Judge Forces Detroit Bankruptcy Foe To Name Its price: 75 Percent Of What’s Owed
By Nathan Bomey, Matt Helms and Tresa Baldas, Detroit Free Press
DETROIT — Detroit’s most vociferous bankruptcy opponent said Wednesday the city cannot legally justify treating pensioners better than financial creditors and said it wants to be paid 75 percent of what it’s owed.
In a dynamic exchange, Bankruptcy Judge Steven Rhodes demanded that Marc Kieselstein, an attorney for bond insurer Syncora, reveal the payout the financial creditor is seeking.
“Something that’s within shouting distance” of Detroit pensioners, Kieselstein responded.
“I want a percentage and I want it now,” Rhodes retorted.
After complaining that he would have to violate the judge’s mediation order protecting the confidentiality of closed-door talks, Kieselstein caved and said Syncora wants 75 cents on the dollar. Attorneys for Syncora have said the city owes the insurer about $400 million.
If that’s what the insurer truly wants, the two sides are far apart. The city’s official plan is to play zero to ten cents on the dollar, depending on whether Syncora-insured debt holds up as legal in court.
In a full-blown assault on Detroit’s bankruptcy plan, Kieselstein got biblical Wednesday, claiming the city wants the court to blindly accept certain arguments “by faith alone, no explanation is necessary.”
Kieselstein’s remarks came on day two of Detroit’s history bankruptcy trial, which will determine the fate of the city’s sweeping restructuring plan to slash more than $7 billion in liabilities and invest $1.4 billion over ten years in services.
Detroit emergency manager Kevyn Orr and investment banker Ken Buckfire relied on faulty logic and improper legal standards to design a plan of adjustment that favors pensioners, Kieselstein argued before Rhodes.
“We are not in a house of worship,” Kieselstein said. “There is no gospel according to Mr. Buckfire or Mr. Orr.”
The dispute between Syncora, fellow bond insurer Financial Guaranty Insurance Co. and the city is one of the last fights preventing an amicable resolution to the largest municipal bankruptcy in U.S. history.
Syncora and FGIC are fighting Detroit’s bankruptcy plan because they face massive losses after insuring a $1.4 billion debt deal brokered by Mayor Kwame Kilpatrick’s administration in 2005 to fund pension payments.
The city wants to wipe out that debt, deliver smaller cuts to pensions and green-light a $1.4 billion, ten-year reinvestment plan in services, including police, fire and blight removal.
Kieselstein said the plan unfairly gives preferential treatment to retirees over other creditors.
“This plan has epic levels of discrimination,” said Kieselstein, who repeatedly argued that the city has no business justification for, as he sees it, giving retirees a better deal than others. He also argued: “It didn’t have to be this way.”
Pensioners this summer voted in favor of Orr’s plan, which calls for general retirees to take a 4.5 percent pension cut and lose annual inflation adjustments. Retired police officers and firefighters would lose only a portion of their annual cost-of-living raise.
Kieselstein argues the grand bargain is flawed and discriminatory: Pensioners get something; other creditors get nothing.
“This is where the line is crossed, in my view,” Kieselstein argued.
Kieselstein also challenged Orr’s claim that the impact of Detroit’s bankruptcy on pensioners involves a “human dimension” — meaning the pensioners are people who did nothing wrong to deserve hardship.
Kieselstein said that theory is legally impermissible under bankruptcy law.
“Bankruptcy is sadly the land of broken promises,” he said.
Jones Day attorney Bruce Bennett defended the city’s plan as fair and said it’s imperative for the city to invest in basic services after exiting bankruptcy.
“The evidence will show that Detroit has a better future after Chapter 9,” Bennett said. “Detroit has earned this court’s help.”
Critically, Bennett said that the city’s elected officials support the plan of adjustment, despite some quibbling about the details of the reinvestment plan.
That’s crucial because Rhodes — who has the power to approve or reject the plan of adjustment following the trial — has emphasized that the city’s politicians must be committed to the plan after Orr is gone.
Mayor Mike Duggan and City Council President Brenda Jones will testify during the trial that they understand the plan of adjustment and will implement it.
But Bennett acknowledged that some changes will be necessary to accommodate for unforeseen events.
“In the future things will happen that we have not planned for,” he said, and the city “will have to adjust.”
As for Syncora’s claims that retirees are getting preferential treatment, one lawyer scoffed at that idea.
Attorney Sam Alberts, who represents the U.S. government-appointed Official Committee of Retirees, said in court Wednesday that post-bankruptcy effects will be “life-changing” for retirees and that they will face “drastic” cuts in health care benefits.
Kieselstein said the plan “unfairly discriminates, fails the best interests tests and is not fair and equitable.
He added: “This isn’t Back to the Future. Mr. Orr is not Marty McFly. He cannot pilot the DeLorean back in time,” he said in reference to the 1980s film Back to the Future.
Bennett argued that the plan of adjustment will place the city on a path to an economic recovery by restoring services and drastically reducing the city’s crushing debt load.
Bennett said the Chapter 9 restructuring would prove that Gov. Rick Snyder was correct to authorize the largest municipal bankruptcy in U.S. history.
It should “not be viewed as the lowest point in city’s history but the beginning of the city’s recovery,” Bennett said Wednesday.
AFP Photo/Bill Pugliano