • Art on loan? Proposal seeks to use DIA collection as collateral

    UPDATE: Here is the actual objection filed in court by creditors objecting to the DIA settlement proposed in the city’s bankruptcy case. In it, attorneys argue Judge Steven Rhodes should reject the city’s plans on the grounds that it does not maximize the value of the city’s assets (the artwork).

    The national media debuted the collection of stories that emerged this week about the latest genre of proposed deals to monetize the Detroit Institute of Arts holdings in order to pay creditors in Detroit’s bankruptcy case: a proposed $4 billion loan for the city using the artwork as collateral.

    The New York Times displayed the flair of pop art in its story:

    “On Wall Street, there is the art of the deal. In Detroit, there is the deal of the art,” the paper quipped. “Why not mortgage all the Van Goghs, Picassos and other works in the Detroit Institute of Arts? A company called Art Capital, which makes loans backed by artwork, has told the city it is willing to lend it up to $3 billion, roughly 10 times the exit financing Detroit is now contemplating, using the museum’s art as collateral.”

    While the Wall Street Journal seemed more of an Old Master in its no-nonsense news story:

    “Art Capital Group raised its proposed loan to Detroit to as much as $4 billion to help ease the city out of bankruptcy, if it uses its art collection as collateral. The art-backed loan is being touted the week before the start of Detroit’s municipal bankruptcy trial as an alternative to the so-called grand bargain, a complex deal using hundreds of millions of dollars in funds from the state of Michigan and private donors to protect the collection at the city-owned Detroit Institute of Arts, while helping to shore up city pension funds.”

    The city, for its part, left the canvass blank with officials refusing to even sketch an outline of such a deal, the Detroit Free Press reported:

    The city swiftly dismissed Art Capital’s latest proposal. Bill Nowling, a spokesman for Orr, said the city is “100% committed to the grand bargain.”

    “The city will not sell or leverage the art,” Nowling said in an e-mail. “This latest proposal is nothing but a thinly veiled attempted by our remaining hold-out creditors to improve their recovery at the expense of the city’s pensioners and its cultural assets.”

    In its gallery, the Detroit News displayed the variety of styles that have emerged in Detroit’s bankruptcy case, with bond insurers Syncora and FGIC arguing for sale (and presumably now mortgaging) of the art in order to spread available funds more evenly among creditor classes. The two companies continue their attempts to devalue the “grand bargain,” the deal that brings in $660 million of pensions as long as the DIA collection is protected from sale.

    “FGIC and bond insurer Syncora Guarantee Inc. have argued the grand bargain’s 20-year payout is the equivalent of about $400 million in today’s dollars and that more money can be extracted from the city’s art collection through a sale of some or all of the 60,000-piece collection.

    Art Capital said it is making the loan at a 5.5 percent to 8.5 percent interest rate, plus the LIBOR benchmark interest rate.”

    Detroit News columnist Daniel Howes, for his part, deconstructed the motivations of the bond insurers in having Detroit has a subject:

    Choosing to dump the grand bargain in favor of the bond insurer-backed Art Capital offer would risk deeper cuts to city pensioners because theoretically larger recoveries would be spread across a broader pool of unsecured creditors, the city says; would saddle Detroit with new debt it cannot easily manage; would ease the financial pain for bond insurers who reaped high yields off risky investments now gone sour. 

    That’s a) why they call it risk and b) why they created insurance. Detroit’s financial collapse, at least 10 years in the making, was perhaps the poorest-kept secret in American municipal finance, at least to those willing to look deeper than the easy fees and high yields they could reap from a political class too cowardly and too financially unsophisticated to make tough calls.

     

    The bankruptcy trial begins Tuesday and promises to be nothing, if not colorful.