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.