Local 4 Business Editor Rod Meloni was in court Wednesday as a trial continued over whether Detroit can borrow $350 million with Barclays of London.
Another long line at the security kiosk this morning so arrived a bit late. In my absence Judge Rhodes was pointed in his questioning of a Jones Day attorney regarding who the members of the state Emergency Loan Board are and why that entity, which has final say in disputes between the city and the state regarding procedural issues in Detroit’s Chapter 9 municipal bankruptcy, has not signed off on the “swaps” forbearance agreement between the city and Barclay’s of London. This deal, which would pay $255 million dollars to Barclays, would unravel the devastating “swaps” deal Kwame Kilpatrick [now in federal prison] struck with UBS and Bank of America in 2005-6 that propped up the city’s floundering pension funds.
Download: Detroit Bankruptcy filing December 2013
The “forbearance” agreement struck in negotiations by investment banker Ken Buckfire would pay the banks 75 cents on the dollar for their forgiving the debt, thus freeing up casino revenues for the city to use in its restructuring. Kevyn Orr’s desire is to take $120 Million a year for ten years to restructure and rebuild the City of Detroit when it emerges from Chapter 9. Judge Rhodes was curious why the ELB did not sign off on the Barclay’s deal and wants to know why the ELB has not been attentive to this issue. The city’s attorney said there was no disrespect to the bench but the Judge was adamant saying it is a waste of the court’s time and costing thousands of dollars in hourly attorney billing to conduct a two day trial without the ELB’s approval of the Barclay’s deal. The Jones Day attorney told the judge the FAB would have no problem approving the deal and would take it up by Friday Morning. The State Emergency Loan Board is made up of three Governor Rick Snyder appointees; the state treasurer Kevin Clinton [newly appointed as of November first] the state budget director John E. Nixon and Department of Licensing and Regulatory Affairs Director Steve Arwood. Arwood is currently the acting director of LARA.
On the stand all morning has been Mr. James Doak, an investment banker who works for Miller Buckfire and is now representing the City of Detroit as a member of the negotiating team that struck the Barclay’s deal. Doak testified it was his responsibility to explain and lobby Detroit City Council on the details of the deal and look for its support even though that support was not necessary and was not brought to a vote at council table. He was asked how the deal came together and in great detail he discussed the myriad companies that responded to the city’s request for proposal to make this so-called “debtor-in-possession” style financing deal. He said of all the companies and offers that came in that would underwrite this forbearance agreement only Barclay’s was closest to what the city was looking for in a borrowing partner. He testified “Barclay’s negotiated terms were ones we [the city] could perform on time.” In particular he said the collateral provisions [the assets the city would commit if the deal failed] “worked with the indicative term sheet provided” by the city and Doak said Barclay’s limited collateral interest on gaming and tax revenues.” The Barclay’s terms were better than other proposals because other companies wanted more collateral. Barclay’s has limited rights to utilize $4 million in gaming revenues and $4 million a year and no more expansive rights to tax revenue in the city’s general fund. Doak said Barclay’s provided “the best available financing to the city based on the current circumstances… that it was properly vetted and there is no unsecured financing available to the City of Detroit” that might have come to the table. The Jones Day attorneys turned Doak over to objector attorneys who have spent the past hour working on whether he was totally up front with Detroit City Council regarding the borrowing costs for the deal. They are also pushing him on whether his assessment of the Barclay’s deal was in fact the best option.
Kevyn D. Orr took the stand is now testifying about his involvement in the forbearance agreement. Part of the reason for the forbearance agreement was "The city was flowing cash flow negatively that were severe enough that it might not be able to pay its bills. The City had been In default on a number of issues [in the swaps agreement]... The city was at risk at any given time of being in default and losing access to casino revenues. Casino revenue is the city’s single most important and secure revenue source and could not continue without it.
Negotiations were going on the business side before I got involved. Personally I went in to negotiate the best possible discount rate we could get."
The trial took a strange twist at this point. Synacora's attorney complained the city claimed attorney client privilege regarding its assessment of the legal arguments it intended to use should the city end up in a lawsuit with UBS and Bank of America over the "swaps" and "cops" pension fund loan agreement. The city, through Jones Day continued to say it wanted to continue to assert privilege when Judge Rhodes interjected "I don't get it… when it comes to claiming privilege, Just because you have it doesn’t mean you have to claim it… How can I decide whether this was a fair settlement without understanding what the city’s assessment of the claims against the cops and swaps?" "Why has the city asserted the privilege?"
Attorney: “This is a well-known effort to protect the city with regard to the communication between the clients and its lawyers. [Detroit and Jones Day attorneys] It is about the free exchange of ideas and is important to the system.
There are firms on the objector side that would love to have the Jones Day information so it could bolster their negotiating positions in this case.”
It was at that time another Jones Day attorney rose and said: "We may still sue the banks."
This was a particularly perplexing and alarming revelation to Judge Rhodes:
Judge: "Assume the court denies approval of this forbearance agreement and it winds up in litigation… it is all going to come out."
A: "Your honor we’re suggesting to split the baby here."
Judge Rhodes interrupted - not satisfied with the answer: "Let’s take a pause here. It’s a little early and we’re going to take lunch now and I would like you to think about how to resolve this issue over lunch."
Let's reconvene at 1:15 you think about what position to take that is in the best interest of the city.
So the court is now in recess.
Mr. Gregory Shoemaker: Over lunch I have to confess that I was thinking about what your honor had told us in pretrial conference the proponent of a settlement being in an awkward position. I kind of find ourselves in the awkward
You did not want to know what Jones Day and Kevyn Orr and what he considered during negotiations. I stand here awkwardly after a busy lunch. I guess my answer is twofold. One, we have pulled together a packet of what your honor would find under normal circumstances attorney client work product and complaints prepared.
We are trying to figure out what to prepare for your honor.
The judge was not requesting you to disclose privileged information my request was to decide whether keeping privilege is in the city’s best interest. It is not impossible. I will say in hindsight now that I understand what the issue was, had I understood that motion the other day these memos were the subject of the privilege I would have ordered it.
Now Synacora's attorney Stephen Hackney is discussing with the judge about debtor in possession financing discovery of documents.
We want to see the deliberative process, they have to disclose the subject matter of the discussions. My objection they have now put the objectors in the position of being in a difficult position to cross examine Mr. Orr as to the process of these negotiations.
The conversations now have wandered into whether the city can claim attorney client privilege, whether those claims are too broad, whether other depositions of city staffers need to be as a result of any changes to the city’s position of privilege. The Jones Day Attorneys are attempting to provide paperwork to objectors and the judge but the judge is now uncertain whether to release those documents.
There was lengthy discussion and debate over how the city can thread this needle. With a gun to the city’s head.
Judge Rhodes said of the situation: "Of the hundreds and thousands of motions I have had to settle in 28 1/2 years, in every case, everyone knew what the claims and defenses were, the alleged factual bases. I don’t have that here, I did not get it from Mr. Orr and I certainly did not get that from Mr. Buckfire. I am at a loss to figure out what the city is doing. The burden is on the city to slow the fairness of the settlement. In the end it is your call and I could make a decision that would work against the forbearance agreement and you do not want that."
Jones Day attorney Thomas Cullen told the judge “The settlement was made very quickly because of the short time the city had before its bankruptcy filing. Judge you have all those documents.
Judge Rhodes: "I am going to say this. Every transaction the city has entered into was with a gun to its head. That has to stop. That has to stop! I think it’s part of a bankruptcy judge’s role to carefully scrutinize whether to approve a settlement. The reasons are obvious. It is not just the debtor who is affected. I have a whole courtroom of people affected."
Cullen: "No one likes making a decision with a gun to the head. The reason for the forbearance agreement is to stabilize the city."
Judge Rhodes: "Stabilizing the city was the motivation behind the swaps and cops agreements [the pension fund prop up financing arranged by Kwame Kilpatrick] and look where we are."
Cullen: "It’s not a great spot, I agree with your honor. I don’t know how we can right the ship without the casino revenues being jeopardized."
Judge Rhodes: "The question is whether you are overpaying for that. I don’t know why consideration should be different than other losses."
The city proposed a solution that would give up the paperwork to the judge and the objector attorneys with certain conditions. The judge told the parties to take 20 minutes and figure out how to resolve this issue.
Court is in recess for 20 minutes while they work out a way to exchange information,
Judge: "Consult among yourselves the best way to resolve this."
The objectors have caucused together and Syncora attorney pleads the following:
With respect to providing Corinne Ball Jones Day attorney for deposition tonight is irrelevant. The record from Mr. Buckfire he was the evaluator and was unaware anyone else had
He never argued the city's claim to the other companies. That testimony is compelling. What they now want to do is to rebut their own case by calling in Ms. Ball backfilling and saying she was fully apprised and can not contradict Buckfire’s testimony he was lead investigator.
Judge: Assuming what you say it is true it doesn’t make the testimony is inadmissible does it?
Syncora: If you decide given the significance of this settlement that you want to hear the testimony and see the documents but we will say we have to do this in an orderly way.
Judge: I am going to stop you there. I view what I want as irrelevant. Let me rephrase: if the city says we’re going to give documents and have Ms. Ball testify this has to be in an orderly way and not with the five documents, let’s get order to where privilege is being taken and not and Mr. Orr will hate me for saying this but I will have to depose other witnesses.
Judge: Mr. Orr won’t hate you, he won’t like you [laughter]
Mr. Steven Hackney for Syncora: “The gun that is to our head in this case from the standpoint of schedule. At first it was the discount posts in the forbearance agreement, there was a gun to all of our heads to do this by this time. The discount posts have been extended four months and now it’s December 31st and the Barclay’s agreement expires January 7th. If we go this way I’ve seen federal bankruptcy judges look at certain parties as d-i-p lenders and ask if that January 7th as firm as it says in black and white. It turns out it was flexible. I think we don’t know which way we are going but if we’re going the second way, it’s infected everything, the scope, the pace of discovery and impacted our case to you. I think you’ve made observations in this case and its significance. And if we can stop the gun pointing to our head I hope we can stop the gun from being pointed to our head.”
Mr. Greg Shoemaker for Jones Day and the city of Detroit: "First of all, Mr. Hackney has talked about how important this issue, the assertion of privilege has been to the objectors for a long time. This was calculated for a long time. The first question he asked Mr. Orr in his deposition was 'did you get legal advice'? The answer was yes. Five questions later he asked more about this subject which led to 50 questions that delved into whether privilege would be claimed and what discussions were had with legal advisors.” He cited precedent telling the judge the city did not need to waive privilege saying “the notion this is a surprise, it was a tactic from the get go. This gun is not going away."
Judge Rhodes: "Everyone uses tactics, the question is whether it was illegitimate. I asked the same questions."
Shoemaker: "I was not saying you were using a tactic your honor."
Judge: "As I have said before the burden is on you. If you want to put these memos in under 502d we can talk about that. If you want to question Ms. Ball we can talk about how to properly do that. This approval will get the closest scrutiny from me and it’s your burden and you have to decide what you want to do to meet that burden. I can tell you I agree with Mr. Hackney that if we are going to open this up as you suggested we will not be able to do it today or tomorrow. I am not available between Dec. 22nd and January first.?"
Shoemaker: "Can I get some time your honor?"
Judge: "Ten minutes? We are in recess for 10 minutes."
Up now before Judge Rhodes is Thomas Cullen: His reply to the judge’s concerns went as follows:
Cullen: "The city would like to propose the following if it makes sense to the court. Given the court’s guidance, given the concerns of the objectors, and given our need to reach out to other parties to talk about how we can accomodate all of these is that we and the other parties take tomorrow to try and work out a procedural schedule for your honor. To be frank to your honor, we will be talking about various things including the options laid forth to cabin those in such a way to meet the judge’s schedule. We would propose to report back to the court on Friday about what we have achieved with all of the financial and procedural constraints. Otherwise we’re going to have a series of hand battles that are not productive. I am respectful to the time it’s taken, how much money this is costing."
Mr. Stephen Hackney of Syncora is up now: "Your honor, I’m going to state what the senate consensus is. I can say it is the sense of the objectors is that the city is trying to continue its hearing at another date. We would agree to the continuance, but it’s taken a lot of money to prepare for this hearing. The objectors are willing to meet with the city to hear its ideas on how to handles evidence. Two things though. I hope the city will will understand that it can change evidence in this procedure. I am not backing off, I think I know what happened with this deal. The second is that having lived under the gun of these kinds of deals, whether it is the discount expiration or other things. It will be a problem for us if they move the date two days. If the city is asking for continuance we do not object. We want Friday’s hearing to be a status conference."
Judge: "Mr. Cullen, to the extent I heard you say you are willing to use the time of any continuance to extend the date of the deal you want me to approve, I would encourage that as strongly as I can. Anyone who has been practicing in bankruptcy law or litigation for that matter knows that even if a winning party gets a judgment they will take 75%, you hear what I am saying?"
Judge: "What time Friday?"
Judge: "I’ll see you then."
Ultimately the hearing in this trial is now postponed and a status conference will be held Friday at 10am to see where this is going. A strange turn of events indeed.
Court is in recess.