Objectors say not only casino taxes, but city’s swap payments should be released during bankruptcy case
Depositions of EM Kevyn Orr, others ordered
Judge elicits agreement from Robert Davis not to challenge Orr appointment in separate OMA lawsuit
Retirees’ committee includes no one from elected pension boards
By Diane Bukowski
August 26, 2013
(Updated article from Bloomberg News on Judge Steven Rhodes order filed after this story was written, is at http://www.crainsdetroit.com/article/20130827/NEWS01/130829883/detroit-bankruptcy-judge-speeds-up-part-of-eligibility-fight.)
DETROIT – In response to U.S. Bankruptcy Judge Steven Rhodes’ demand that city consultant Milliman, Inc. appear in court Aug. 28 to defend its secrecy requirement on negative pension fund liabilities reports, Detroit Emergency Manager Kevyn Orr said that Milliman has withdrawn that requirement, in a “Motion for a Protective Order” filed Aug. 23.
“There have been releases or information provided by the city about those reports, but they are not actual actuarial statements,” Atty. Robert Gordon, representing the retirement systems, told Judge Rhodes during the last bankruptcy hearing Aug. 21.
The retirement systems have objected that the Milliman reports, which claim the systems are $3.5 billion under-funded, are based on admitted “guesstimates.” A recent report by Morningstar, a major investment research firm, says the systems’ own actuarial reports, which show them to be in good shape, are in line with accepted practice in the industry.
“Since the August 21, 2013 hearing, the City has taken steps to ensure that all interested parties have appropriate, unrestricted access to the materials in the data room,” Orr’s motion says. “Moreover, the City has approached Milliman about the limitations on access to its materials, and Milliman has agreed to amend its contract with the City to eliminate access restrictions. Those having access to the data room will no longer be required to sign a non-disclosure agreement with Milliman.”
The Milliman reports are among 70,000 pages of bankruptcy-related documents in a city “data room,” which have also been subject to a general NDA requirement.
Jones Day attorney Gregory Shumaker told Judge Rhodes that Orr wants to keep secret “cash projections related to the city’s financial future.” He said different scenarios might develop, and that not all the information in the room is relevant to the case.
“Doesn’t the city want every one of its citizens to see what city’s financial future is projected to look like?” Judge Rhodes asked. “Generally speaking speculation and conjecture are not the basis for confidentiality . . . .this is bankruptcy: what’s not relevant?”
Despite backing down from his original position, Orr still wants Judge Rhodes to grant a protective order on the documents.
He is asking Rhodes to rule that “The Debtor may redact personally identifiable information of the City and third parties contained in any and all documents and materials that it provides to interested parties. Personally identifiable information shall include names, physical and electronic addresses, telephone numbers, social security numbers, financial account numbers, and any other information whose disclosure would create an undue risk of identity theft or other unlawful injury.”
He does not explain what “other unlawful injury” might include. The motion also argues, “Although Fed. R. Civ. P. Rule 26(b)(1) and Fed. R. Bankr. P. Rule 7026 generally permit broad discovery of any non-privileged and relevant matter, the Court ‘may, for good cause, issue an order to protect a party or person from annoyance, embarrassment, oppression, or undue burden or expense.'”
For example, Sean Werdlow, who was Detroit’s Chief Financial Officer during negotiations over the $1.5 billion “Pension Obligation Certificate” (POC) loans from UBS AG and SBS Financial in 2005 and 2006, promptly took a top management position with SBS after the deal was solidified.
Names relevant to the POC loan would also include Wall Street ratings agency representatives Stephen Murphy of Standard and Poor’s, and Joe O’Keefe of Fitch Ratings, who lobbied for the loan with the Detroit City Council during its session Jan. 31, 2005, a highly unusual and possibly collusive action.
The motion is to be argued during the next bankruptcy hearing Wed. Aug. 28 at 10 a.m., among other matters.
Rhodes also ordered Orr and two other city witnesses to subject themselves to six hours of depositions by objectors to a “Forbearance Agreement.” That agreement would allow the city to continue paying UBS AG, SBS, Bank of America and Citigroup on costly “swap agreements” connected to the POC loan during the pendency of the bankruptcy, although at a 25 percent discount.
A hearing on the agreement itself is to be held Monday, Sept. 9 at 10 a.m.
Meanwhile, Judge Rhodes is also expected to rule on swap insurer Syncora, Inc.’s objection to release of casino taxes held hostage to ensure payment on the POC loan and related swaps, by Aug. 28.
Orr previously obtained a “Temporary Restraining Order” against Syncora which forced it to release the funds, which amount to about $178 million a year. Extensive arguments were put forward on both sides of the issue Aug. 21.
Two objectors to the Forbearance Agreement, Attorney Jerome Goldberg representing city retiree David Sole, and Attorney Gordon representing the pension systems, argued that not only should the casino taxes be released, but that the city should cease payment on the swaps as well.
Jones Day attorneys repeatedly said Aug. 21 that the city has continued to pay on the swaps despite the bankruptcy stay, arguing that this allows the release of the casino taxes. Orr ceased payment on the POC loan itself on June 14, prior to the bankruptcy filing.
“We feel this whole issue is major,” Goldberg said during the hearing. “Tons of money are involved. It goes to the efficacy of the forbearance agreement, and the fact that less funds will be available for city workers’ pensions because of money going to the banks. We have raised valid arguments on whether the automatic stay does apply [to the swap payments themselves.]”
Gordon expressed concurrence with Goldberg’s arguments.
In the Sole motion against the forbearance agreement, Goldberg addressed the issue of the swaps and the casino taxes. Goldberg agreed with Jones Day attorneys that the casino taxes do not constitute “special revenues” that can be exempted from the bankruptcy stay.
“ . . .pursuant to both Michigan law and City of Detroit ordinances which incorporate the law, casino tax revenues are for general public purposes, and specifically are not to be appropriated for the payment of Interest Rate Swaps,” his objection reads.
The full objection asserts that “ . . . [T]here are numerous issues that must be examined, based on (1) the criminal indictments of several UBS and Bank of America executives who dealt in the banks’ municipal bond departments; (2) issues concerning potential fraud with regard to calculations of interest using the Libor as an index as well as the “ISDA fix” with regard to the setting of termination fees; (3) the huge differential the banks are netting from the City of Detroit relative to the meager interest rate actually being paid on the bonds; and (4) the role the banks played in issuing massive quantities of subprime mortgages to Detroit’s population which created the current financial crisis, that at least rate examination by the Court before it okays a forbearance agreement that removes the POCs and connected Interest Rate Swaps from the bankruptcy proceedings.
“The potential exists that this honorable Court may find the claims by UBS and Bank of America ripe for disallowance or equitable subordination. The potential that this could occur, especially in light of the cost to the City of Detroit of hundreds of millions of dollars in payments to the banks for doing what amounts to nothing, and thus depriving pensioners, city workers and community residents of compensation for the years of labor and years of paying taxes, should weigh heavily in favor of the Court denying the City of Detroit’s Motion for Approval of the Forbearance Agreement and allowing the interest rate swaps to remain part of the bankruptcy.”
In his Proposal for Creditors issued June 14, Orr himself noted obscurely, ‘The City has identified certain issues related to the validity and/or enforceability of the COPS that may warrant further investigation.” He has not done so
In other matters before Judge Rhodes Aug. 21, Attorney Andrew Paterson agreed, in response to Rhodes’ repeated insistence, that his client Robert Davis will not challenge Orr’s right to hold office as Emergency Manager. In exchange, the city was to withdraw its contention that Davis’ Open Meetings Act lawsuit against Gov. Rick Snyder, State Treasurer Andy Dillon, and the Emergency Financial Loan Board, violated Rhodes’ extended stay. That OMA lawsuit contended that the defendants operated secretly in appointing Orr.
At the conclusion of the hearing, Judge Rhodes held a session closed to the public and the media, and not recorded, with the parties directly related to the casino tax issue.
Meanwhile, U.S. Trustee Daniel M. McDermott appointed a so-called “Retirees Committee” over objections that it was premature under Chapter 9 law, because no bankruptcy eligibility determination has yet been made. A hearing on that is not set until Oct. 23. McDermott’s office never responded to an email inquiry from VOD about the legitimacy of the committee.
Members of the Committee are:
- Edward McNeil, representing members of the Detroit, Michigan Retiree Sub-Chapter 98 of AFSCME
- Michael J. Karwoski, a retired city attorney who asked for broad notice to all retirees of bankruptcy proceedings during an earlier hearing
- Shirley Lightsey of Southfield, president of the Detroit Retired City Employees Association (DRCEA)
- Donald Taylor, a retired police officer and president of the Retired Detroit Police & Fire Fighters Association
- Wendy Fields-Jacobs of the UAW.
- Lawyer Terri Renshaw of Onsted.
- Gail Wilson Turner, a former deputy police chief.
- Gail Wilson, an attorney previously with Southfield Public Schools and the Legal Aid and Defender Association.
- Robert Shinske, of Dearborn, treasurer for the Detroit Fire Fighters Association.
No one is on the committee representing the boards of the Detroit General Retirement System and/or the Detroit Police and Fire Retirement System, whose 23,500 members elect the majority of their trustees. Instead of using those systems to contact retirees, as Karwoski suggested, Rhodes contracted “claims and noticing” functions to a California firm, Kurtzman Carlson.
No general notice went out to all retirees that they could apply for the committee. Notices are posted on the bankruptcy court and city websites, but all retirees do not have access to a computer or even general awareness of what it happening. Kurtzman Carlson did send out a “Notice of Commencement of Case Under Chapter 9,” to retirees’ home addresses, indicating that it has obtained those addresses independently of the pension systems, without retirees’ consent.
McDermott’s notice of the committee formation gave the committee “fiduciary” responsibilities, although the Retirement Systems hold all retiree-related assets.
The Detroit Free Press reported, “Committee members have a fiduciary duty to negotiate with Detroit emergency manager Kevyn Orr’s team about any future changes to retiree pensions, health care and benefits included in the restructuring plan Orr says he will propose by the end of the year. The committee would make recommendations for the retirees, who would have the final vote on any plan that changes their benefits.”
The Free Press reported inaccurately that the DRCEA and the RDPFFA represent all 23,500 city retirees. In fact, DRCEA Pres. Shirley Lightsey said in a letter to EM Orr that their membership is 6500. RDFFFA Pres. Don Taylor told the Freep itself in a videotaped interview (see below) that his organization also has 6500 members.
The Freep quoted the associations’ attorney saying thay they want a “third opinion” on the funding levels of the pension systems, other that of Gabriel, Roeder and Smith, the official actuaries for the retirement systems and city consultant Milliman, Inc.
No details have been provided on how a vote by 23,500 geographically scattered retirees will take place, and how information about any negotiations will be disseminated to retirees. The only parties with full lists of retirees’ names and addresses are the retirement systems themselves and the City of Detroit. Since the city is the debtor in the case, and retirees are creditors, it would be inappropriate for the city to mail any voting notices.
Numerous objections to Detroit’s eligibility for bankruptcy have been filed, citing protections in the Michigan State Constitution for public pensions. The legitimacy of any “vote” contrary to those protections will likely be hotly disputed by the retirement systems.