U.S. Bankruptcy Judge Steven Rhodes to rule Fri. April 11 on total $385 million “swaps” proposal
“Settlement Agreement” bars cancellation of $1.45 BILLION in outstanding, illegal city COPS debt to UBS AG, BOA
Banks would approve EM Orr’s Plan of Adjustment, including huge cuts to workers and retirees pensions, annuities, health care
Orr speeds to final judgment Oct. 15 while Sixth Circuit and U.S. District Courts dally on appeals
By Diane Bukowski
April 9, 2014
DETROIT – U.S. Bankruptcy Court Judge Steven Rhodes is to rule April 11 on a “Settlement Agreement” between the City of Detroit (EM Kevyn Orr as imposed by the state) and UBS AG and Bank of America (Merrill Lynch). The city proposes to pay $85 million to the banks to write off interest “swap” agreements related to a $1.5 billion “Pension Obligation Certificate” (POC) loan from the two banks.
The amount is down from $230 million and $165 million in earlier agreements rejected by Judge Rhodes, the last on Jan. 16. It is being touted as a bargain for the city by the major media, which cites the alleged swaps debt as $288 million.
But Attorney Jerome Goldberg told Judge Rhodes during a hearing April 3, “It was very clearly the court’s holding on Jan. 16 that the city is reasonably likely to succeed in invalidating the swap agreements [in litigation], and would have the potential to recover the $300 million already paid to the swap counterparties. What the banks are receiving is actually $385 million including what they have already taken. That’s more like a 67 percent payout on a total of $588 million, not 30 percent as EM Orr testified.”
Noting proposed retiree cuts including pensions, annuities, COLA and health care amount to 50-60 percent, he said, “The City has the potential to recover money from the banks, not pay them. Equity plays a role in this courtroom, and when you combine the legal claim with equities I don’t see any way that this court can OK this settlement any more than others. Since this settlement, the SEC launched a lawsuit in February Feb. against UBS and BOA for LIBOR fraud. A leader of BOA’s municipal securities division was jailed in February. This is symptomatic of the problem with the swaps and part of the overall crisis brought on by banks through their fraudulent practices.”
The agreement also essentially bars further claims on the two banks to cancel the $1.45 BILLION still outstanding in POC principal and interest. In a Jan. 31 filing, Orr asked Rhodes to cancel that debt, saying it was “void ab initio, illegal and unenforceable” because it constituted an end run around the city’s debt limits under state law among other factors.
“UBS and Merrill Lynch (BOA) did the swaps, and were the managers of the COPS deal, all stuck together,” Prof. Wallace Turbeville explained during a forum at Wayne State University April 8. “They told the city they have a right to grab 20 percent of city revenues and keep them until all of the termination rate gets paid. The city agreed quickly to settle, three days before filing bankruptcy, for 80 cents on the dollar. The bankruptcy judge said no, that’s too high. The EM burst out of the courtroom and renegotiated. The good thing was he had to work during Christmas, but the court said the new amount was still too high. In this third time, the payment of $85 million includes a release for UBS and Merrill Lynch from any liability associated with the [overall] COPS deals.”
Turbeville authored the Nov. 13 Demos report on Detroit’s bankruptcy, which denied the city should be in bankruptcy at all and challenged the legality of the COPS deals.
For the first time in this third agreement, UBS AG and BOA pledge to approve Orr’s “Plan of Adjustment” (POA), including cuts to workers and retirees, likely water privatization with increased rates, and other measures that will hurt city residents. Objectors say judicial approval of the settlement agreement would make it immune from challenge during the POA trial.
The parties make it expressly clear that a chief purpose of the settlement is to facilitate a “cramdown” by Judge Rhodes of the POA if the majority of creditors do not approve it.
“ . . .the Swap Counterparties have similarly agreed to support and vote in favor of a plan that is consistent with the compromise, which will facilitate the City’s ability to confirm a plan of adjustment, including, if necessary, a cramdown plan of adjustment over the objection of a dissenting class or classes,” says Section 51 of the 79-page agreement. (See link below for entire agreement.)
During his appearance in bankruptcy court March 3, Orr said the city’s attorneys from Jones Day and Pepper Hamilton had drafted a lawsuit in the event that UBS AG and BOA did not agree to drop their payment demands below $100 million.
“There was a complaint, a motion for an injunction, a brief that accompanied the injunction, a new city ordinance, an EM order to effectuate, orders revoking letters of instruction to casinos, and my affidavit,” Orr testified on direct exam. “There were 17 counts in the complaint, including void ab initio, unjust enrichment, superior knowledge, fraud [et al.]”
Orr alleged litigation would be too time-consuming and costly, despite the fact that most of the documents were already drawn up.
Orr said the $85 million agreement in lieu of $288 million claimed by the banks was in line with cuts of 70 to 80 percent proposed for other city creditors, in particular the pension funds.
“The parties agree to use their best efforts not to attempt to sue, to make sure casino revenue is not trapped,” he said. In other words, the swaps are still out there and casino revenue is still at stake, despite state law which bars its use for anything other than “Quality of Life” city services, as Judge Rhodes noted in his Jan. 16 ruling.
Meanwhile, as Orr, Jones Day, and the rest of their highly paid consultants rush to judgment day, matters on pending lawsuits challenging Rhodes’ bankruptcy eligibility ruling and the constitutionality of Public Act 436, the “Emergency Manager Act,” are proceeding at more of a snail’s pace.
The Sixth Circuit Court of Appeals agreed to bypass U.S. District Court and hear eligibility appeals from seven creditor groups representing city retiree and union members on Feb. 21, 2014, but not on an expedited basis as requested by the appellants.
At the same time, the Sixth Circuit sent a letter to the appellants indicating it would be in touch with U.S. District Court Chief Judge Gerald Rosen, a right-wing Federalist Society member, who is acting as mediator in the bankruptcy case, to assess the progress of mediation without disclosing specifics.
The appellants on March 7 asked that their filings be forwarded directly to the panel members in the case. A Sixth Circuit Court Clerk told VOD that the court does not disclose the identity of panel members until actual hearings are scheduled.
The panel selection is key because the Sixth Circuit’s Chief Judge Alice Batchelder, an appointee of President Reagan’s, designated Judge Rhodes to hear the Detroit bankruptcy case in accordance with protocol.
As VOD revealed in earlier stories, Judge Rhodes chaired a forum on Chapter 9 and Emergency Managers Oct. 10, 2012. Five of the six speakers advocated both. One was a co-author of PA 436’s predecessor PA 4, two trained emergency managers, and another, Charles Moore of Conway McKenzie, has been a chief witness for Orr/Jones Day in the bankruptcy trial.
In U.S. District Court, a lawsuit originally filed by Catherine Phillips of Michigan AFSCME Council 25 et. al. against Gov. Rick Snyder and other state officials which challenges the constitutionality of PA 436 is finally being heard before U.S. District Court Judge George Caram Steeh, a Clinton appointee. In order to get Judge Rhodes to lift the stay protecting state officials from lawsuits, the City of Detroit was removed as a plaintiff and the lawsuit now covers only cities in the rest of the state.
Detroit is the only major city facing bankruptcy that is not under elected rule. Under Chapter 9 provisions, creditors cannot demand liquidation of a municipality’s assets “unless the debtor agrees.” The unelected Orr has already said he plans to privatize Detroit’s Water and Sewerage Department if a regional authority is not established. Negotiations on that matter are ongoing as part of the bankruptcy proceedings, frequently held at the New York City offices of Jones Day instead of in Detroit where water workers and rate payers cannot be present.
A hearing before Steeh on the state’s motion to dismiss the PA 436 case is scheduled for April 30, 2014.
On a positive note, the Sixth Circuit Court of Appeals upheld an injunction preventing health care cuts to City of Flint retirees on Jan. 3. The Court earlier made a similar ruling regarding City of Pontiac retirees.