The attorneys for Detroit bond insurer Syncora, whom no one would describe as shy or reserved nor particularly successful, thus far, in their approach to the bankruptcy case, had a small victory in court today: They’ll get to see a series of communications between officials at the Detroit Institute of Arts and the Michigan Attorney General’s office as they asked for in a massive subpoena.
Why do they want the documents?
Syncora, which insured part of the $1.4 billion loan to the city’s pension funds in 2005, is advocating that the city sell some of the museum’s artwork to pay as-yet-unresolved debt. Making nearly full payments to pensioners and proposing pennies on the dollar as owed to financial creditors, as the city is currently doing, is unfair, Syncora’s argument goes. Syncora, according to a Detroit Free Press review of court documents, is owed about $240 million.
“The art has been a sort of noteworthy, highly publicized part of the case, and from our standpoint, a very important part of the case because of what we’ve all been doing here,” said Stephen Hackney, a Syncora attorney who works at the Kirkland & Ellis firm in Chicago. “The city is proposing to address the issues surrounding the art collection in a way, from our standpoint, that yields far less value.” He called the DIA collection “one very powerful asset” that could be sold to provide a more fair settlement to all creditors.
In pursuing that argument, the Bermuda-based bond insurer wants to examine the communications between the museum and the state attorney general for the two months prior to Attorney General Bill Schuette’s opinion that the DIA collection “is held by the City of Detroit in charitable trust for the people of Michigan, and no piece in the collection may thus be sold, conveyed, or transferred to satisfy City debts or obligations.” Schuette’s opinion, of course, has no force of law in the federal bankruptcy court handling the city’s Chapter 9 case, but it is part of the evidence and arguments Bankruptcy Judge Steven Rhodes could consider in his final determination about the fairness of the city’s financial plans and debt management in emerging from bankruptcy.
Attorneys for the DIA and the AG argued the documents Syncora wants are “privileged” — that’s the legal term that deems some documents confidential and therefore protected from opposing parties in cases. The city also objected.
But Judge Rhodes disagreed with the museum and the state, as represented today by Arthur O’Reilly, from the Detroit law firm of Honigman, Miller, Schwartz and Cohn, and Eric Restuccia, from the Attorney General’s office, respectively.
Here’s what Judge Rhodes said in granting Syncora’s request. WARNING: It gets into some legal-speak, but it also gives some insight about the judge’s thoughtfulness and fair-minded approach to the case as many legal observers have described:
The basis of the objection to the request for these documents is the common interest privilege. The court concludes that the claim of privilege should be overruled and that Syncora’s request for an order compelling the production of these documents should be granted.
Plainly, the extent to which the art held by the Detroit Institute of Arts should be taken into account in evaluating whether the city’s plan meets the best-interest test of the bankruptcy code is a substantial issue in the case, one that has not been prejudged or determined by the court at all, and, of course, this ruling should not be construed to suggest one way or another how the court will or may rule on that substantive issue of confirmation. The common interest privilege, however, requires a common legal interest, and the court is unpersuaded that at the time these documents were exchanged there was any common legal interest between the Attorney General of the State of Michigan and the Detroit Institute of Arts. The client, on whose behalf the Honigman firm produced these documents or received them from the Attorney General is the corporate entity that maintains and manages the collection for the city as a result or a contract with the city. Nothing in the record, to this point, anyway, in any event, suggests that he contract requires this entity to take a position one way or another on the issue on which the Attorney General expressed in his opinion ultimately.
More fundamentally, the fact that parties align in presenting their arguments to the court does not by itself mean that they have common legal interest. Much more has to be shown than that, and whatever that more is has not been shown on the record here. More than that, at the time these documents were produced, before there was even an alignment of positions. So for all these reasons, the claim of privilege is disallowed and overruled and the motion is granted.
One little open issue, were documents inadvertently produced and should have been destroyed? I’m going to trust counsel to work all of that out.
In that final statement, Judge Rhodes was referring to what DIA Attorney O’Reilly had mentioned during the attorneys’ arguments about the issue. The museum had inadvertently turned over material to the AG’s office, O’Reilly said. The AG’s office had said those documents would be destroyed. They weren’t. And now the attorneys for the museum, the AG and Syncora will settle that issue themselves.
UPDATE, April 29, 2014: Here’s what they worked out.
-By WDET’s Sandra Svoboda
@WDETSandra and email@example.com