JUDGE RULES HE CAN'T STOP DETROIT WATER SHUTOFFS

Original Story: freep.com

Detroit's bankruptcy judge today said he lacked the authority to issue a restraining order to stop water shutoffs over delinquent bills, saying that there is no constitutional right to water and a moratorium would be a financial hit to the Detroit Water and Sewerage Department.

"Chapter 9 strictly limits the courts' power in a bankruptcy case," U.S. Bankruptcy Judge Steven Rhodes said as he read a ruling from the bench this morning.

While Rhodes' ruling made it clear he understood the scope of the problem of water shutoffs in a city with deep poverty, he said the plaintiffs in the case — advocates including Moratorium Now, the Peoples Water Board and the National Action Network — did not make the case that a six-month moratorium was necessary or within his powers.

He also noted that Detroit and Wayne, Oakland and Macomb counties are in the process of approving a new Great Lakes Water Authority under which Detroit would maintain ownership of the region's water and sewer system but lease the pipes that largely serve the suburbs, in exchange for $50 million a year for 40 years dedicated to fixing aging water and sewer lines.

Given that Detroit is in bankruptcy and under intense pressure to make every operation in the city as cost-effective and efficient as possible, "the last thing it needs is this hit to its revenues," Rhodes said.

Alice Jennings, a lawyer representing the plaintiffs who sought a moratorium on water shutoffs, said she is disappointed in Rhodes' ruling and will look to appeal his decision.

"No one ever said the water had to be free," Jennings said. "Our position is the water had to be affordable. We're still looking for affordable water."

Jennings said the most important part of Rhodes' ruling was his admission cutting off water service causes irreparable harm. Jennings pointed out the city does not have specific data on how often water has been cut off at homes with children or disabled people.

Jennings said federal mediators and the state came up with a plan to save art at the Detroit Institute of Arts. Why not a plan to save people without access to affordable water, she asked.

"We need to evaluate how many people are without water and the safety and health risks involved," she said. "Come up with the grand bargain to save the health and safety of the children and seniors."

The testimony came this morning in the hearings on Detroit's bid to get out of bankruptcy.

Rhodes also is likely to hear updates from city lawyers about the agreement reached last week to keep emergency manager Kevyn Orr on the job until the bankruptcy exit strategy is approved, yet restore power to run city government to Mayor Mike Duggan and the City Council.

During a meeting of the city's financial advisory board on Friday, Orr outlined the arrangement that will keep him in charge of shepherding Detroit through the final stages of its bankruptcy.

Orr will technically remain emergency manager until the plan of adjustment is confirmed, but he relinquished control of city government back to elected officials in a deal announced Thursday. Without the powers of emergency manager, he told the board, it wasn't clear he'd have the authority to conclude bond deals crucial to the city emerging from the largest municipal bankruptcy in U.S. history.

Orr said he expects testimony to last only a couple more weeks.

"Hopefully sometime between the end of the trial and Thanksgiving we'll have a final ruling," Orr told the board.

Orr is among the next four witnesses Jones Day lawyers for the city plan to call this week. An amended witness list the city filed last week said that, before Orr appears on the stand — for what's likely to be some of the most critical testimony of the case — the city plans to call:

■ Gaurav Malhotra, a managing partner at the accounting firm Ernst & Young's Chicago office, who has been a key financial adviser to the city.

■ Ken Buckfire of Miller Buckfire, the investment banker who has been advising Detroit on matters like creation of a regional water authority.

■ James Doak, a managing director at Miller Buckfire.

Rhodes said last week, after a day and a half of testimony on the water shutoffs, that he would issue a ruling this morning.

Advocacy groups who sought a moratorium on shutoffs testified last week that the Detroit Water and Sewerage Department's policies of mass shutoffs — 19,000 in recent months — are leaving low-income households with seniors and children without water service.

They asked Rhodes to issue a temporary restraining order to stop the shutoffs until the city can come up with a better way to address the unaffordability of water service in a city where more than half of households live at or below 150% of the federal poverty level.

Also last week, Rhodes agreed to hear an appeal from labor activist Robert Davis. He asked the judge for permission to file a lawsuit in Wayne County Circuit Court on allegations that the Detroit council illegally met in closed session to debate the agreement that keeps Orr on to manage the bankruptcy.

DETROIT MAYOR'S OFFICE: WE WON'T KEEP ORR OR LAW FIRM AFTER TIME'S UP

Original Story:  Freep.com

Mayor Mike Duggan's office said Thursday he won't support extending Kevyn Orr's time as the city's emergency manager or keeping on his former law firm, Jones Day, if Detroit's bankruptcy extends beyond Orr's expected exit date in late September.  A Tulsa Bankruptcy Lawyer is viewing details of the story.

The issue arose after U.S. Bankruptcy Judge Steven Rhodes questioned Jones Day lawyers during a hearing Thursday, asking what impact a delay in the schedule of the bankruptcy case would have on the high-priced law firm the city hired.

Lawyers for Detroit's financial creditors and for Oakland and Macomb counties tried Thursday to convince Rhodes to delay the case by a month because city lawyers aren't releasing critical documents quickly enough to meet ambitious timetables for this summer's confirmation trial on the plan to exit the nation's largest-ever municipal bankruptcy. A Boston Bankruptcy Lawyer agrees that this makes things difficult.

Rhodes appeared concerned about whether such a delay would push the ultimate resolution of Detroit's bankruptcy beyond the tenure of the state-appointed emergency manager, whose 18-month term is set to end in late September, when city officials have the legal option to vote to fire Orr under Michigan's emergency manager law.

Rhodes asked whether Jones Day, the law firm hired by the city under former Mayor Dave Bing, would stay on after Orr is gone. Greg Shumaker, a Jones Day lawyer, acknowledged that the uncertainty about that matter "could be dramatic." But he told the judge: "We have not talked to the mayor or the City Council about that issue."

"I'm surprised by that," Rhodes said.

He then asked Shumaker whether the goal of ending Detroit's bankruptcy case before Orr leaves sets up deadlines that might conflict with sound practices in bankruptcy court. Shumaker concurred.

Duggan made clear that if the bankruptcy proceedings extend beyond Sept. 25, he won't support keeping Jones Day as the city's law firm in bankruptcy.

"We have no intention of keeping Jones Day," Duggan's spokeswoman and chief of staff, Alexis Wiley, told the Free Press. "We have every intention of running this city, and that means both services and finances."

Wiley declined to discuss how Duggan would handle the bankruptcy after ditching Jones Day, or which lawyers would pick up where the firm left off.

Bill Nowling, a spokesman for Orr, acknowledged there have been no discussions about Jones Day staying on after Orr is gone, noting that Orr and the firm's lawyers have been "operating on the schedule which has the confirmation hearings concluding in August."

Orr, who was working out of the Jones Day office in Washington before coming to Detroit, has said previously that he is not interested in staying in Detroit beyond September.  A Lexington Commercial Bankruptcy Attorney said he doesn't blame him.

The confirmation hearings are to determine whether Rhodes approves the city's blueprint for exiting bankruptcy, which has been on a fast-track schedule in large part because Orr's time in Detroit was limited to 18 months. The hearings had been set to begin July 24 and last into August, but a group of financial creditors this week asked Rhodes to push the beginning of the hearings to Aug. 26.

Lawyers for creditors including Syncora -- a bond insurer that's on the hook for nearly $250 million because it guaranteed a disastrous $1.4-billion debt deal meant to shore up underfunded pensions in 2005 -- argued that delays in the city's release of documents creditors have requested make the schedule impossible to follow.

"The city's actions are crippling our efforts," Syncora lawyer Stephen Hackney said during a status conference Thursday.

Creditors' lawyers say that their expert witnesses won't have enough time to analyze and report on city financial assumptions without the delay.

The creditors are seeking access to a number of documents they say the city hasn't released, including reports on the physical condition of Detroit Water and Sewerage Department infrastructure and long-term financial projections for the system, as well as financial background used by consultants such as Milliman, Ernst & Young and Conway MacKenzie, who have advised the city on some matters including restructuring city government and its liabilities and devising a long-term plan to operate Detroit after bankruptcy.

Jones Day lawyer Heather Lennox, representing the city, said that Detroit had already released key documents to the creditors and that the remainder would be handed over by next week. She and other lawyers for the city suggested that the creditors were seeking access to documents in a bid to delay the trial.

Geoff Irwin, also representing the city, said the crush of requests for additional documentation "is becoming incredibly burdensome and unmanageable for the city."  A New Orleans Business Bankruptcy Attorney said that they should expect this type of request.

Rhodes didn't immediately rule on the request for the delay, saying he would issue an order soon to address the concerns. But he told lawyers for the city that the creditors are entitled to access a significant number of the documents they're requesting.

How a major shift in legal representation during the endgame of the case would impact Detroit's bankruptcy wasn't immediately clear.

Even if Orr departs before the bankruptcy is settled, under the state's emergency manager law, Public Act 436, Detroit would remain under a financial emergency -- with significant state oversight -- until Gov. Rick Snyder declares the emergency over. That could put pressure on Duggan and the council to accept new agreements to maintain Jones Day's representation in some form.

Snyder's spokeswoman couldn't be reached for comment Thursday.

As of last fall, Jones Day's contract with the city had been approved up to $18 million, among the largest fees charged by lawyers and consulting firms addressing Detroit's financial collapse. .

BANKRUPTCY DEBT DEAL TO SAVE DETROIT ABOUT $65M

Story first appeared on DetroitNews.com.

Detroit — Emergency Manager Kevyn Orr and lawyers for two banks reached a new $165 million agreement Tuesday for terminating a pension debt deal blamed for plunging Detroit into bankruptcy.

The new agreement saves Detroit an additional $65 million and was announced in court this morning before Chief U.S. District Judge Gerald Rosen, who is the lead mediator in Detroit’s bankruptcy case. The city spent two days trying to reach more favorable terms for ending the pension deal as part of a settlement seen as crucial to Orr's overall plan to shed billions in city debt.

“It's the first, I think it's fair to say, significant agreement in the bankruptcy,” Rosen said today, according to a court transcript. “We understand this has been difficult for everybody and we appreciate it.”

The deal must be finalized by Jan. 31 and approved by U.S. Bankruptcy Judge Steven Rhodes. It was unclear whether bond insurers and others who objected to the original $230 million deal will fight the new agreement.

“We are very pleased and hope that this is a change that Judge Rhodes is happy with,” lead Detroit bankruptcy lawyer David Heiman said Tuesday outside federal court before climbing into a taxi.

Asked if he was happy about reaching the deal early on Christmas Eve, he simply said: “Yes.”

Mediation talks have been private and security guards were stationed outside Rosen’s courtroom Tuesday morning. Rosen ordered the city, banks and bond insurers to meet Monday and on Christmas Eve to negotiate a deal that could free up money for restructuring.

In all, Detroit will save $128 million by terminating the troubled debt deal reached during ex-Mayor Kwame Kilpatrick’s tenure. That represents a 43 percent savings, according to Orr.

The settlement means Detroit won’t have to borrow as much money to pay off two banks, UBS and Bank of America. Instead of borrowing $350 million from London-based Barclays, the city will borrow $288 million.

Detroit will pay $165 million to the banks and spend $120 million on basic city services, including blight removal, updating city information technology and other “quality of life” improvements.

“This is an important development for the city and its residents because it means we can start moving forward on implementing needed investments in public safety and services,” Orr said in a statement Tuesday.

The negotiation sessions were ordered late last week after Rhodes expressed concern about Detroit’s plan to pay two banks up to $230 million to end an interest rate swap arrangement. Rhodes questioned whether the deal was fair to other city creditors.

“Clearly they were sent a message and they listened to what Judge Rhodes had to say – that he wasn’t going to approve it,” said Douglas Bernstein, a Bloomfield Hills attorney and expert on municipal bankruptcy. “Absent that push, nobody would have done anything and they would have had to fight it out with the other creditors.”

The renegotiated deal comes three weeks after Rhodes ruled that Detroit is eligible for Chapter 9 bankruptcy relief and said pensions can be cut in bankruptcy court.

“This is an indication that Detroit, at least for now, is starting to follow the same pattern as bankruptcies in other cities in that once you get by the eligibility dispute, settlements fall into place,” Bernstein said.

Before Rhodes raised his concern, Detroit proposed borrowing $350 million from Barclays. Orr wants to use most of the loan to pay off UBS and Bank of America for a hedge owed on interest rate swaps tied to $1.44 billion in 2005-06 pension debt.

A city banking consultant Friday said Detroit’s legal team was engaged in “extraordinarily active” negotiations with the banks to lower the swap settlement amount. Based on the value of the swaps, which is calculated based on increasing interest rates, Detroit could owe UBS and Bank of America $200 million if the city pays the banks 75 cents on the dollar, said James Doak, managing director at the consulting firm Miller Buckfire.

Several groups had objected to the initial deal, arguing it gave banks a greater payout than other creditors. Orr has proposed paying pensioners as little as 20 cents on the dollar.

Rhodes halted a trial Wednesday to determine whether Detroit could borrow the money and settle the swaps debt before presenting its debt-cutting plan of adjustment.

The judge scheduled the trial to continue Jan. 3.

A two-day trial last week focused on a soured loan deal Kilpatrick’s administration used to pump $1.44 billion into pension funds in 2005 and 2006. The deal included an interest rate swap piled on $800 million of pension debt, court records show.

Detroit’s interest rate swaps with UBS and Bank of America were supposed to protect the city from rising interest rates. But the deal soured for Detroit when prevailing interest rates plummeted in 2008-09, causing the city’s annual payments on the swaps to rise to $50 million.