11.15.13

Motor City Transition & Power Sharing: Detroit Emergency Manager Kevyn Orr yesterday gave approval to a request from Mayor-elect Mike Duggan to spend up to $275,000 for his transition team expenses, one day after the Mayor-elect named four members of his campaign to head up his transition team. He tapped former Detroit Police Chief Isaiah “Ike” McKinnon, Lisa Howze, a former state representative and mayoral candidate, as co-chairs of the team, who will focus on his key priorities: finances and public safety. Ms. Howze said the transition funding would be “adequate to perform our operational support in the transition process,” and that “It’s a beginning of a cooperative relationship between the Duggan transition team and the emergency manager’s office.” Mr. Duggan named his campaign manager, Bryan Barnhill, as his talent coordinator, and John Roach as the communications manager. The appointments came as the Mayor-elect is seeking to carve out a power sharing role with the Emergency Manager, so that he has begun negotiations with Governor Rick Snyder and Mr. Orr about whether he can run parts or all of city government — and how broad his authority is to bring on a full team. Mr. Duggan hopes to complete appointment of his transition team with volunteers who have expertise in areas such as public safety, blight, health, recreation, and public services. The decisions came as, in a separate arena, U.S. Bankruptcy Judge Steven Rhodes yesterday rejected union activist Robert Davis’ request for “blanket” authority to challenge the legality of Emergency Manager Kevyn Orr’s appointments, including Police Chief James Craig―warning Mr. Davis’ attorney that both he and Mr. Davis could face “sanctions” if they attempt to circumvent his court’s gatekeeper authority over all legal action against Detroit and its elected and appointed officials while the city is in bankruptcy court, although he did grant Mr. Davis relief from the automatic stay to pursue an appeal over his lawsuit challenging City Councilwoman Saunteel Jenkins’ election last summer as council president. Mr. Davis has challenged Council President Jenkins’ appointment, claiming it violated Detroit’s charter, because the election promoted Ms. Jenkins to the president’s chair while then-President Charles Pugh was still in office—even though he was missing in action and stripped of his pay by Mr. Orr. A Wayne County judge had previously held that Mr. Davis could not unseat Council President Jenkins for the remainder of the year. During yesterday’s hearing, Mr. Davis’ attorney additionally sought permission from Judge Rhodes to file legal challenges against other city officials, without providing specifics, except for naming the Chief of Police as one potential target—leading an increasingly testy Judge Rhodes to note: “It’s unfathomable to me in a city with the problems this city has that you want to call into question the office of chief of police.” Detroit city attorney Stephen LaPlante speculated Mr. Davis might be seeking legal authority to block the swearing-in of Mayor-elect Mike Duggan, telling Judge Rhodes: “But if he’s going to be a target, then it may well jeopardize the city’s ability to restructure.” (Mr. Davis, an employee of AFSCME Council 25, appears to have other judicial issues: he faces federal charges for allegedly stealing money from the cash-strapped Highland Parks school district.

Dipping in for a Loan—So much for Helping Detroit. Judge Rhodes appears to have no shortage of tasks in overseeing Detroit’s bankruptcy, also holding hearings yesterday on various motions from the Motor city and its creditors that have been pending before his court, including an effort by Emergency Manager Orr’s legal team to file with the court under seal a bank’s offer to loan the city $350 million during bankruptcy―to which Judge Rhodes responded that the city will have to reveal the fees it would pay to Barclays for a $350 million debtor-in-possession loan―a setback for Detroit and the bank as they are trying to close one of the few so-called DIP loans by a municipality in Chapter 9. (In most large bankruptcy reorganizations, the entity filing for protection, known in bankruptcy lingo as the debtor in possession or “DIP,” requires new funding to finance the costs of the case.  These kinds of loans are almost always secured by senior liens on the debtor’s assets.  In some instances, municipalities facing significant short-term liquidity problems have looked to hedge funds as possible lending sources. Section 901 of the Bankruptcy Code, makes Sections 364(c) and (d) of the Bankruptcy Code applicable to Chapter 9 municipality bankruptcy cases. Under these provisions, a municipality may borrow money on a senior secured (and even a priming) basis. Therefore, a federal bankruptcy court could grant an order authorizing a municipal debtor to borrow money and grant senior security interests in its assets.) In this case, the loan would give Barclays a super-priority lien and a pledge of Detroit’s income and casino tax revenues. The effort is opposed by several bond insurers and other creditors are fighting the deal and have challenged Detroit’s request to keep secret the fee it will pay to Barclays for the loan. Judge Rhodes rejected the secrecy request, calling it “really quite irrelevant.” He noted that the fees are subject to the Freedom of Information Act and, therefore, cannot be kept confidential. Moreover, Judge Rhodes made clear his apprehensions and concerns when, during the hearing as the city attorney was questioning James Saakvitne, a managing director at Barclays, Judge Rhodes interrupted the questioning just after Mr. Saakvitne testified it was ”very important” to Barclays to help the city.” This statement provoked Judge Rhodes to say: “Hold on…What’s very important to you is to make money.” To which Mr. Saakvitne responded, “Yes.” “So much for being willing to help the city, huh?” said the Judge. Then Mr. Saavkvitne testified Barclays might not have agreed to the loan had it known the fees had to be disclosed. It was a problem, according to Detroit and Barclays in their respective court filings, that the bank plans to re-sell the loan to investors― and its borrowing costs could rise if investors knew what Barclays was paid: “It is of the utmost importance to Barclays that the details of the fee structure set forth in the fee letter be confidential so that competitors may not use the information contained therein to gain a strategic advantage in the marketplace.” 

An Unappealing Choice. U.S. Bankruptcy Judge Meredith Jury yesterday said she will decide as early as today whether to certify CalPERS’ attempt to appeal her decision finding San Bernardino eligible for federal bankruptcy to the 9th U.S. Circuit Court of Appeals.  Judge Jury noted that attorneys for both San Bernardino and for the California Public Employees’ Retirement System made good arguments. She stated she will issue either the order supplied by CalPERS or a slightly modified version of one supplied by the city: “You both have good ideas, and I have some good ideas that I have a dilemma as to which is the right place to decide this issue and I’m not going to decide it right now,” she said during a telephonic hearing as she was in the U.S. Bankruptcy Court in Riverside. On one hand, the Judge said, it seemed to her that certifying the appeal would disrupt the mediation process and make it more difficult for San Bernardino and its creditors to come to a consensual agreement; on the other, she said: “(However,) there is a side of me that could support the 9th Circuit weighing in on these tricky questions of desire and good faith,” because higher courts have not given rulings to guide municipal bankruptcy cases: “If there were some definitive rulings, it would give direction to some potential debtor cities as well as creditors in those proceedings, perhaps changing the landscape of how the eligibility battle has become the war that it is.” Nevertheless, she appeared skeptical of CalPERS attorney Michael Ryan’s response when she asked what CalPERS would do if she issued the order it wants: “(You’re saying) if we lose at the 9th Circuit, then we’re going to try again at the district court…Which doesn’t seem fair…That seems like extra work, not less work.” Counselor Ryan responded that CalPERS thinks allowing the appeal would be most efficient, and if the appellate court denies the petition “the city will have that arrow in its quiver” for future arguments. In contrast, he said, CalPERS is apprehensive the mediation process would produce a plan and it could be three years before CalPERS was able to make its arguments—and, he added, if the circuit court does not think the appeal belonged in the appellate court — as a previous case by the 9th Circuit suggested, according to the city — the court does not have to accept it. Countering, Paul Glassman, San Bernardino’s attorney, alerted Judge Jury to a decision by a Delaware bankruptcy judge that he said presented compelling arguments as to why the request should be denied: “Lastly, we invite the court to look at the Simon Schuster decision (Advanced Marketing Services, Inc. v. Simon&Schuster, No. 06-11480, U.S. Bankruptcy Court for the District of Delaware, January 22, 2007.)…It’s not that it’s controlling (as precedent). It’s that it’s a thoughtful, analytic decision,” because, he told the judge, it has the same factors that Judge Jury considered when she said at an Oct. 29th hearing that she would not certify the appeal. In that decision, U.S. Bankruptcy Judge Christopher Sontchi wrote:

This is a simple case. Under the express language of §546(c)(1) of the Bankruptcy Code, as amended, the Senior Lenders’ pre-petition and post-petition liens on the Debtors’ inventory are superior to S&S’s reclamation claim. For this reason, S&S has failed to establish it any likelihood (let alone a probability) of success in establishing it has a valid reclamation right under section 546(c) of the Bankruptcy Code. Moreover, S&S has failed to establish the existence of any irreparable harm. Finally, S&S has failed to meet its burden of proof of establishing that the balance of equities support granting an injunction. In short, all of the factors relevant in this case weigh against entering an injunction.9 Thus, the TRO Motion is denied without prejudice.

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