Should Judge Rhodes recuse himself? He chaired pro-Ch9 forum with trial witness Charles Moore, PA 4/EM advocates in Oct. 2012
Judge has ignored motions to lift stay on higher-level U.S. District Court lawsuits re: constitutionality of PA 436/EM before eligibility trial
He has not yet ruled on Orr’s $349 million Barclay’s “debtor-in-possession” loan which Detroit City Council has twice nixed
By Diane Bukowski
October 27, 2013
DETROIT – At least one thousand city retirees and their supporters, including leaders of virtually the entire union movement, and many from community and faith-based organizations, took the streets in front of the federal courthouse in downtown Detroit for hours on Oct. 23.
At the start of the march, the crowd was big enough to circle the building without a break.
Inside, U.S. Bankruptcy Judge Steven Rhodes kicked off the eligibility trial in Detroit’s Chapter 9 Bankruptcy case, the largest in the nation’s history. The filing is also only one in the country initiated by an unelected official, Detroit Emergency Manager (EM) Kevyn Orr, under state Public Act 436.
Early on, Judge Rhodes ruled definitively that he recognizes Orr as the official representative of the city of Detroit, and in an unprecedented move extended bankruptcy protection to state officials including Mich. Governor Rick Snyder, who is to take the stand Mon. Oct. 28.
Rhodes’ impartiality is seriously open to question. More than a year ago, he chaired a forum on Chapter 9 bankruptcy and EM’s which featured Charles Moore of Detroit consultant Conway McKenzie, a chief witness in the trial. Also on the panel were a drafter of PA 4, PA 436’s predecessor EM law, and EM trainers. The possibility of a Detroit Chapter 9 bankruptcy was discussed at the forum long before Kevyn Orr was a gleam in the eyes of the banks and Michigan Gov. Rick Snyder.
The presence of protesters in unprecedented numbers showed that many are increasingly distrustful of Rhodes’ ultimate ruling in the case and sense that broad mass action is necessary to stave off the destruction of Detroit.
“We’re coming off of the wall”
“They think they’ve got our backs to the wall,” said Ed McNeil, a member of the Official Retirees Committee as well as top executive assistant to Al Garrett, president of AFSCME Council 25. “But we’re going to come off that wall. We’re going to fight in whatever way we have to.”
He noted that Detroit financial czar Mike Illitch is planning to build an $881 million hockey stadium and upscale housing/retail complex in midtown Detroit, athough Illitch’s Red Wings owe the city $70 million in taxes. DTE, which is set to run the newly-formed Public Lighting Authority, shutting down Detroit’s Public Lighting Department, owes another $170 million, McNeil said.
“These same banks demanding their money are the ones who drove 200,000 Detroiters out of their homes through predatory mortgages and illegal foreclosures,” Attorney Jerome Goldberg, a member of the Detroit Debt Moratorium Coalition, said. “Chase Bank is paying $13 billion to settle a Justice Department lawsuit related to these practices and still may face criminal charges. Orr serves the banks at the expense of the workers with predatory lending not only to homeowners but to the city itself.”
Keith Johnson, president of the Detroit Federation of Teachers, referenced Orr’s answer on a 60 minutes show to the moderator’s question, “What do you say to the workers who will lose their small pensions?” Orr said only, “Sorry.”
“We don’t need your apology,” Johnson said. “We are all here today, the UAW, AFSCME, the American Federation of Teachers, all of us—we are ONE.”
Should Rhodes recuse himself?
Rhodes is pressing ahead at breakneck speed with the eligibility trial, despite broad outstanding issues objectors have asked to be addressed prior to the trial, related to District Court level constitutional matters. News reports have indicated Rhodes expects the trial to last five days, despite a 132-page order he issued Oct. 24 listing a multitude of issues to be debated.
(Click on http://www.mieb.uscourts.gov/apps/detroit/SelectedOrder.cfm and hit “Orders,” then hit “Amended Final Pre-Trial Order #1354.”)
On Oct. 10, 2012, Rhodes chaired a Federal Bar Association (FBA) of Eastern Michigan Bankruptcy Committee forum, called “Between a Rock and a Hard Place–Municipal Entities in Distress.” In its notice of the forum, the FBA said it was “a panel discussion on emergency managers and Chapter 9 bankruptcy.”
Rhodes declined comment on his stance during the Southfield-based forum, which involved a broad discussion after the panel presentations. Rhodes was hardly an expert on Chapter 9 bankruptcy at the time, having handled only one other much smaller Chapter 9 case. That was the 1994 case of “Addison Community Hospital Authority.” In it, Rhodes barred the “Concerned Citizens for Addison Community Hospital” from intervening as a group. Addison is located just south of Jackson, Michigan.
The FBA and the U.S. Trustees’ office both said that the forum was not videotaped or transcribed, but the Oakland Legal News gave a brief description. A broader article in the Flint-Genessee Legal News expanded on the panelists’ comments, which were universally critical of public officials as opposed to business executives, advocating downsizing of city workforces and land.
Neither quoted Rhodes directly.
The company Rhodes kept
“Frederick Headen, Director of the Bureau of Local Government Services in the Michigan Department of Treasury, discussed the various Michigan statutes relating to emergency managers,” said the Oakland Legal News.
“Edward J. Plawecki, Jr., General Counsel/Director of Government Relations at Pierce Monroe & Associates, discussed how the Michigan emergency manager statutes work in practice. Charles M. Moore, Principal at Conway MacKenzie, discussed the practical realities of emergency managers, ways municipalities can avoid emergency managers and otherwise deal with financial distress issues. Judy A. O’Neill, Partner at Foley & Lardner, discussed Chapter 9 bankruptcy issues, including constitutional concerns, contract, and plan confirmation issues. Douglas C. Bernstein, Shareholder at Plunkett Cooney, spoke on Chapter 9 eligibility and filing challenges.”
Conway McKenzie has a one-year $19.3 million consultant contract on the Detroit bankruptcy case, and has already been paid nearly $3 million. The firm’s Charles Moore is one of the chief witnesses Orr plans to call in the Detroit Chapter 9 eligibility hearing.
“Why aren’t municipalities addressing these issues?” Moore asked during the forum, according to the Flint article, referring to what had been termed excess numbers of municipal workers in Detroit.
“If this is what is causing financial distress, why aren’t leaders taking more action, as companies would, to address them? . . . .Many times those elected officials have no experience in business at all. . . . No politician ever gets rewarded for solving tomorrow’s problems today. So you have a situation where you see the trends happening, but there’s no incentive to act, even if the leader knew what to do. They’re not equipped with crisis management skills or expertise.”
O’Neill helped draft Public Act 4; she and Bernstein trained EM’s
According to the Foley & Lardner website, Judy O’Neill “assisted with drafting Public Act 4 [the predecessor to PA 436] . . . and has assisted at two Emergency Manager training sessions.” She “practices in bankruptcy, insolvency, reorganization, commercial transactions, and corporate law, concentrating on issues arising under the bankruptcy code.”
PA 4 was resoundingly defeated in a state referendum at the polls in Nov. 2012, with only four of 83 counties approving it. PA 436 was birthed in the dead of the night during a lame-duck session of the Michigan state legislature, which added an appropriations clause to prevent another referendum.
“What we’ve heard from everybody here today is that every method of implementation is replete with litigation,” O’Neill said at the forum according to the Flint article. “Even Chapter 9, which probably has the strongest hold, has this eligibility fight that consumes resources and time.”
Bernstein, often quoted in the daily media as a bankruptcy expert, also helped train candidates for emergency manager positions along with other Plunkett Cooney Associates, according to their website. Plunkett Cooney itself held a similar forum in April of that year.
According to the Flint paper, Headen said during the forum that he has served on 16 financial review teams, five each under former Michigan Governors John Engler and Jennifer Granholm, and six “so far,” under Snyder.“ He took a highly anti-union, anti-worker stance in his remarks.
Headen denounces number of Detroit unions, workers
“Back in January our review team was in Detroit,” the paper quoted Headen. “The city at that time had between nine and ten thousand employees. It also had 48 bargaining units, one of which I believe had only one member. The state of Michigan, by contrast, has about 50,000 employees with less than half a dozen bargaining units. In Detroit, 65 people are doing payroll while we have 15 people doing payroll for the entire state of Michigan.”
Plawecki appeared to be the only participant taking a somewhat measured view.
“I hear all the time that we [Detroit] have too many police officers,” Plawecki said according to the Flint article.
“Well, if you look at a study that says for 700,000 people you should have 5000 officers, statistically that’s too many. However, you can’t look at it that way. A geographical analysis would show that just two precincts in Detroit — the 7th and the 9th — are larger than the entire cities of Cleveland or Paris. So when you’re talking about resources you would have to move firefighters or officers from one side of the city to the other. You’ve got to look at the size of the land when you look at the size of the services.”
One attendee at the forum defended Rhodes’ role.
“I attended the forum,” Attorney Thomas R. Morris said in an email to VOD. “I recall some speculation by the speakers regarding the possibility of a chapter 9 filing by Detroit, but the topics which I recall as being the primary topics of discussion were past appointments of emergency managers or emergency financial managers. Judges are not precluded from participating in educational programs, and in fact are encouraged to do so. I do not see anything improper about Judge Rhodes having participated in the forum. I do not speak on behalf of any client or organization in this regard, but only on my own behalf.”
Rhodes has not ruled on motions to lift stay on PA 436 lawsuits
Rhodes earlier denied eloquent motions filed by the Official Retirees Committee, constituted at Orr’s request, to stay the bankruptcy proceedings until a higher-level U.S. District Court determines matters of constitutionality vis-à-vis the state and the federal government.
The Committee said in its filing, “. . . 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.”
Rhodes has not yet ruled on motions filed by the Michigan NAACP et al and Phillips et al to lift the stay on two lawsuits challenging the constitutionality of PA 436, the Emergency Manager law which put Orr in place. The suits have been pending before U.S. District Court Judge George Caram Steeh since before Orr’s July 18 Chapter 9 filing, and challenge Orr’s capacity to file bankruptcy as an unelected official.
Clearly angry at Rhodes’ stay, Steeh ruled, “Although it is not apparent that any interests of the City of Detroit bankruptcy proceedings are implicated in the case, the plain language of the stay order would apply to this lawsuit. In accordance with the broadly worded Extension Order issued by the bankruptcy court, this court will abide by the stay unless and until such time as an order issues lifting or modifying the stay to permit the captioned matter to proceed.” (Emphasis added in Phillips brief).
According to his Oct. 24 order, Rhodes appears to be planning to decide the constitutional questions himself during the eligibility trial, despite his lower role in federal court. He has said that objectors can still appeal his actions to the District Court.
Meanwhile, however, Orr is moving full speed ahead with the dismantling of Detroit, having ordered a state lease of Belle Isle, a takeover of the Public Lighting Department, and a $349 million “debtor-in-possession” loan from Barclay’s, a chief participant in the global LIBOR interest rate-rigging scandal.
Barclay’s loan awaits Rhodes approval
Orr’s Barclay’s proposal must still be approved by Rhodes. The loan is intended to pay off UBS AG and Bank of America, other LIBOR participants who have been sued by government regulators across the world, on a $250 million swap deal.
The deal is related to the disastrous 2005 $1.5 billion pension obligation certificate loan pressed on Detroit by Wall Street ratings agencies Standard and Poor’s and Fitch, and implemented by former Detroit CFO Sean Werdlow, who promptly took a position with UBS AG’s minority partner in the deal, Siebert, Brandford and Shank.
That deal would cut off any further action by Detroit to recoup the losses it suffered on the debt when the stock market crashed in 2008, or the cancellation of the entire debt if it was negotiated under fraudulent circumstances. Attorney Vanessa Fluker demanded at the City Council hearing on the debt that Orr obey the dictates of PA 436 and investigate any criminal actions which contributed to the city’s financial crisis.
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