Judge: Detroit retirees to get a seat at table during bankruptcy

Detroit — U.S. Bankruptcy Judge Steven Rhodes adjourned Detroit’s second bankruptcy hearing Friday afternoon after creating a committee to represent city retirees and hearing feedback from lawyers about the expedited deadlines he’s set for the case.

The judge also said he wants a mediator to resolve disputes as the case proceeds and a fee examiner to ensure the city’s legal fees are appropriate. He also heard from a city attorney who said Detroit intends to file a plan to adjust its debt by Dec. 31, months ahead of schedule.

Rhodes said he would not decide who should serve on the retirees’ committee, leaving that the power in the hands of U.S. trustee officials who also are to create deadlines for the panel. The judge also said he “commends and accepts” the city’s offer to pay for the committee’s expenses.

The judge also said a second committee should be considered for civil claims and other “litigation pending or contemplated to be filed.”

City lawyer Heather Lennox told Rhodes that Detroit wants the retiree committee so the city can negotiate cuts with retirees, who are largely unrepresented by their unions.

“Given the pressing financial crisis the city faces, we want a clearly authorized representative who can speak for the city’s retirees,” Lennox told the judge.

There are about 23,500 retirees with vested pension benefits. Those benefits are targeted for cuts during the city’s bankruptcy case.

Earlier Friday, another city lawyer, David Heiman, told Rhodes the city intends to present its “plan of adjustment” by year’s end. The plan is a major pillar of the biggest municipal bankruptcy filing in U.S. history.

“Time is our enemy,” Heiman told Rhodes. “The facts are not going to change no matter how long we wait.”

First, the city has to pass an eligibility fight that will revolve around whether members of Emergency Manager Kevyn Orr’s restructuring team negotiated in good faith with creditors. Some creditors are vowing a fight, alleging the bankruptcy was not authorized because it would slash constitutionally protected pension benefits.

Rhodes indicated he is mulling whether to speed up deadlines in the case. He has set an Oct. 23 trial to decide whether Detroit is eligible for Chapter 9 bankruptcy relief.

Two Detroit pension funds already have argued Gov. Rick Snyder was prohibited from authorizing the bankruptcy case because it could lead to cuts in constitutionally protected pension benefits.

The judge proposed using an independent examiner for the city’s legal fees, noting scrutiny of those expenses is anticipated.

“It is easy to predict there will be intense media and public scrutiny of the city’s professional fees,” Rhodes said. “This is entirely natural and proper and, frankly, the court encourages the public to remain fully informed of all aspects of the case.”

Rhodes mulled whether he will allow for a limited discovery period, which would include depositions. Rhodes tentatively set an Aug. 19 deadline to file eligibility objections.

Meanwhile on Friday, a lawyer representing the city’s pension funds criticized the lack of negotiations before the city filed Chapter 9 bankruptcy last month and claimed the city is not broke.

Attorney Robert Gordon said there were several meetings with Orr’s teams and due diligence sessions but no negotiations. He also said the pension funds are still awaiting actuarial calculations that could illustrate the funds’ financial health.

“This is not a mom-and-pop convenience store situation,” Gordon told Rhodes.

Gordon also tried to slow the pace of the city’s bankruptcy case and faulted the perception that the city is broke.

“That is a catchy sound bite,” Gordon told the judge. “The city is meeting its payroll obligations. While everything needs to move with due speed — we understand that — it should not be used as an excuse to move faster than reasonable.”

The stakes are high, he added, but current employees and retirees shouldn’t be steamrolled.

Earlier, Heiman told the judge that “significant differences” remain between the city and unsecured creditors who risk losing billions.

The talks are “civil and friendly yet when it comes to the point of saying ‘how do you view our proposal?’ no one likes it and that’s not surprising,” Heiman said. “Our proposal requires significant across-the-board debt relief.”

Orr is offering a $2 billion debt settlement to holders of $11.5 billion in unsecured debt.

Talks continue, Heiman added.

“We have had discussions in the last week and have discussions even scheduled today and next week,” Heiman said.

“How would you characterize your client’s willingness to continue to try to bridge those differences?” Rhodes asked.

“I would say more than a willingness,” Heiman said. “There is a commitment not only by Kevyn Orr but other people in the city.”

In a nod to the rarity of Chapter 9 cases, Rhodes opened the proceedings Friday with a primer on the court’s limited role in the city’s restructuring.

“It is important to note the very limited role a bankruptcy court and judge play in a municipal bankruptcy case under Chapter 9,” Rhodes told dozens of lawyers.

Rhodes also emphasized that he is not responsible for city services or hiring or firing officials.

“City officials are not accountable to this court,” Rhodes said. “The court has no role in running the city or the services it provides. Complaints, compliments and suggestions should continue to be directed to the city.”

Updates have ended

View our archived coverage of Judge: Detroit retirees to get a seat at table during bankruptcy.

Retired city workers will have a seat at the table during restructuring negotiations in the historic Detroit bankruptcy case.

U.S. Bankruptcy Judge Steven Rhodes said he would not decide who should serve on the committee. He left the power in the hands of the U.S. Trustee.

The judge’s order came after three hours of debate among lawyers representing Emergency Manager Kevyn Orr’s restructuring team and various creditors.

Orr’s lawyers wanted a committee created to represent some 21,000 retired city workers, a request that triggered a turf war between retiree groups and the city’s largest union, The American Federation of State, County and Municipal Employees Council 25.

U.S. Bankruptcy Judge Steven Rhodes said he sees merit in creating a committee of people who have sued the city over civil rights disputes and personal injury claims.

Those people have seen their lawsuits frozen since the city filed bankruptcy July 18.  They can ask for their cases to be unfrozen but numerous requests could wreak havoc on the city’s bankruptcy case, Rhodes said.

“The last thing any of us wants is a flood of motions for relief,” Rhodes said.

Dwayne Provience

Dwayne Provience

The judge floated the possible committee days after The News reported about Dwayne Provience, who spent almost 10 years in prison for a murder he didn’t commit.

Freed in 2009, Provience sued Detroit and a police sergeant. Mediators recommended he receive $5 million — a figure rejected by the city before filing bankruptcy.

A lawyer for the United Auto Workers took a veiled swipe at one of the city’s bankruptcy lawyers.

While offering input on creation of a committee to represent retired city workers, UAW lawyer Babette Ceccotti countered an earlier claim from city attorney Heather Lennox.

Lennox had claimed the “overwhelming majority” of unions said they wouldn’t represent retirees during bankruptcy talks. She also said the UAW initially passed on giving voice to retired workers before reconsidering.

Lennox works for the law firm Jones Day, which is the former firm of Emergency Manager Kevyn Orr. She has offices in New York and Cleveland, Ohio — a fact the UAW lawyer alluded to while insisting the UAW could represent active and retired city workers.

“We do not think it is appropriate for an outsider to make across the board statements,” Ceccotti told the judge.

Ceccotti is based in New York, according to her law firm’s website.

Ceccotti said the UAW does not see a conflict in representing active workers and retirees while retiree groups and unions jockey for position among the city’s unsecured creditors. She pointed to the labor union’s work during the General Motors Corp. bankruptcy in 2009.

Emergency Manager Kevyn Orr’s team adopted the attitude that it could “do anything” it wanted except slash pensions, a creditor’s lawyer said Friday.

Kevyn Orr

Kevyn Orr

Orr’s team took the stance it was not obligated to negotiate with the Detroit Police Command Officers Association, the group’s lawyer Barbara Patek told U.S. Bankruptcy Judge Steven Rhodes.

“They can do anything they want except modify pensions,” she told the judge. “For that, they need bankruptcy court, and here we are.”

Patek’s comments are aligned with complaints from other creditor groups that accuse Orr and his team of failing to negotiate in earnest before filing bankruptcy July 18. The city is required to show it negotiated in good faith, or can be kicked out of bankruptcy court.

U.S. Bankruptcy Judge Steven Rhodes is getting feedback from lawyers about creating a committee of retired city workers that can negotiate for a bigger payout during the bankruptcy case.

City bankruptcy lawyer Heather Lennox wants to create a committee so the city can negotiate cuts with retirees, who are largely unrepresented by their unions.

“Given the pressing financial crisis the city faces, we want a clearly authorized representative who can speak for the city’s retirees,” Lennox told the judge.

The committee’s makeup is being debated, including whether current employees would get a seat on the committee. There are about 23,500 retirees with vested pension benefits. Those benefits are targeted for cuts during the city’s bankruptcy case.

The committee proposal triggered a turf war among retiree groups and the city’s largest labor union, The American Federation of State, County and Municipal Employees Council 25. Read more about the battle here.

The city’s bankruptcy case is the biggest municipal filing in U.S. history, but not as big as former Detroit Mayor Kwame Kilpatrick.

U.S. Bankruptcy Judge Steven Rhodes said court officials have asked him not to schedule any hearings in early September, when Kilpatrick and pal Bobby Ferguson are sentenced for their roles in the City Hall corruption scandal.

Kilpatrick will be sentenced Sept. 3; Ferguson the next day.

Kilpatrick was convicted of 24 charges including racketeering conspiracy in March. Prosecutors say his sentencing guideline range “will likely fall somewhere between 20 and 30 years’ imprisonment,” according to court records.

The city has not been charged excessively by its restructuring team, U.S. Bankruptcy Judge Steven Rhodes said today, but he wants to appoint an examiner to bird-dog the bills.

There is no reason to believe the city’s fees have been or will be excessive or improper,” Rhodes told lawyers today.

But a fee examiner would help lawyers justify the fees they charge the city and the city would be able to justify the expenses to citizens, Rhodes said.

“It is easy to predict there will be intense media and public scrutiny of the city’s professional fees,” Rhodes said. “This is entirely natural and proper and, frankly, the court encourages the public to remain fully informed of all aspects of the case.”

Last month, Emergency Manager Kevyn Orr said the lead bankruptcy counsel at his former law firm, Jones Day, had billed the city $1.4 million and waived $3 million in fees.

If a fee examiner is appointed, the bankruptcy cases of General Motors and Lehman Brothers could serve as a guide to eyeballing expenses and fees. In GM’s case, professional fees totaled more than $120 million.

Those landmark cases are not comparable to the city’s bankruptcy case, Detroit bankruptcy lawyer David Heiman said.

“Hopefully we will have far fewer retained professionals and the length and process will not be as complicated,” Heiman said.

A lawyer representing the city’s pension funds criticized the lack of negotiations before the city filed Chapter 9 bankruptcy last month and claimed the city is not broke.

Attorney Robert Gordon said there were several meetings with Orr’s teams and due diligence sessions but no negotiations. He also said the pension funds are still awaiting actuarial calculations that could illustrate the funds’ financial health.

“This is not a mom-and-pop convenience store situation,” Gordon told U.S. Bankruptcy Judge Steven Rhodes.

Gordon also tried to slow the pace of the city’s bankruptcy case and faulted the perception that the city is broke.

“That is a catchy sound bite,” Gordon told the judge. “The city is meeting its payroll obligations. While everything needs to move with due speed — we understand that — it should not  be used as an excuse to move faster than reasonable.”

The stakes are high, he added, but current employees and retirees shouldn’t be steamrolled.

The city plans to tell a bankruptcy judge how it will adjust its debts by year’s end, three months ahead of schedule.

City lawyer David Heiman said the city will file its plan of adjustment by Dec. 31. The plan is a major pillar of the biggest municipal bankruptcy filing in U.S. history.

“Time is our enemy,” Heiman told U.S. Bankruptcy Judge Steven Rhodes. “The facts are not going to change no matter how long we wait.”

First, the city has to pass an eligibility fight that will revolve around whether members of Emergency Manager Kevyn Orr’s restructuring team negotiated in good faith with creditors. Some creditors are vowing a fight, alleging the bankruptcy was not authorized because it would slash constitutionally protected pension benefits.

The city’s legal team is “confused” by Michigan Attorney General Bill Schuette’s role in the biggest municipal bankruptcy case in U.S. history.

Michigan Attorney General Bill Schuette

Michigan Attorney General Bill Schuette

Schuette is navigating a seemingly contradictory path. Days ago, he vowed to protect pensioners from having their retirement benefits slashed and has filed an appearance in the case. But he also has to represent Gov. Rick Snyder in legal challenges because the governor authorized the city’s bankruptcy filing.

Schuette’s role “confuses us a bit,” city lawyer David Heiman told U.S. Bankruptcy Judge Steven Rhodes during a hearing today. “We want to try and unravel that.”

Separately, Heiman said most union contracts have expired as the city moves through bankruptcy court except for “six or seven” collective-bargaining agreements involving Detroit Water and Sewerage workers.

U.S. Bankruptcy Judge Steven Rhodes mulled speeding up the city’s historic bankruptcy case, which legal experts already said is on an aggressive timeline.

Rhodes is feeling out lawyers for the city and creditors about whether he will allow for a limited discovery period before holding an Oct. 23 trial. The trial will decide whether Detroit is eligible for Chapter 9 bankruptcy relief.

The eligibility fight is expected to focus on creditor claims that Emergency Manager Kevyn Orr failed to negotiate the city’s restructuring in good faith and that the July 18 bankruptcy was unauthorized, legal experts said.

Two Detroit pension funds already have argued Gov. Rick Snyder was prohibited from authorizing the bankruptcy case because it could lead to cuts in constitutionally protected pension benefits.

Rhodes mulled whether he will allow for a limited discovery period, which would include depositions. Rhodes tentatively set an Aug. 19 deadline to file eligibility objections.

“If there is not a need for discovery, we are going to have to talk about even advancing (the eligibility trial date) from where I have tentatively suggested it,” Rhodes told lawyers today.

Rhodes questioned whether battle lines surrounding the good-faith fight were already set.

“I have a sense, and I could be wrong, that anyone who might object on that ground has already first-hand knowledge of what the negotiations were or weren’t,” Rhodes said.

There remain “significant differences” between the city and unsecured creditors who risk losing billions, city lawyer David Heiman told a federal judge today.

The talks are “civil and friendly yet when it comes to the point of saying ‘how do you view our proposal?’ no one likes it and that’s not surprising,” Heiman told U.S. Bankruptcy Judge Steven Rhodes. “Our proposal requires significant across the board debt relief.”

Orr  is offering a $2 billion debt settlement to holders of $11.5 billion in unsecured debt.

Talks continue, Heiman added.

“We have had discussions in the last week and have discussions even scheduled today and next week,” Heiman said.

“How would you characterize your client’s willingness to continue to try to bridge those differences?” Rhodes asked.

While police and security guards discreetly watched, a crowd of about 50 protesters demonstrated outside of the federal courthouse in downtown Detroit Friday morning, shouting down plans by the city to cut or eliminate their pensions.

Protesters chanted “banks got bailed out, we got sold out” as they circled in front of the courthouse. A handful of cars and trunks honked in solidarity as the crowd marched.

Among those in the crowd was firefighter Rebecca Koller.

“I’m here because I believe it is our right to have our pensions; it’s in the Constitution,” Koller said. “We fought for that right in the Civil War.”

Protesters march outside Detroit's federal courthouse on Friday.

Protesters march outside Detroit’s federal courthouse on Friday. (David Coates / The Detroit News)

Koller was also suspicious of emergency manager Kevyn Orr.

“He worked for the company, which is overseeing the bankruptcy of the city,” Koller said of the Jones Day lawfirm. “Isn’t that a conflict of interest? Watch out New York, Philadelphia, Chicago, Atlanta and other big cities; they’ll be coming after you next.”

Retired Detroit Water and Sewerage department employee David Sole had the crowd shouting “right on” and “amen” when he said Detroit was a test case for other city bankruptcies.

“What’s going on up in those courtrooms is not in our best interest,” Sole said. “Those people are not our friends. We want them to know that we are ready and willing to march, to demonstrate and to shout; to do whatever is necessary to save our jobs and pensions.”

House painter Ken Parks has never worked for the city of Detroit, but he felt his place was with the demonstrators. “I’m speaking up to try to help set things right,” said Parks, 70. “I don’t even have a pension, but who knows, I might end up with a painting job from someone whose pension I helped save.”

In a nod to the rarity of Chapter 9 cases, U.S. District Judge Steven Rhodes opened proceedings today with a primer on the court’s limited role in the city’s restructuring.

“It is important to note the very limited role a bankruptcy court and judge play in a municipal bankruptcy case under Chapter 9,” Rhodes told dozens of lawyers attending the second hearing in the historic bankruptcy case.

Rhodes also emphasized that he is not responsible for city services or hiring or firing officials.

“City officials are not accountable to this court,” Rhodes said. “The court has no role in running the city or the services it provides. Complaints, compliments and suggestions should continue to be directed to the city.”

Rhodes said he will resolve challenges raised as the city tries to prove that it is eligible for Chapter 9 relief and pursues approval of its plan to restructure debts.

The federal courtroom hosting the Detroit bankruptcy hearing today is near-capacity a few minutes before U.S. Bankruptcy Judge Steven Rhodes takes the bench at 10 a.m.

The eight rows are filled with reporters and attorneys, including several pop-up pundits ready to feed the media with a quip and analysis.

So many lawyers, in fact, that they have to sign in alphabetically: A-I, J-R, S-Z.

There are two overflow courtrooms on the first floor of U.S. District Court for media and attorneys who can’t squeeze into Rhodes’ courtroom, which he is borrowing from U.S. District Judge Bernard Friedman because bankruptcy court across Fort Street is so small.

Outside, several protesters marched along Lafayette, complaining about proposed pension cuts and carrying signs urging harsh treatment for Wall Street banks.

Serial plaintiff/criminal defendant Robert Davis tried his ant-at-the-picnic trick in bankruptcy court Wednesday and got squashed.

The indicted Highland Park school board member, who has injected himself into Detroit’s financial crisis by filing multiple lawsuits while awaiting trial on federal charges he stole $125,000 from the cash-strapped school district, popped up in the bankruptcy case Wednesday.

U.S. Bankruptcy Judge Steven Rhodes plays rhythm guitar in the cover band The Indubitable Equivalents.

U.S. Bankruptcy Judge Steven Rhodes plays rhythm guitar in the cover band The Indubitable Equivalents.

Davis tried clarifying whether the city’s bankruptcy case froze his lawsuit challenging whether Emergency Manager Kevyn Orr’s appointment violated the Open Meetings Act.

One problem: his lawyer isn’t trained on the court’s electronic filing system. So Davis dropped a hard copy on U.S. Bankruptcy Judge Steven Rhodes, the axe-slinging jurist who rocks houses after putting them in financial order.

Rhodes beat down Davis’ request like a skinny kid in a mosh pit.

“The court finds that neither the motion for paper filing nor the underlying motion suggest any good reason why the underlying motion needs to be filed before counsel takes his…training,” Rhodes wrote.

Davis won’t have to wait long for courtroom access of another kind. His criminal trial is Sept. 16.

Picassos and park land aren’t the only assets endangered by the city’s historic bankruptcy filing.

So is the city’s nuclear junk.

The Nuclear Regulatory Commission warned the city this week that Emergency Manager Kevyn Orr can’t dump the city’s cache of radioactive material during the bankruptcy case, according to a court filing. Turns out there are strict regulations governing the disposal of radioactive materials licensed by the feds.

“You cannot just go and sell something at the pawn shop,” commission spokeswoman Viktoria Mitlyng told The News.

The city has 66 devices that are registered with the Nuclear Regulatory Commission due to low-levels of radioactive material. Those devices include chemical agent monitors, lead paint analyzers, and  X-ray fluorescence analyzers. It’s possible the city also has glow-in-the-dark signs that feature a radioactive isotope of hydrogen, but Detroit gets a pass because the levels of are so low.

The Department of Justice routinely tracks bankruptcies involving companies and municipalities licensed by federal agencies, which explains why the Nuclear Regulatory Commission popped out of its silo Wednesday.

“If a company goes bust and a financial entity takes over, they will just liquidate as much as they can,” Mitlyng said, “but you cannot liquidate nuclear material.”

She had a quick answer when asked whether Detroit was sitting on any barrels of nuclear waste.

“No, no, no, no, no,” she said.

Robert Snell
Robert Snell is the Detroit News federal courts reporter. He can be reached at rsnell@detnews.com or (313) 222-2028.