BLOG: Robert Davis warned about bankruptcy lawsuits

By Rod Meloni - Reporter, CFP ®

DETROIT - Local 4's Rod Meloni is blogging from inside Detroit's bankruptcy trial.

9:48 a.m.

A very late start in the morning for the City of Detroit Bankruptcy motions hearings. Long lines at the security booths on another immigration and naturalization Thursday left the judge on the bench and a virtually empty courtroom. The first case was supposed to be AFSCME Activist Robert Davis' case against the city attempting to unseat City Council President Saunteel Jenkins. There is much about this cases I will get to in a minute… it is headline material.

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In order to get things out in order the Judge first heard the case of a motion looking to remove the automatic stay in a property title issue. Attorney Michael Greiner of Warren wanted Judge Rhodes to allow the removal of the automatic stay because he sued the city to try and get clear title of a property for one of his clients. The City said it did not understand why it is involved because Greiner had not done the proper title work to establish ownership. Greiner said the city had placed liens on the property at various points and therefore it was a party to be sued in establishing the land's title. Greiner also told the judge there is conflicting ownership. That is when Judge Rhodes jumped in and effectively all over Greiner. He asked Greiner "Should the City be involved?" He wanted both parties to explain the city's involvement. The City said it had none. Greiner said he was not sure. Rhodes denied the motion in tough terms. He said "The motion should be denied. "It also borders on the frivolous if not entirely frivolous." "The City shouldn't spend another minute on this unless it can be shown it has any interest."

10:25 a.m.

Now comes the bare knuckle part of the morning: Robert Davis' desire to sue every move made in Detroit City Hall may begin to diminish. It was a motion hearing by Robert Davis, represented by Michael Andrew Paterson before Judge Rhodes this morning. The motion sought to unseat Saunteel Jenkins as City Council President in the aftermath of the Charles Pugh incident. You might recall when Pugh disappeared from office for several months last summer he asked emergency manager Kevyn Orr for a medical leave. Orr said unless Pugh could establish a true medical emergency or issue he would not allow a medical leave. Furthermore Orr told Pugh if he did not show up for work he would dock his pay and remove his powers of the Presidency. Pugh did not show up for work, and eventually the city council elected Saunteel Jenkins to take over the gavel instead. Pugh later resigned. Davis believes the city council, in the election of Jenkins, failed to follow the city charter.

When Judge Rhodes asked Paterson what it was Davis was after in the case, Paterson said, "The plaintiff's action questions the authority of the office holder." "It seeks no damages, it is largely an issue of following the charter in selection of council president."

That means that in this case anyway, Davis was not seeking an financial damages. Paterson went on "The city charter is new, transitional in some areas. It requires the old charter to be enforced to a point and the new charter to another." Davis' belief is the old charter was not applied in this case. Judge Rhodes, clearly concerned about Robert Davis' continued cases against the city and their potential to impede progress, asked Paterson "Who else's office do you intend to challenge?" Paterson shot back immediately "not the emergency manager." That is an important point because previously Paterson came before Rhodes seeking action against the city and Rhodes made it abundantly clear he would not allow Davis to attempt to remove Orr from office.

The Judge Pressed Paterson to list other filings Davis plans. Paterson hedged for a minute and then admitted "the chief of police among other appointments." Rhodes was in disbelief at the notion they would try and unseat the chief of police. He said, "It is unfathomable to me with the problems this city has you want to file an action against." "You're going to try and unseat the chief of police." Paterson quickly shot back without hesitation, "Not me, my client does." Judge Rhodes asked, "Why?". Patterson said, "He doesn't believe they followed the law."

At this point the judge wanted to hear from the City of Detroit's Lawyers. Miller Canfield attorney Stephen LaPlante said the city is growing weary of Davis has. He quoted Davis from a Lansing radio station appearance recently saying "Mike Duggan will not be sworn in as Mayor of Detroit" as an example of Davis' work saying it will "jeopardize the city" if allowed to continue. Judge Rhodes told LaPlante he could "maintain this court as the gatekeeper" regarding Davis. The Judge also asked LaPlante if he was aware the city has the option of asking for "stay violation damages against Davis and Citizens United". LaPlante said he was. This is a clear shot across Davis' bow, telling him the lawsuits are not helping and Rhodes could shut them down. Rhodes asked Paterson "given the circuit court's order, what is left to do?" Patterson said "appeal." The circuit court had turned down Davis' request to unseat Jenkins and Paterson wanted to bring it to an appeals court. Strangely enough, through all of this gyration, the city agreed to allow Davis and Paterson to appeal. Judge Rhodes said "the court will enter this order with two cautions to you: 1.) the court does deny a request for a blanket order for future actions that may be filed without permission" essentially telling Paterson and Davis their days of suing every move the city makes will not be tolerated and in fact he will insist on seeing every suit to consider whether it can move forward and Rhodes said "2.) "I will caution you and your client you risk sanctions for violating the stay." Rhodes reiterated to Paterson "your client risks it."

With that the session ended and the court is now in recess until 11am.

11:42 a.m.

We are now back in session and a long line of lawyers has just made "appearances", essentially introducing themselves to Judge Rhodes and telling who they represent. This hearing is a request to keep a financing deal with investment bank Barclay's with the city secret. This is a dicey area in that government is supposed to operate in the sunshine.

What Barclay's is saying in its deeply arcane and esoteric filing is that it wants to be able to sell parts of its $350 million dollar loan to the city it will use to restructure.

Barclay's is attempting to keep secret its interest rate for the loan claiming the information is proprietary. On the stand right now is James Saak Vitne. He said this deal the city struck with Barclays in October is unique, a first ever attempt at this kind of financing. He said, "This is really, effectively a  hybrid". "It is a combination of municipal credit and post-petition financing not typical for a municipal facility." Barclay's pointed out it is making this loan and already has a deal in place with the city and has been paid 50% of its fee to make the deal happen. In order for Barclay's to make a profit it is asking the judge to keep the interest rate it has with the city in its deal quiet. This way it does not give the customers it brings into a "syndication deal" a leg up and it also keeps the interest rate lower for the city. Saak Vitne compared the deal to trying to buy a car. You don't go into the showroom and tell the salesperson you are willing to pay $15,000 for it but let's start negotiating @ $10,000. He said that is the same position Barclay's and the city is in and does not want that to happen.

There is a very long line of attorneys looking to do the cross examination of Saak Vitne who are going to try and rip apart Barclay's assertions and the deal itself. Judge Rhodes has asked, in the interest of time, to have one single lawyer do the cross examination. It did not look as if there were many taker on that offer, we are awaiting the decision when the judge returns to the bench in a minute.

On the cross examination now is AFSCME attorney Jack Sherwood. He began by asking Saak Vitne if he knew about a couple of Chapter 11 cases cited on direct [Patriot Colt and Res Cap {that financed the GM restructuring}]that their financing details were partially disclosed. Saak Vitne said he was unaware.

Sherwood: In this case Barclay's is not willing to disclose?

Saak Vitne: Yes.

Sherwood: Is there one fee, and one fee and one fee only and you have received 50% of it from the city?

Saak Vitne: That is correct.

Sherwood: What fee is that called?"

Saak Vitne: A commitment fee. We chose not to subdivide it into five fees but kept it as one.

Sherwood: In addition to the commitment fee is Barclay's entitled to reimbursement from out of pocket fees and expenses from the city?"

Saak Vitne: Yes.

This blog will be getting shut down for a bit because of the Kwame Kilpatrick/Bobby Ferguson status hearing scheduled for noontime and I will have to go visit that for a while.

12:59 p.m.

The hearing into the silent "fee letter" with Barclays has continued and while the AFSCME attorney pushed hard on the notion it is a bad idea to keep the letter silent it was Judge Rhodes who weighed in more heavily in that regard. He grilled James Saak Vitne in exceptionally tough fashion. No one raised a voice but the Judge made it clear he is not buying the notion that Barclay's has the city's best interest in mind in asking for a seal on the deal. Judge Rhodes specifically asked Saak Vitne about that.

Saak Vitne: It is very important to us to help the city.

Judge Rhodes: What's very important to you is to make lots of money, right?

Saak Vitne: [hesitating] "Yes." He went on to say that there was nothing written in the contract specificically "if the court ruled one way we would not make a commitment." Thus saying if the deal is not sealed it would likely stick with the city on it.

Judge: Is it in Barclay's commercial interest to keep this secret. Your competitors will use it to their advantage in future deals?

Saak Vitne: Yes.

Judge: You are concerned that they will undercut your fee structure? Wouldn't that be good for your customer?

Saak Vitne: non responsive.

Judge: If, heaven forbid, there is a future Detroit wouldn't making the letter public help them?

Saak Vitne: No

Judge: Why not?
Saak Vitne: There is a concern that if, going forward in a municipal debtor in financing [bankruptcy lending]if fees are public it will chill lenders." [give lenders reason to not get into the business.]

Judge: "So much for being willing to help the city!

A Miller Buckfire investment banker was cross examined on the same subject with much less drama.

The City has rested its evidentiary hearing:

The city gave up its right to offer closing arguments.

The objectors are giving their closing arguments:

Mark James of FGIC [Federal Guarantee Insurance Company] says he wants to know the information in the "fee letter"

We're not asking for wholesale dissemination of all of this information." We would be happy not to disclose in public or on a website.

Judge Rhodes is now asking, "What about objections?"

James: "We will file under seal."

Jerome Goldberg: I was struck by the testimony that Barclay's is charging a fee to deal with risk taking. It was clear to me ultimately the cost of this deal is being borne by taxpayers. To me when I looked at the deal it's the people of the city who will be paying on the deal at a higher the idea that the people of the city will be paying for years to come. I believe it is Unconscionable the residents will not know what is in the deal. and I also believe it is against the freedom of information act.; There is a duty to disclose. I would ask you to reject this it would be an insult to the people of the city because they are paying for it and it's their right to know."

Sherwood: When dealing with Confidential commercial information you have to deal with expectations. What are the expectations of someone coming in. It's not public information what the fees and rates are, they are not published on their website." "But when you walk into a bankruptcy court you have to disclose. In a bankruptcy court it is the rule that you have to disclose. In order for any party in a dip financing concept, fees charged on the loan is a huge issue because one of the main things the parties din the waterfall want to know what are the terms of condition of payment for Barclays. Anybody who is a creditor has a right to know the fees.

1:15 p.m.

Up now for the objectors is Guy Neal representing national public finance guarantee corp., a municipal bond insurer:

Neal: "We have a strong overarching vital interest in this. As such as creditors and the public generally are entitled to a transparent and open process. Where is the disadvantage in this process in the full and open disclosure of those fees. This has never been done before and I don't think there should be a precedent that the total cost of this facility should be sealed."

Now the city is rebutting the other closings.

1:35 p.m.

There was extended and complex argument by the city of Detroit attorneys and the Barclay's attorneys regarding the secrecy issue. There was much discussion about the fact that this is a precedent setting and the judge is going to rule when he comes back at 2:30pm.


Read: Rod Meloni: Day 8 of Detroit's bankruptcy trial

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