Finance

Feds, Counties Object to Detroit's Bankruptcy Exit Plan

by | May 13, 2014

By Matt Helms and Nathan Bomey

The political wrangling over Detroit's bankruptcy restructuring plan intensified Monday when the U.S. government, Oakland and Macomb counties filed official objections to the plan.

Separately, bond insurer Syncora said it plans to call Gov. Rick Snyder, state Attorney General Bill Schuette and former Detroit Mayor Dave Bing to testify during a summer trial about the case.

The disputes over the future of the Detroit Institute of Arts and the Detroit Water and Sewerage Department (DWSD) served as the centerpiece for objections from several creditors.

A group of major water and sewer bondholders also objected to the plan, adding a new legal obstacle to the city's attempt to emerge from bankruptcy by mid-October.

Macomb County said in a court filing that Detroit's restructuring plan is "not feasible" and protested that the city's plan to spin off its water department would raise rates on suburban customers.

Oakland County accused Detroit emergency manager Kevyn Orr's restructuring team of "putting the water and sewerage systems at risk" by considering transferring the assets to an outside authority in exchange for lease payments that could help reduce the city's debt and reinvest in services.

"Nothing can be more vital to a thriving commercial 21st- Century metropolis than the providing of clean, safe water and sewerage service in an efficient and sufficient manner," Oakland County said in its filing. "Yet, notwithstanding this essential need, the city appears willing to engage in a game of chance, jeopardizing the DWSD, and thus the region, by putting the DWSD's operations at risk."

Despite the rush of objections, Detroit is riding a wave of momentum in its bankruptcy restructuring talks, fueled by deals with retiree groups that have pledged to recommend a "yes" vote to pensioners.

The city's two independent pension boards, two retiree associations and the Official Committee of Retirees have agreed to support pension cuts. The city has also reached new contracts with several unions, including its largest civilian union, the American Federation of State, City and Municipal Employees Council 25.

Still, the restructuring plan faces a litany of legal, political and logistical hurdles. U.S. Bankruptcy Judge Steven Rhodes will conduct a massive confirmation trial starting July 24 to decide whether the plan is fair to creditors and feasible.

On Monday, the U.S. government said it would oppose the city's restructuring plan until its objections can be resolved. Attorneys for the U.S. objected on the grounds that the city owes $112 million to the Department of Housing and Urban Development, though the city says it owes $90 million. They also said the city has failed to guarantee that it will follow Environmental Protection Agency guidelines during its restructuring.

The U.S. government's objections are not expected to remain as obstacles in the city's restructuring. But Syncora and fellow bond insurer Financial Guaranty Insurance Co. are expected to wage a vigorous fight against the city's restructuring plan.

On Monday, during a daylong hearing on arguments over documents the city and creditors must provide to each other, Rhodes chastised city lawyers for including confidential mediation documents on a computer disk of court documents creditors had sought in the case.

A lawyer for city creditor Assured Guaranty, a municipal bond insurer, asked Rhodes to order the city to request the disks be returned and then re-release the documents without the ones that contain confidential information in court-ordered mediation.

But Geoff Irwin, a Jones Day bankruptcy lawyer representing the city, suggested the error could be corrected without having to pull back all the documents. Irwin said the city believes that creditors can continue their work while the city prepares replacement disks. Irwin said ordering the earlier versions destroyed could add delays to the bankruptcy case.

"This is not a deliberate or intentional violation of the court's order," Irwin said.

The city and creditors who received the disks agreed to return them and destroy any electronic or paper duplicates.

Irwin told the judge that there were about 120 documents inadvertently included, and that not all of them contain sensitive information.

In other actions, Rhodes:

-- Approved allowing his expert witness, Martha Kopacz, to hire an attorney for herself. The judge hired Kopacz to help him review and assess the feasibility of Detroit's plan for exiting bankruptcy, The city agreed to pay the costs of the lawyer, whose role would be limited to issues such as advising Kopacz on answering questions during depositions.

Kopacz also suggested that Detroit wasn't releasing information she'd requested, particularly the economic data associated with deals the city has struck with city unions. Rhodes in turn told city lawyers he was "disappointed to remind you that the city has the burden of proving the feasibility of the plan," and that anything that helps the city make its case should be revealed.

"I've said to Jones Day before," Rhodes said, "that just because something is subject to privilege doesn't mean you have to claim it."

Jones Day lawyer Heather Lennox said the city wasn't withholding information from Kopacz, but rather working to put together a comprehensive report for her, rather than piecemeal incomplete data.

-- Gave lawyers for Syncora 30 days to produce additional documents the city sought related to the disastrous $1.4-billion "pension obligation certificates of participation" debt deal brokered by former Mayor Kwame Kilpatrick's administration to shore up underfunded city pensions. Detroit filed a suit in February challenging the legality of the deal, for which Syncora is an insurer.

(c)2014 the Detroit Free Press

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