Pensions

  • Syncora’s Alternative Universe: What if bondholders had been prioritized like pensioners?

    It was Syncora’s “Alternative Universe” argument.

    An attorney for the bond insurer asked Judge Steven Rhodes to consider the Detroit bankruptcy case from the perspective of the financial creditor in a creative nine-minute narrative on Monday that was part of a bigger hearing.

    Part Mad Libs, part legal strategy, part emotional appeal, Syncora attorney Stephen Hackney essentially replaced “pensioners” with “bondholders” as he attempted to demonstrate how some of the dynamics of the historic bankruptcy case would have played out if the parties who would benefit from some of the settlements were changed.

    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 company’s recent filing objecting to the plan attacks the negotiations related to the “Grand Bargain” and criticizes the mediators for some of their actions and public statements. Following that filing, the city asked the judge to strike it from the record and to sanction Hackney and his partners. On Monday, attorneys for the two sides argued in front of Rhodes who said he would rule before trial starts Sept. 2.

    The court released the audio today, and we transcribed part of it. Click on the underlined names, terms or phrases for explanation and context.

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    Stephen Hackney:

    What I was thinking about your Honor, is the problem when you are a hated minority is that there can be bias that creeps into the system, and as I was preparing for this argument I was thinking about John Rawls and what he said about the “veil of ignorance” and how you can use the “veil of ignorance” to try and assist yourself as a policymaker to make sure that you don’t know who is who when you come to any particular circumstance and you make the decision about the fairness or rightness of something blind to who you are in the scenario and I was thinking how can I convey to Judge Rhodes, how can I put the “veil of ignorance” on him to decide this motion as if it weren’t once again hated Syncora, the obstructionist, Mr. Cullen (an attorney for the city who used this phrasing in an earlier argument) says we have a gun to the city’s head. How can I help him do that? So what I would like to do and I will not take forever to do this but I would ask you to hear me briefly on this, which is consider the following alternative universe which is:

    The city of Detroit files for bankruptcy and a mediation team is appointed and while one of the members of the mediation team, his wife does sit on the board of the DIA or did, she’s a director emerita, the chief mediator tells everyone that that individual will be mediating issues relating to the invalidity of the COPs and everyone goes on from there.

    Now Ms. Neville and Mr. Gordon who are fierce advocates on behalf of the retirees who I’ve gotten to know through this case and have done a great job for their clients, they are certainly concerned about what is going on in connection with this, but they are, you know, representing their own clients and trying to do the best that they can do for them. So they move on.

    What happens next, your Honor, is you begin to hear some rumblings about the fact that there is some deal out there involving the art that will ultimately bring money into the city, and you aren’t sure about what exactly, how this is coming about. You aren’t sure exactly what he structure of it is and you won’t be for months and months and months, but you hear people saying things like “It’s important for it to protect the city’s credit rating which is the lifeblood of the city.” And as matters proceed very quickly from rumblings in mid December to in mid January an announcement that there will be contributions by foundations that are designed to protect the credit rating of the city which is the lifeblood of the city.

    And there is an announcement that the monies will go solely to the city’s bondholders. They will not go at all to the retirees, and there are statements by people to the effect of “the retirees, those legacy costs, they were 80 percent of the problem that put this city into bankruptcy. They caused it. The unions broke this city. We shouldn’t punish the financial creditors for the fact that they got caught up in a fight between Detroit and its own unions. It’s not their fault. We have to protect the credit rating of the city. We need to get money for this art. This is a great thing.”

    Now, the retirees’ lawyers who are fierce advocates are absolutely appalled by what they are seeing. They’re also confused. They don’t know how the transaction came about. They don’t know who decided that the money would all go to one particular creditor and not to another, and they are very concerned. So what they want to do is they want to set out and take discovery and find out what happened on this. But there’s a bigger problem. And the bigger problem is that the city and the mediators, whoever it was that decided to make that public announcement that the grand bargain funds would come in and that they would all go solely to the bondholders, they made the announcement before they actually got the bondholders to say that that would be sufficient. No indenture trustee. No monoline insurer actually came in and said, “yeah, if you give us everything that relates to the art, we’ll take that and we’ll be done.”

    They never say that so what happens is as the mediation team and the city front run this by announcing this, they hand the keys of the bankruptcy over to the bondholders, and the bondholders now realize the city is on record saying two things: “I am absolutely essential to the future of the city, and the charitable foundations are insisting not only that I get all of the money but also that I approve the plan.”

    What Ms. Neville and Mr. Gordon see before they’re able to take any discovery or figure out what is going on, is they see a sequence of events where not only do the bondholders get all of the amount of the money from the Grand Bargain, but when there’s an additional $200 million settlement and 74 cents on the dollar or whatever the approximate amount of that was, the 26 cents that was leftover goes to the bondholders. When the Obama Administration makes $100 million in blight fees available to the city, blight amounts don’t go up by $100 million, it’s part of an improved deal for the bondholders. When there is a DWSD transaction and they agree that over the next nine years the DWSD will make substantial payments to the bondholders, they seek to invalidate the pensions under the theory that the pensions were obtained by corrupt means because of the fact that the unions had always controlled Detroit, there was no good arm’s length negotiation and so they ought to invalidate those things, they told the bondholders you’ll get 65 percent of the reserve they’ve set up to litigate that claim.

    With all this in hand, now that they do have profound recoveries in the case by any standard, now the bondholders come in and approve the deal.

    Now, Ms. Neville wants to pick up her pen and write an objection but she can’t because she has an aneurysm and is taken to the hospital because she is absolutely infuriated about what’s happened here. So what she does, she doesn’t know how this has come together. She’s seen it all play out in front of her, and it doesn’t feel right to her. She begins to try and take discovery. She is stopped at every stage in the process.

    She tries to find out what happened on the charitable foundation side. She can’t. She tries to find out from Kevyn Orr, “what happened with what you were thinking?” And he very solemnly tells her, “even though there have been many published statements in the press about this particular deal, oh, I’m sorry. Now I can’t say anything with respect to that.”

    Now at the same time that she’s getting blocked at every turn, trying to develop this evidence, she is watching something else unfold in public, which is the chief mediator is lobbying the legislature to pass the needed legislation to get the deal. He’s holding press conferences, and in the press conferences he’s saying things like, “We need to remember that this Grand Bargain, what it’s really about and what it’s really about is Detroit’s financial creditors, The bondholders who have built our hospitals and our sewer system and kept our city running for so long. That’s what this is really about.”

    And he turns to a group of people at the DIA and he says “And I’d like to recognize one of the heroes of this bankruptcy and that hero is Claude LeBlanc. He’s the chief restructuring officer of Syncora, and I want us all to stand up and applaud Claude LeBlanc as one of the heroes of the bankruptcy.” And he also quotes FGIC’s CEO but I don’t know who that is so I can’t put it in.

    Ms. Neville’s also about to learn something else. She’s about to learn in a video from one of the foundations that very early on, the mediator who all agreed, the chief mediator, is described as a powerful man in the city, and he is a powerful man in the city, that this powerful man came to him and said, “there are two issues that are going to tie this bankruptcy up. No. 1 is the art, and No. 2 is the city’s credit rating. This city can’t function without a credit rating. If we try to invalidate those COPs, if we try and say General Obligation Bonds aren’t secure, it’s going to go all the way to the Supreme Court and so will the art. And so we’ve got to take care of that and what I’d like you to do is can you put together some of your friends and come in and make a contributions, solely, we’ll make sure it goes solely to the bondholders.We won’t let those retirees get any of this. Absolutely not. We know they’re part of the problem. They were crazy to have allowed themselves to continue to work for the city with deferred compensation. They live here. They know the politicians. Their unions are the ones that run things around here. They’re getting what they deserve. But you bondholders. We’re going to do it like Central Falls. We’re not going to let you get caught in the middle of this.”

    That’s what Ms. Neville says. Now, I would like to ask you something, your Honor. Take the “veil of ignorance” that John Rawls talked about for a moment and ask yourself, in that parallel universe, do you seriously think you are engaging a motion to strike Ms. Neville’s supplemental objection that she files where she says that it ain’t right and it’s not consistent with good faith and that she didn’t know what was going on and that this is the best she’s been able to piece together from the outside? Let’s have a trial on the merits of this case, your Honor.

    Let’s not be striking things off and cutting them off before we have an opportunity to at least be heard. That is all we are asking.

  • The Detroit News: Andy Dillon to have oversight of retiree health care?

    Remember Andy Dillon? He was the state representative from Redford who became Speaker of the House. After he was term-limited out, Gov. Rick Snyder named him state Treasurer where he played a key role in Detroit’s run up to bankruptcy. Now he’s with Conway MacKenzie, a restructuring firm that has been paid more than $8 million by Detroit for its work related to the bankruptcy case.

    Today The Detroit News reports Dillon may help manage city retirees’ health care benefits following the bankruptcy.

    The Retired Detroit Police & Fire Fighters Association wants to appoint Dillon to the board of a new trust that will manage health care benefits for retired public safety workers after the city sheds billions of dollars in legacy costs in bankruptcy court. The latest version of Detroit’s restructuring plan names Dillon and retirees Gregory Trozak and Allan Grant as the retiree association’s appointees on the seven-member board of the new police and fire Voluntary Employee Benefits Association, or VEBA.

    The plan calls for two trusts — one for general retires, another for police and fire — to share $450 million from the city to fund the medical care. The city estimates that retiree health care will cost $4.3 billion.

    “It will be a challenge to maintain the coverage that retires have today, so some tough decisions will have to be made,” Dillon told The Detroit News.

     

  • Detroit’s latest Plan of Adjustment

    Late last night, the city filed its seventh version of its Plan of Adjustment, the blueprint of how it wants to restructure debt and city services as part of its bankruptcy case. Here it is with this correction:

     

    8.20.14 Redlined Sixth Amended Plan of Adjustment

  • On WDET: The latest with bond insurer Syncora

    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 final stand against the bankruptcy exit plan

    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.

  • Syncora to Judge: The Grand Bargain should go away

    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:.)

     

    8.12.14 Syncora Second Supplemental Objection

  • Latest Plan of Adjustment: See the changes from previous versions

    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.

     

    Fifth Amended and Corrected Redlined Plan of Adjustment

     

     

  • In Bridge Magazine: Can Detroit pay its bills after bankruptcy?

    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?