Local 4's Rod Meloni is blogging from inside Detroit's bankruptcy trial.
A quiet and uneventful morning so far at the federal courthouse, security line short, the usual crowd in the media room… several newspapers and a couple of us tv types. The judge is usually quite prompt. The television monitors we view the action from are on but nothing has come up on the television screens just yet. Today we will hear arguments from Syncora Guarantee Corp. It is a bond insurance company that insures the pension debt for the city. What that really means is the Syncora insures the companies that lent Detroit money when its pensions were badly underfunded in the case of default… non-payment. Syncora is seeing that Detroit's bankruptcy proposal treats retirees and the pensioners as unsecured creditors which means everyone stands to lose big money since the city is looking to pay just pennies on the dollar. The companies that lent the money to the city clearly would use the insurance they have through Syncora and Syncora stands to lose a LOT of money… perhaps up to a billion dollars. So Syncora is looking to find any money it can to be pushed the city's way to lessen its losses so now Syncora is looking to do things like prevent the city from creating a public lighting authority and instead have the tax dollars go into city coffers. That is the main point that will be argued today.
Before that Judge Rhodes tentatively approved a $175,000 a month contract with the Lazzard Ltd. Financial advisory company to work with the retiree committee and decide the financials on the pension system. Judge Rhodes was not at all happy with the amount Lazzard will be paid and only tentatively approved the contract. He intends to hear more from Lazzard in mid-December to find out what exactly the company will do for its money.
The City of Detroit and the State of Michigan have both spent the first 15 minutes of today's hearing pleading to Judge Rhodes why the City should be able to continue with its participation in the public lighting authority and use public utility tax dollars to do so. The authority is set up to fix broken street lights because Detroit's lighting system is ancient, falling apart and barely works when it works at all. Robert Hamilton of Jones Day is the attorney representing the city in this corner of the case. He said, "It is important to get facts right pay $40 million annually to in utility tax revenues that are collected by the utilities. There is no dispute the lighting system is in disarray." He went on "The Public Lighting authority formed under PA 100 requires the city to pay $12.5 million to fund the public lighting authority. It was approved in February 2013 and the city entered into a trust agreement in August 2013. All $40 million of that money has been transferred to the trust and all amounts above $12.5 million sent back to the city. Regardless of what the city does, all amounts are sent back to the city." Public Lighting Authority revenues are not available for creditor claims, no creditor is adversely affected by this because no creditor is affected by this transaction. No creditor has any reason to challenge."
He went on to say a substantial delay has been caused by the Public Lighting Authority's ability to close $60 million in financing, that's $60 million dollars of interim financing. In fact he said they had to take out a bridge loan because of this filing has held up the movement of the lighting authority. Hamilton closed by asking the court to approve the revenue use as proposed saying, "It is an urgent and important step for the city and there is no reason not to approve this contract."
Judge Rhodes is skeptical of this entire situation. He wanted to know what legal standard the city makes its argument. The city pointed out it is in a unique situation that liens to be pledged cannot be used by creditors. The Judge did not like the answer.
Judge: What is my role?
Hamilton: Confirm business judgment of the city of Detroit to pledge the $12.5 million to the trust.
Jim Wright, an attorney for the state of Michigan agreed with the City's argument. He said, "40% of the city's lights are out and there is high crime This is not an argument we should be having today."
Then it was Syncora's turn and it was eventful to say the least. Judge Rhodes is not a fan of the request and made it clear by the questions he asked.
The real issue behind all of this is the financing of the Public Lighting Authority. The City and State are trying to fund the Public Lighting Authority with this money and the state's bonding authority is being used to borrow the cash to create the cash pool they can use to work on the city's lights. Syncora is objecting to the use of city tax money to help create this trust fund saying it is a piecemeal approach to an overarching problem and may not be the best way to do this and that the cash should be made available for other things.
Bill Arnault is the attorney for Syncora. He said "the purpose of our objection… we recognize the city has many challenges. We take issue with the process and the means by which they're done so. There has been a lack of transparency we are at a loss of what is going on." "We have yet to see any of that information… there is a failure of process we want to see corrected." "We are still very much in the dark"
Judge Rhodes: I am going to allow you to withdraw that.
Arnault: I'll stand by that.
The judge actually laughed out loud at that and repeated the line "we are still very much in the dark." He then asked
Judge: Why does Syncora even have a stake in this?
Arnault: Cash is fungible. Rather than funding the PLA the city might use the money for hiring police officers. There is a quality of life note for $110 million that could otherwise use that money.
Judge: So you are asking me to decide for the city whether to give the money to the lighting authority or the police?
Arnault: Yes. We are concerned about the structure of the transaction itself. We want to depose witnesses and ask for documentation of the deal itself.
Here the judge weighed in with his dismay
Judge: The dark you are in does not compare to the dark the City of Detroit's citizens have been in and demanded to know how long Syncora wanted, a number of days it would take to gather the information it is requesting.
Arnault: 2 weeks.
Judge: How many citizens will be subject to crime in two weeks? What is the single most significant, specific information you want to know?
Arnault: About the negotiation process, what were the terms? What were the proposals for alternatives and in the end we may find out something that might be a benefit to citizens.
Judge: I wonder if you will ever be satisfied.
Arnault: We will be if there is adequate discovery.
Two more attorneys got up to plead their support to Syncora's case.
Mark Angelo of AMBAC [another bond insurer] and agreed that the city has not been forthcoming with the details of the deal.
Angelo: They used bridge loans to get the process started, there has been no evidence that has been done. They are borrowing $160 million and yet there is no evidence they are fixing lights and thought given to alternatives.
Judge Rhodes continued his highly skeptical questioning
Judge: You want me to judge that? That makes me sound like a mayor and a city council. I am not permitted to interfere with the city's function.
Angelo: Yes you are.
The judge invited him to find case law or a ruling that says that
Judge: Take your time and pick a good one.
He offered a couple and the judge said nothing. Later the judge again wanted to know what the Syncora side wanted and was told depositions of Odis Jones who is running the lighting authority, they want to know why didn't the city use any of the $12.5 million for operating and management costs.
Judge: All that in two weeks?
Up next was attorney Vincent Marriot of the firm Ballard Spahr. He worked hardest at explaining the real underlying reasoning for the objection to the public lighting authority funding deal. He said, "Syncora's positions get delegitimized and is considered a trouble maker and works at stirring the pot" but it is not he claimed. He said it is raising important and valid points. He said that there is not a lot of case law regarding the situation they are discussing. He said there is not a lot of authority for a municipality to get debtor in possession financing [loans to go forward] He said, "There is a larger principle at stake, nobody disputes the ultimate need to remove blight or fix street lights. Detroit's problems are decades in the making and it will take decades to fix."
The Judge asked if this is the right time for his argument
Judge: "Should I take this up in a plan of confirmation?" And when Marriott did not answer immediately he said "I'll take that as a yes."
Judge hits city for using Miller Canfield Lawyer in the Public Lighting Authority negotiations. Attorney Jonathan Green represented the PLA in the negotiations and his firm represents the city in other parts of the bankruptcy case. Therefore the judge said he would delay a decision in the case because of conflict of interest problems. He said it is likely that the city must re-negotiate its Public Lighting Authority deal using another law firm and he delayed the decision until next week.
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