Challenges use of city bankruptcy filing to impoverish retirees, residents
Orr-requested Committee questions constitutionality of PA 436, says Ch. 9 would be “unconstitutional” under Orr’s interpretation
Opposes $300 M pay-off to UBS AG and Bank of America
Hearing Thurs. Sept. 19, Federal Courthouse, 231 W. Lafayette
By Diane Bukowski
Sept. 17, 2013
DETROIT – In a stunning development in Detroit’s Chapter 9 bankruptcy case, an appointed “Official Committee of Retirees” is asking to stay an eligibility trial until a higher-level U.S. District Court rules on matters including the constitutionality of Public Act 436, the “Emergency Manager” Act, and the primacy of Michigan’s protection of public retiree benefits.
“. . . if Chapter 9 is as broad as the Emergency Manager [Kevyn Orr] contends, then Chapter 9 is unconstitutional and the City cannot be a debtor in Chapter 9,” the Committee says in one of a series of motions filed during the past week.
The Committee’s motion to the eligibility trial, set for Oct. 23, is to be heard Thurs. Sept. 19 at 3 p.m. before Judge Steven W. Rhodes in courtroom 716 at the federal courthouse located at 231 W. Lafayette. Rhodes has scheduled the bankruptcy eligibility objections of 109 individuals for a hearing earlier that day, at 10 a.m, in Room 224 of the same courthouse. He is asking objectors to be present by 9 a.m.
Rhodes earlier postponed a hearing on “legal” eligibility objections from Sept. 18 to Oct. 15 at the request of many creditors.
In its filings, the Official Retirees Committee portrays a conspiracy between Michigan Gov. Rick Snyder and Orr to violate the state constitutional rights of the city’s retirees and residents, as well as their federal rights under the Tenth Amendment, which balances state and federal obligations to citizens.
It also blasts Orr’s attempt to pay off creditors UBS AG and Bank of America in a “swap termination” deal that would end up costing the city $350 million in bonds, more than it would save. It says that the deal, joined with corporate development plans, would greatly diminish funds available for pensions and other public needs.
Orr boasted during a July 19 press conference that he would have the retirees’ committee appointed, evidently to skirt the role of the retirement systems and unions in the bankruptcy case. Rhodes later granted his motion, and U.S. Trustee Daniel McDermott appointed a nine member committee.
“It is unusual that a debtor would ask for an opposing committee to be appointed,” Orr said at the time.
The Committee, however, appears to have taken its role to heart with a vengeance, belying the assumptions of some (including VOD) that it would be nothing but a puppet formation.
The Committee’s nine members are Edward McNeil, representing AFSCME Retirees’ Sub-Chapter 98, Michael J. Karwoski, a retired city attorney, Shirley Lightsey, president of the Detroit Retired City Employees Association (DRCEA), Donald Taylor, president of the Retired Detroit Police & Fire Fighters Association, Wendy Fields-Jacobs of the UAW, attorney Terri Renshaw, former deputy police chief Gail Wilson Turner, Attorney Gail Wilson, and Robert Shinske, Detroit Firefighters Association treasurer.
Its legal counsel is Brooks, Wilkins, Sharkey & Turco, PLLC, based in Birmingham, Michigan, along with attorneys from Dentons US LLP and Dentons Europe LLP, based in New York City and Washington, D.C.
After obtaining an order from Judge Rhodes extending the Aug. 19 deadline for filing bankruptcy eligibility objections to Sept. 16, the Committee filed its objection Sept. 10, three weeks after its formation Aug. 22. The objection disputes Orr’s insistence in his “Proposal to Creditors” that retirees and residents alike must sacrifice their pensions, health care, and assets. (Click on DB retirees committee objection to eligibility 805 to read Committee’s entire objection. Also click on Mary Diane Bukowski affidavit for eligibility objection 2 to read affidavit and attachments cited in sidebar at left.)
The Committee notes that it is joining with the eligibility objections filed by Michigan AFSCME Council 25 and its Retirees Subchapter 98, the International UAW, various Retiree Associations, and the Detroit Retirement Systems, thwarting what appeared to be an attempt by Orr and the city’s retained counsel, Jones Day, to divide and conquer.
The motion further declares, “In addition, should the Court determine that such authorization [for eligibility] can be found as a matter of state law, notwithstanding the proscriptions of the MICH. CONST. Art IX, § 24 (the “Pension Clause”), then Chapter 9 must be found to be unconstitutional as permitting acts in derogation of Michigan’s sovereignty and the right of the people of Michigan to define and control the acts of their elected and appointed officials.”
Later in that motion, in a section titled, “THE EMERGENCY MANAGER MARCHES DETROIT TOWARDS CHAPTER 9 INTENDING TO IMPAIR PENSIONS,” the committee says, “Prior to his appointment, the Emergency Manager knew that ‘the new [emergency manager] law is a clear run around the prior initiative that was rejected by the voters in November’ in an effort to terminate employee retirement benefits,” quoting a published email from Orr. It first cites WWJ reporter Vickie Thomas’s interview with Orr: http://detroit.cbslocal.com/2013/05/12/kevin-orr-releases-financial-plan-for-city-of-detroit/
It cites numerous other instances in which Orr and Snyder made clear that the primary objective of the bankruptcy filing was to attack public pensions, thereby endangering municipalities across the U.S.
In a section titled, “ACCEPTANCE OF THE CITY’S AUTHORIZATION TO FILE ITS PETITION WOULD RENDER CHAPTER 9 UNCONSTITUTIONAL,” the motion says, “24. MICH. CONST. art. IX, § 24 provides that vested pension rights ‘shall not be diminished or impaired.’ The Emergency Manager contends that he may use Chapter 9 of the Bankruptcy Code, 11 U.S.C. § 901 et seq. to “trump” the Pension Clause, and intends to ask the Bankruptcy Court to approve a plan that would diminish those vested rights. . . .But that application of Chapter 9 would violate the Tenth Amendment to the U.S. Constitution.”
The motion also quotes and concurs with 30th Circuit Court Judge Rosemarie Aquilina’s order barring Gov. Snyder from approving the bankruptcy filing, saying that Snyder had no authority to do so unless he exempted the city’s pension systems from harm under the State Constitution.
It questions Rhodes’ authority to stay all legal actions against Detroit officials as well as Snyder, State Treasurer Andy Dillon, and other state entities. So far, U.S. District Court George Graham Steeh has temporily dismissed lawsuits initiated by AFSCME and the NAACP in his court, pursuant to a state filing citing Rhodes’ action. U.S. District Court Judge Paul Borman has remanded the lawsuit filed by the pension funds challenging Snyder’s authority to approve the bankruptcy filing, which Judge Aquilina granted and then stayed, back to her court.
In its motion opposing a Forbearance Agreement between the City of Detroit, UBS AG, SBS Financial and Merrill Lynch (Bank of America), filed Sept. 16, the Committee says it is joining with virtually every other city creditor. (Click on DB Retirees comm re FA to read entire motion.)
The Forbearance Agreement relates to Orr’s vaunted “haircut” to those banks, pledging to pay 75 cents on the dollar for what is owed on “interest-rate” swaps, at the same time he threatened the retirement systems with payment of 10 cents on the dollar.
The motion says that the swaps are not an obligation of the city, but agreements between third parties. It notes that the city has said it will assume at least $300 million in bonded debt to pay off UBS AG, SBS, and Merrill Lynch (Bank of America).
“ . . .[T]he Committee is concerned that the steps the City must take to actually consummate the Forbearance Agreement will tie up the City’s assets in a manner that leaves the City without any resources to provide the promised retirement compensation (both pension and healthcare benefits) to its retirees. As a practical matter, implementation of the Forbearance Agreement is entirely dependent on the City’s finding debtor-in-possession financing (“DIP Financing”). The City is intending to use DIP Financing (a) to pay the Counterparties a significant percentage of their newly recognized secured claim against the City and, (b) for City redevelopment programs as part of the City’s transition plan. The City will most likely pledge all its free assets, including the casino revenue, to the DIP financers.”
The motion continues, “The Forbearance Agreement and related ‘settlement’ are inequitable or unfair in that they force the City to finance operations with draconian cuts to the retirees’ benefits and pensions while the City borrows to prefer entities that have no legitimate claim as creditors over the retirees who hold a constitutionally protected, higher priority claim.”
One recently announced “redevelopment plan” in Detroit is an $881 million Red Wings Arena and retail and housing development in the Cass Avenue community area. It would be 61 percent publicly funded, including the use of federal Empowerment Zone credits to profit Detroit billionaire Mike Illitch, who owns the Red Wings and the Detroit Tigers. Bloomberg Businessweek blasted that project in a Sept. 5 article titled, “Detroit Billionaires Get Arena Help as Bankrupt City Suffers.”
Former Detroit Mayor Dennis Archer and billionaire Dan Gilbert, owner of the Greektown Casino and a proposed buyer of the failed Wayne County Jail project, recently met with members of President Barack Obama’s staff to discuss “leveraging federal funds” as well. They are planning an entertainment complex in the area surrounding Greektown Casino. Gilbert also owns the Cleveland Cavaliers.