04.23.14

In some ways, the bankruptcy is like a jigsaw puzzle, where a thousand little pieces have to fall into place before the big picture can take shape. ~ Stephen Henderson, The Detroit Free Press

One More Lap.  U.S. Bankruptcy Judge Steven Rhodes yesterday appointed Martha Kopacz (please see court order below) to serve as: “The [U.S. Bankruptcy] Court’s expert witness [who] shall investigate and reach a conclusion on:

  • (a) Whether the City’s plan is feasible as required by 11 U.S.C. § 943(b)(7); and
  • (b) Whether the assumptions that underlie the City’s cash flow projections and forecasts regarding its revenues, expenses and plan payments are reasonable.

Judge Rhodes, who described the unprecedented appointment as temporary, made the $595/hour appointment of Martha Kopacz of Philadelphia-based Phoenix Management Services just four days after interviewing five candidates in his courtroom. She estimated her fees would cost “about seven figures.” In addition, Judge Rhodes asked Richard Ravitch, the former Lieutenant Governor of New York and Co-Chair with Paul Volcker of the State Budget Crisis Task Force to serve as a consultant on municipal finance issues and viability of the city’s debt-cutting plan. Mr. Ravitch will not ask for payment. The Judge has described the unique role as one to assist him in assessing the feasibility of Detroit’s proposed plan of adjustment, including reviewing the city’s financial assumptions and projections. Ms. Kopacz has described Detroit’s bankruptcy as massive, but states that “If this city gets it right, it’s going to lay a nice foundation for other cities, other municipalities to go forward,” describing the plan “as a giant change project” for the city. The seven figure final tally will be paid for by the city of Detroit, so one can appreciate some sense of the investments Judge Rhodes deems necessary to ‘get it right,’ to take the steps to ensure the financial numbers that will be critical to his final determination have been confirmed by an outside expert—all part of his unremitting effort to seek to ensure that if and when Detroit exits municipal bankruptcy, it does so to realize a sustainable future.

U.S. Treasury Secretary Jacob Lew will travel to the Motor City Thursday and Friday this week. While he will not be bringing cash or a new urban policy, he will travel with some hope of wrapping up discussions with regard to redirecting federal foreclosure relief funds to be invested in blight removal—a critical step towards the long-term sustainability of Detroit. According to the Treasury, the Secretary is making the trip to “highlight the Obama Administration’s continued commitment to the city’s revitalization and explore ways to promote job creation and economic growth.” Secretary Lew oversaw the Treasury’s efforts to shed its final shares in Detroit-based automobile lender Ally Financial Inc. Thursday, he will meet with the city’s non-profit leaders to discuss ways the nonprofit sector could help spur Detroit’s revitalization “by developing and investing in programs that support economic development, promote education and workforce skills training, and increase access to capital.”

Friday, the Secretary will tour New Center Stamping, a metal stamping business in Detroit which received $3.7 million in funding from the Treasury Department’s State Small Business Credit Initiative, and was credited with saving existing jobs and “will allow it to expand its workforce,” according to the Treasury. In addition, Secretary Lew will meet with area business and community leaders to “discuss the condition of Detroit’s economy.” The Secretary will be walking a fine line, as the Obama Administration has been emphatic that – unlike the federal bailouts for General Motors and Ford, the Obama administration will not provide a bailout for the City of Detroit. Nevertheless, as Emergency Manager Kevyn Orr and the ever so synchronizing U.S. Bankruptcy Judge Steven Rhodes are coordinating the “thousand little jigsaw pieces” to fall together, negotiations to free up federal blight funding could add some greater flexibility and resources to better enable all those pieces to come together. Mayhap more importantly, as we think about longer term recovery and fiscal and economic sustainability, the discussions this week could be vital to Mr. Orr’s proposed plans to dedicate about $520 million to blight removal during the next five years to address the Motor City’s estimated 78,000 blighted and abandoned properties. Already, the Obama administration has a team of advisers — including two from Treasury — working to find ways to speed up funds and help the city apply for funds for which it might be eligible. The team also is providing technical assistance and other help.

State Constitution v. Federal Law. At his press conference in Lansing yesterday in the wake of the U.S. Supreme Court’s decision upholding Michigan’s voter-approved ban on race-based admissions at the University, Michigan Attorney General Bill Schuette did not respond to questions with regard to his next steps in Michigan’s appeal of U.S. Bankruptcy Judge Steven Rhodes’ December decision finding Detroit eligible for municipal bankruptcy—and that the federal law trumps the Michigan constitution with regard to the sanctity of contracts—in this case the contract guaranteeing no cuts in pension benefits. With last week’s agreement by the boards of the Motor City’s two major retirement systems and a retiree association to end their appeals, it would appear the next step is up to Attorney General Schuette, who, last January, had requested an expedited appeal from the 6th U.S. Circuit Court of Appeals, with the state brief noting: “The city can no more discharge these debts than it can suspend civil liberties, seize the property of former employees, or cancel elections — all fundamental violations of Michigan law.” But now the rubber must be ready to meet the proverbial Motor City road: Briefs from all sides, including Attorney General Schuette , are due tomorrow.

Recovery & Sustainable Future. Last month, a devastating landslide rendered the unincorporated municipality of Oso in Washington State insolvent. But unlike a fiscal landslide, a natural one leads to a very different response—including significant aid from neighboring municipalities, from the state, and from the feds. But, yet, the very hard questions of whether and how to provide for a sustainable future – here defined by will it even be safe to rebuild, will the water be safe, will the roads be rebuilt, will there be timely warnings of future slides, and how will all this be financed are not dissimilar to the hard questions Judge Rhodes and Kevyn Orr are confronting in Detroit. There are, of course, extraordinary differences: President Obama yesterday toured Oso, promising residents that the nation was still with them in grieving and rebuilding, and would be for the long haul, “Every step of the way.” He said the nation had watched how Oso came together and had been made better by the example: “To see the strength in adversity of this community, I think, should inspire all of us.”

There has been no question with regard to a federal bailout―even as remains are still being retrieved from the municipality’s 30-feet-high debris field. It is pretty clear that reliance on municipal property taxes in the foreseeable future is not on the table. Indeed, the search for victims continues day and night. There are 600 or more workers on site—workers with the merciless mission of combing the site for the bodies of loved ones. The federal government, via the U.S. Army Corps of Engineers has built a 2,000-foot-long earthen berm to allow standing water to be drained, so rescuers and searchers can get closer to where they believe victims are buried, after earlier relying on divers working in near-zero visibility. Some residents are concerned that soil from the slide is contaminated, and, if not removed, will damage the value of properties nearby—a concern not unlike the ones shared by Judge Rhodes and Kevyn Orr that blight in Detroit can continue to erode assessed property values―and threaten the city’s fiscal future. Like in Detroit and San Bernardino, the costs of recovery are uncertain. Unlike in either of those cities, however, in little Oso there are nearly 100 federal, state and local agencies involved, including the Washington State Military Department, State Police, National Guardsmen, and the departments of Agriculture and Archaeology & Historic Preservation. The state, moreover, believes the damage estimate will top $53 million, a good portion of which may be reimbursed with federal funds, with highway restoration costs alone running into “tens of millions” of dollars. Monday, the U.S. Department of Labor announced a $2.9 million grant for cleanup and recovery. On Saturday, the Federal Emergency Management Agency disclosed $13 million for relief.

Challenging Municipal Bankruptcy Recovery. Jefferson County’s attorneys, who face a hearing May 15th challenging U.S. Bankruptcy Judge Thomas Bennett’s approval of the county’s exit from chapter 9 municipal bankruptcy, are already claiming the petitions filed by former broker-dealer Calvin Grigsby, an attorney representing 13 people known as the Bennett ratepayers whose lead plaintiff is Jefferson County Tax Assessor Andrew Bennett, fail to address required legal matters and are largely devoted to “completely tangential allegations.” The hearing the week after next will focus on two of the three appeals filed by includes local residents and elected officials who are trying to unwind the bankruptcy exit that resolved the Jefferson County’s $3.1 billion of sewer debt with the sale of $1.8 billion in new sewer refunding warrants last December. The Bennett ratepayers filed a main appeal of the reorganization plan, which dismissed their claim for the return of sewer funds paid by the ratepayers. The group also appealed rulings over their two adversary proceedings opened during the county’s two-year stint in court. Adversary proceedings are complaints about specific claims, equitable relief, or other issues. The ratepayers’ proceedings, however, were dismissed as being moot when the Chapter 9 plan was confirmed. Similarly, Jefferson County claims it has already demonstrated the two appeals are moot under constitutional, equitable, and statutory doctrines. According to the attorneys for the County, the Bennett ratepayers do not have a viable response to the mootness doctrines; they did not contest the county’s evidence; and they did not submit evidence of their own. Judge Bennett approved the County’s exit from municipal bankruptcy on December 3rd after implementation of its plan of adjustment plan through the sewer refunding. The county also had $1 billion of other debt outstanding, and the plan made most of those creditors whole though the underlying debt was refunded in some cases to extend maturities or resolve non-payment defaults. Next month’s hearing comes just weeks after Ronald Sims, the court-appointed receiver in Jefferson County, officially assumed direct supervision of Jefferson County’s Human Resources Department earlier this month. Mr. Sims and his team will earn more than $700,000 annually, according to court filings—a small portion of the receiver’s $9.8 million budget for this year. Since his appointment, Mr. Sims has phased out former Human Resources Director Demetruis Taylor, who earned approximately $175,000 annually. Now, with total control of the department the receiver has crafted a proposed organizational chart that includes a cadre of his own hires.

Read it & Smile! Central Falls Mayor James Diossa yesterday reported that Actor Alec Baldwin will visit Rhode Island this June 7th to help fundraise for the Adams Memorial Library in Central Falls. Mr. Baldwin will visit the library and Fete, a boutique live music venue in nearby Providence, for fundraisers expected to raise up to $125,000 for the library. According to an announcement on the Adams library website, Mr. Baldwin and others will present dramatic interpretations of famous literature at Fete. Ticket holders can enter into a raffle for a chance to read a dialogue on stage with Mr. Baldwin, who has already contributed $15,000 to the Adams library since Central Falls or Chocolateville filed for municipal bankruptcy in August of 2011; in addition, he has given $2,500 to support the Central Falls High School chess club. The old mill town we visited nearly two years ago today to meet with its receiver, Judge Flanders, has a population of 19,000, and is walking distance to East Providence and Providence. It exited Chapter 9 protection in September 2012. Two years ago, our crack team of students noted:

Central Falls was plagued with problems contributing to its insolvency: low civic engagement, a small tax base, and the departure of business. Its old industrial base is gone; it is unclear whether a community of one square mile can have a sufficient economic base. The key to the Central Falls story is signs of financial distress were apparent in 1991 and, absent political will, no changes were made. Some see Central Falls as emblematic of the crisis facing municipalities across America. The inability of Central Falls’ leaders, employees, citizens and taxpayers to reach an agreement to avert insolvency and default triggered a filing for federal Chapter 9 municipal bankruptcy protection—a critical tool to avoid default and loss of access to credit markets so that the city could continue to provide essential services—and so that the city’s budget could be restored to balance. Central Falls expects to emerge from municipal bankruptcy soon due to the restructure of the city’s budget to eliminate its deficit and adoption of a five year plan.

 

Violent Crime in the Windy City. In our report on Chicago, we noted that “[A]ddressing crime has been a critical fiscal priority for the city, as a perception of safety is fundamental to the city’s aspirations to be an international convention city—not to mention the perception and relationship of public safety to healthy assessed property values. The increased attention and focus on crime appears to be paying off. Chicago crime statistics report an overall downward trend in crime based on data from 12 years with violent crime decreasing and property crime decreasing. Based on this trend, the crime rate in Chicago for this year is expected to be lower than in 2010. The city violent crime rate for Chicago in 2010 was higher than the national violent crime rate average by 148.31%. The city property crime rate in Chicago was higher than the national property crime rate average by 44%.”

We noted that Mayor Rahm Emanuel has made addressing violent crime a high priority. Nevertheless, following one of the most violent weekends of the year so far, the U.S. attorney’s office in Chicago this week reported it was forming a violent-crimes section that focuses specifically on gangs, guns, and drugs—with Zachary Fardon, the U.S. attorney for the Northern District of Illinois, specially creating a new effort from a larger narcotics and gangs group: of the approximately 150 prosecutors in the office, 16 are now dedicated to the violent-crimes unit. This past weekend, thirty six people were injured, including four girls and a boy hurt during a drive-by shooting Sunday night, according to the police department. Eight people were shot to death, boosting the murder count to 83 for the year—compared to last year’s year-to-date number of 85; Chicago’s murder toll in 2013 fell 18% from a year earlier to 415, according to the police department—the lowest since 1965 in the nation’s third-largest city.

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

In re: Chapter 9

City of Detroit, Michigan, Case No. 13-53846

Debtor. Hon. Steven W. Rhodes

 

Order Appointing Expert Witness

1. Under Fed. R. Evid. 706(a), Martha E. M. Kopacz of Phoenix Management Services, Boston

MA, is hereby appointed as the Court’s expert witness.1

2. The Court’s expert witness shall investigate and reach a conclusion on:

(a) Whether the City’s plan is feasible as required by 11 U.S.C. § 943(b)(7); and

(b) Whether the assumptions that underlie the City’s cash flow projections and forecasts regarding its revenues, expenses and plan payments are reasonable.

3. Unless the Court orders otherwise, the matters in paragraph 2 above are the only matters that the Court’s expert witness is authorized to investigate, reach a conclusion on, or testify about.

4. All interested parties and their professionals shall fully and promptly cooperate with the

Court’s expert witness and shall promptly comply with any requests for information made by the witness.

5. The Court’s expert witness shall have no ex parte communications with the Court, except that the witness may submit a written request to the Court for assistance as needed in carrying out her responsibilities, or for guidance. Such a request shall be submitted to the Court as an attachment to an email sent to christine_sikula@mieb.uscourts.gov. Upon receipt of such a request, the Court will arrange for its filing on the docket of the case and will promptly determine the appropriate process to address the matter.

6. By the deadline for the parties’ expert witnesses to serve their reports on other parties, the

Court’s expert witness shall serve her report (in such manner as may be agreed by the parties or directed by the Court), along with copies of any document cited in the report or otherwise considered by the witness in preparing the report, excluding documents previously produced in discovery among the parties and publicly-available professional literature. (Currently, this deadline is June 24, 2014.)

1 The resume of Ms. Kopacz is attached to this order.

 

7. After filing the report required by paragraph 6 above, but by the deadline for other expert depositions, the Court’s expert witness shall be available for a consolidated deposition by any interested parties. (Currently, this deadline is July 15, 2014.)

8. The report of the Court’s expert witness shall be admitted as evidence at the hearing on confirmation of the City’s plan only as provided by the Federal Rules of Evidence, unless otherwise agreed by the parties or ordered by the Court.

9. The Court’s expert witness shall be available to testify in person at the hearing on confirmation of the City’s plan without the need for subpoena or other process, at such time as may be agreed by the parties or ordered by the Court. (Currently, the confirmation hearing is scheduled to commence on July 24, 2014.)

10. Until the conclusion of her responsibilities under this order, the Court’s expert witness shall not accept any retention or engagement that might result in a conflict of interest in this case.

11. The Court’s expert witness shall file an interim fee and expense application on a monthly basis during the course of this appointment, with contemporaneous time records attached to the application. These applications shall be filed within 14 days after the close of the each calendar month.

12. The City shall promptly pay the expert witness’s fees and expenses as approved by the Court.

13. The Court’s appointment of the expert witness shall not be deemed to preclude Daubert or other challenges under the Federal Rules of Evidence to the admissibility of all or any of the expert witness’s opinions at the hearing on confirmation of the City’s plan.

14. The Court’s expert witness shall maintain a contemporaneous log of all contacts relating to this case, whether initiated by the witness to others or by others to the witness. This log shall disclose for each such contact the date, time, means and subject matter of the contact and shall be attached to her report.

15. Except as set forth herein or otherwise ordered by the Court, the Court’s expert witness shall treat her investigations and work product as confidential until the conclusion of her testimony at the confirmation hearing.

 

Signed on April 22, 2014

/s/ Steven Rhodes

Steven Rhodes

United States Bankruptcy Judge

13-53846-swr Doc 4215 Filed 04/22/14 Entered 04/22/14 09:54:47

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