Economy  
comments_image Comments

Federal Judge Describes, Then Supports Plot to Rob Detroit Pensioners

This is what it looks like when a federal judge declares a city bankrupt—to the surprise of its residents and elected officials.
 
 
Share

Photo Credit: Shutterstock.com/John Hanley

 
 
 
 

On December 3, United States Bankruptcy Judge Stephen A. Rhodes—to the surprise of no one—formally ruled that Detroit is “eligible” for bankruptcy. In other words, creditors will now wrangle over Detroit’s government assets with Rhodes as the referee.

It is important to understand that at no point has Detroit declared or requested bankruptcy. Indeed Detroiters and others in Michigan have resisted as best they could, only to be overpowered at every turn. As Judge Rhodes explains below, bankruptcy has been orchestrated from Lansing (the state capitol) with a lot of help from Wall Street banks and other financial players.

Taking power away from Detroiters began decades ago. As the city's African American population grew, so did the forces trying to deprive it of democracy and assets. A tangled web of bipartisan power grabs steadily shifted revenue and decision making to the suburbs, state government and predatory lenders. Far from helping the city—although onlookers wouldn't know it based on loud, public proclamations to the contrary—the end result crippled Detroit and ushered in its fall.

Starting in 1999 Lansing's state government decided it was in their bailiwick to manage the Detroit Public Schools, a task historically overseen by elected officials. The result? School performance worsened, which resulted in the departure of more residents. Combined, these two factors only sped up the area’s decline.

That colossal failure notwithstanding, from the day he took office in January of 2011, Governor Rick Snyder maneuvered to take even more power and resources away from Michigan’s predominately African American cities. The more he succeeded in doing so, the more difficult life became for residents of those cities.

So far, efforts to put the brakes on this process have failed. Most dramatically, the voters of Michigan repealed Governor Snyder’s emergency manager law (P.A. 4) in a statewide referendum held last November. His lame duck super majority co-conspirators in the Michigan legislature promptly enacted a still worse version. State courts repeatedly found ways to support the Governor’s take-over powers.

Now, a federal judge has also ruled in favor of continuing the very same dynamic.

 If you think about the historic moment unfolding before us with the rationale that Detroit is an unfortunate outlier on the scale of thriving, solvent versus sad, “dysfunctional” U.S. cities—with Detroit falling squarely in the latter category—think again. Every public sector worker’s retirement security in the form of a pension is seriously imperiled. This is only compounded by the fact that Judge Rhodes’s decision greatly expands the leverage of those who want to reduce or eliminate them.

The entire process of taking over the governments of Detroit and other cities is also deeply disturbing if you believe that ordinary people ought to have at least some means to balance the interests of the one percent.

Finally, the point here is not to endorse Judge Rhodes’s version of the opposition to the bankruptcy. Ultimately, his theory of “bad faith” is a straw man characterization designed to help justify his commandeering of the city’s future. It completely ignores decades of white racism and other social and economic factors in favor of a simple conspiracy theory.

That said, it is still a revealing insight into how Rhodes—himself an agent of the one-percent—perceives the behavior of his own allies.

Below is a verbatim excerpt from two sections of Judge Rhodes’s 140-page opinion:

Pp. 127- 130 of the 12/5/13 opinion:

The Objectors’ Theory of Bad Faith

In section 3, below, the Court will review the factors upon which it relies in finding that the City filed this case in good faith. First, however, it is crucial to this process for the Court to give voice to what it understands is the narrative giving rise to the objecting parties’ argument that the City of Detroit did not file this case in good faith. The Court will then, in section 2, explain that there is some support in the record for that narrative.

It must be recognized that the narrative that the Court describes here is a composite of the objecting parties’ positions and presentations on this issue. No single objecting party neatly laid out this precise version with all of the features described here. Moreover, it includes the perceptions of the objecting parties whose objections were filed by attorneys, as well as the many objecting parties who filed their objections without counsel. Naturally, these views on this subject were numerous, diverse, and at times inconsistent.

The Court will use an italics font for its description of this narrative, not to give it emphasis, but as a reminder that these are notthe Court’s findings. As noted, this is only the Court’s perception of a composite narrative that appears to ground the objectors’ various bad faith arguments:

According to this composite narrative of the lead-up to the City of Detroit’sbankruptcy filing on July 18, 2013, the bankruptcy was the intended consequenceof a years-long, strategic plan. The goal of this plan was the impairment of pension rights through a bankruptcy filing by the City.

Its genesis was hatched in a law review article that two Jones Day attorneyswrote. This is significant because Jones Day later became not only the City’sattorneys in the case, but is also the law firm from which the City’s emergencymanager was hired. The article isJeffrey B. Ellman; Daniel J. Merrett, Pensions and Chapter 9: Can Municipalities Use Bankruptcy to Solve Their Pension Woes?,27 EMORY BANKR. DEV. J. 365 (2011). It laid out in detail the legalroadmap for using bankruptcy to impair municipal pensions.

The plan was executed by the top officials of the State of Michigan, including Governor Snyder and others in his administration, assisted by the state’s legaland financial consultants - the Jones Day law firm and the Miller Buckfireinvestment banking firm. The goals of the plan also included lining theprofessionals’ pockets while extending the power of state government at theexpense of the people of Detroit.

Always conscious of the hard-fought and continuing struggle to obtain equalvoting rights in this country and an equal opportunity to partake of the country’sabundance, some who hold to this narrative also suspect a racial element to theplan.

The plan foresaw the rejection of P.A. 4 coming in the November 2102election, and so work began on P.A. 436 beforehand. As a result, it only took 14days to enact it after it was introduced in the legislature’s post-election, lameducksession.

It was also enacted in derogation of the will of the people of Michigan as justexpressed in their rejection of P.A. 4.

The plan also included inserting into P.A. 436 two very minor appropriationsprovisions so that the law would not be subject to the people’s right of referendumand would not risk the same fate as P.A. 4 had just experienced.

The plan also called for P.A. 436 to be drafted so that the Detroit emergencymanager would be in office under the revived P.A. 72 on the effective date of P.A.436. This was done so that he would continue in office under P.A. 436, M.C.L.§ 141.1572, and no consideration could be given to the other options that P.A.436 appeared to offer for resolving municipal financial crises. See M.C.L.§ 141.1549(10) (“An emergency financial manager appointed under former 1988PA 101 or former 1990 PA 72, and serving immediately prior to the effective dateof this act, shall be considered an emergency manager under this act and shallcontinue under this act to fulfill his or her powers and duties.”); see also id.§ 141.1547 (titled, “Local government options . . .”).

The plan also saw the value in enticing a bankruptcy attorney to become theemergency manager, even though he did not have the qualifications required byP.A. 436. M.C.L. § 141.1549(3)(a).

Another important part of the plan was for the state government to starve the City of cash by reducing its revenue sharing, by refusing to pay the City millionsof promised dollars, and by imposing on the City the heavy financial burden ofexpensive professionals.

The plan also included suppressing information about the value of the City’sassets and refusing to investigate the value of its assets - the art at the DetroitInstitute of the Arts; Belle Isle; City Airport; the Detroit Zoo; the Department ofWater and Sewerage; the Detroit Windsor Tunnel; parking operations; Joe LouisArena, and City-owned land.

The narrative continues that this plan also required active concealment andeven deception, despite both the great public importance of resolving the City’sproblems and the democratic mandate of transparency and honesty ingovernment. The purposes of this concealment and deception were to providepolitical cover for the governor and his administration when the City wouldultimately file for bankruptcy and to advance their further political aspirations.Another purpose was to deny creditors, especially those whose retirement benefitswould be at risk from such a filing, from effectively acting to protect thoseinterests.

This concealment and deception were accomplished through a publicrelations campaign that deliberately misstated the ultimate objective of P.A. 436 –the filing of this case. It also downplayed the likelihood of bankruptcy, assertedan unfunded pension liability amount that was based on misleading andincomplete data and analysis, understated the City’s ability to meet that liability,and obscured the vulnerability of pensions in bankruptcy. It also includedimposing an improper requirement to sign a confidentiality and releaseagreement as a condition of accessing the City’s financial information in the“data room.”

As the bankruptcy filing approached, a necessary part of the plan became toengage with the creditors only the minimum necessary so that the City could laterassert in bankruptcy court that it attempted to negotiate in good faith. The plan,however, was not to engage in meaningful pre-petition negotiations with thecreditors because successful negotiations might thwart the plan to filebankruptcy. “Check-a-box” was the phrase that some objecting parties used forthis.

The penultimate moment that represented the successful culmination of theplan was the bankruptcy filing. It was accomplished in secrecy and a day beforethe planned date, in order to thwart the creditors who were, at that very moment,in a state court pursuing their available state law remedies to protect theirconstitutional pension rights. “In the dark of the night” was the phrase used todescribe the actual timing of the filing. The phrase refers to the secrecysurrounding the filing and is also intended to capture in shorthand the assertionthat the petition was filed to avoid an imminent adverse ruling in state court.

Another oft-repeated phrase that was important to the objectors’ theory of theCity’s bad faith was “foregone conclusion.” This was used in the assertion thatDetroit’s bankruptcy case was a “foregone conclusion,” as early as January2013, perhaps even earlier.

Finally, post-petition, the plan also necessitated the assertion of the commoninterest privilege to protect it and its participants from disclosure.[1]

Continuing at Pp. 131- 134 of the opinion:

The evidence in support of the objectors’ theory is as follows:

  • The testimony of Howard Ryan, the legislative assistant for the Michigan Department of Treasury who shepherded P.A. 436 through the legislative process. He testified that the appropriations provisions in P.A. 436 were inserted to eliminate the possibility of a referendum vote on the law, and everyone knew that. Ryan Dep. Tr. 46:1-23, Oct. 14, 2013. To the same effect is Exhibit 403, a January 31, 2013 email from Mr. Orr to fellow Jones Day attorneys, stating, “By contrast Michigan’s new EM law is a clear end-around the prior initiative that was rejected by the voters in November. . . . The news reports state that opponents of the prior law are already lining up to challenge this law. Nonetheless, I’m going to speak with Baird in a few minutes to see what his thinking is. I’ll let you know how it turns out. Thanks.” Ex. 403.
  • Email exchanges between other attorneys at the Jones Day law firm during the time period leading up Mr. Orr’s appointment as Emergency Manager and the retention of the Jones Day law firm to represent the City. For example, Exhibit 402 contains an email dated January 31, 2013 from Corinne Ball of Jones Day to Mr. Orr, which states:

Food for thought for your conversation with Baird and us - I understand that the Bloomberg Foundation has a keen interest in this area. I was thinking about whether we should talk to Baird about financial support for this project and in particular the EM. Harry Wilson-from the auto task force-told me about the foundation and its interest. I can ask Harry for contact info-this kind of support in ways ‘nationalizes’ the issue and the project. Ex. 402 at 2. Exhibit 402 also contains an email dated January 31, 2013, from Dan T. Moss at Jones Day to Mr. Orr, which states: Making this a national issue is not a bad idea. It provides political cover for the state politicians. Indeed, this gives them an even greater incentive to do this right because, if it succeeds, there will be more than enough patronage to allow either Bing or Snyder to look for higher callings whether Cabinet, Senate, or corporate. Further, this would give you cover and options on the back end. Ex. 402 at 2.

  • Exhibit 403, containing an email dated February 20, 2013, from Richard Baird, a consultant to the governor to Mr. Orr, stating: “Told [Mayor Bing] there were certain things I would not think we could agree to without your review, assessment and determination (such as keeping the executive team in its entirety). Will broker a meeting via note between you and the Mayor’s personal assistant who is not FOIA ble.” Ex. 403 (emphasis added). The Court finds that “FOIA” is a reference to the Freedom of Information Act. Generally, FOIA provides citizens with access to documents controlled by state or local governments. SeeM.C.L. § 15.231.
  • The Jones Day Pitch Book. As part of its “Pitch Presentation,” the Jones Day law firm presented, in part, the following playbook for the City’s road to chapter 9: (i) the difficulty of achieving an out of court settlement and steps to bolster the City’s ability to qualify for chapter 9 by establishing a good faith record of negotiations, Ex. 833 at 13; 16-18; 22-23; 28; (ii) the EM could be used as “political cover” for difficult decisions such as an ultimate chapter 9 filing, Ex. 833 at 16; (iii) warning that pre-chapter 9 asset monetization could implicate the chapter 9 eligibility requirement regarding insolvency, thus effectively advising the City against raising money in order to will itself into insolvency, Ex. 833 at 17; and (iv) describing protections under state law for retiree benefits and accrued pension obligations and how chapter 9 could be used as means to further cut back or compromise accrued pension obligations otherwise protected by the Michigan Constitution, Ex. 833 at 39; 41.
  • The State’s selection of a distinguished bankruptcy lawyer to be the emergency manager for Detroit. Orr Dep. Tr. 18:12-21:20, Sept. 16, 2013 (discussing how Mr. Orr came with the Law Firm in late January to pitch for the City’s restructuring work before a “restructuring team [of] advisors”); Baird Dep.Tr. 13:11-15:10, Oct. 10, 2013. During that pitch, Mr. Orr (among other lawyers that would be working on the proposed engagement) was presented primarily as a “bankruptcy and restructuring attorney.” Orr Dep. Tr. 21:3-6, Sept. 16, 2013; see also Bing Dep.Tr. 12:7-13:7, Oct. 14, 2013 (indicating that Baird explained to Mayor Bing that Baird was “impressed with him [Mr. Orr], that he had been part of the bankruptcy team representing Chrysler” and that Mr. Orr primarily had restructuring experience in the context of bankruptcy).
  • Jones Day provided 1,000 hours of service without charge to the City or the State to position itself for this retention. Ex. 860 at 1 (Email dated January 28, 2013, from Corinne Ball to Jeffrey Ellman, both of Jones Day, stating: “Just heard from Buckfire. . . . Strong advice not to mention 1000 hours except to say we don’t have major learning curve”). See alsoEligibility Trial Tr. 103:23-109:17, November 5, 2013; (Dkt. #1584) Ex. 844. Exhibit 844 provides a list of memos that attorneys at Jones Day prepared prior to June 2012, “in connection with the Detroit matter.” Heather Lennox of Jones Day requested copies of these memos for a June 6, 2012, meeting with Ken Buckfire, of Miller Buckfire, and Governor Snyder. Some of the memos include:

(1) “Summary and Comparison of Public Act 4 and Chapter 9”

(2) “Memoranda on Constitutional Protections for Pension and OPEB Liabilities”

(3) “The ability of a city or state to force the decertification of a public union”

(4) “The sources of, and the ability of the State to withdraw, the City’s municipal budgetary authority.”

(5) “Analysis of filing requirements of section 109(c)(5) of the Bankruptcy Code (“Negotiation is Impracticable” and “Negotiated in Good Faith”)

  • Exhibit 846, an email dated March 2, 2012, from Jeffrey Ellman to Corinne Ball, both of Jones Day, with two other Jones Day attorneys copied. The subject line is,

“Consent Agreement,” and the body of the email states: We spoke to a person from Andy’s office and a lawyer to get their thoughts on some of the issues. I though MB was also going to try to follow up with Andy directly about the process for getting this to the Governor, but I am not sure if that happened. ...The cleanest way to do all of this probably is new legislation that establishes the board and its powers, AND includes an appropriation for a state institution. If an appropriation is attached to (included in) the statute to fund a state institution (which is broadly defined), then the statute is not subject to repeal by the referendum process. Tom is revisiting the document and should have a new version shortly, with the idea of getting this to at least M[iller]B[uckfire]/Huron [Consulting] by lunchtime.

  • Exhibits 201 & 202, showing that Jones Day and Miller Buckfire consulted with state officials on the drafting of the failed consent agreement with the City. They continued to work on a “proposed new statute to replace Public Act 4” thereafter. Ex. 847, Ex. 851. See alsoEx. 846.
  • The testimony of Donald Taylor, President of the Retired Detroit Police and Fire Fighters Association. He testified about a meeting that he had with Mr. Orr on April 18, 2013: “I asked him if he was - - about the pensions of retirees. He said that he was fully aware that the pensions were protected by the state Constitution, and he had no intention of trying to modify or set aside . . . or change the state Constitution.” Eligibility Trial Tr. 140:9-13, November 4, 2013. (Dkt. #1605)
  • At the June 10, 2013 community meeting, Mr. Orr was asked a direct question – what is going to happen to the City employee’s pensions? Mr. Orr responded that pension rights are “sacrosanct” under the state constitution and state case law, misleadingly not stating that upon the City’s bankruptcy filing, his position would be quite the opposite. In response to another question about whether Mr. Orr had a “ball park estimation” of the City’s chances of avoiding bankruptcy, Mr. Orr responded that, as of June 10, there was a “50/50” chance that the City could avoid bankruptcy, knowing that in fact there was no chance of that.
  • State Treasurer Andy Dillon expressed concern that giving up too soon on negotiations made the filing “look[] premeditated” Ex. 626 at 2.
  • The City allotted only thirty four days to negotiate with creditors after the June 14 Proposal to Creditors. Ex. 43 at 113.

______________________________________

[1] Judge Rhodes subsequently states: “The Court finds … that in some particulars, the record does support the objectors’ view of the reality that led to this bankruptcy filing.” (P. 131) “The Court must acknowledge some substantial truth in the factual basis for the objectors’ claim that this case was not filed in good faith.” (P. 135)

 

Frank Joyce is a lifelong Detroit labor and political activist and writer.