Attorney gives 'insider's view' of Detroit bankruptcy


By Frank Weir
Legal News

Attorney Valerie Brader delivered the keynote address at the Washtenaw County Bar Association’s 26th Annual Bench Bar Conference on May 15th at Travis Pointe Country Club in Ann Arbor.

In her address, “The Detroit Bankruptcy—An Insider’s View,” Brader offered some personal observations on the Detroit bankruptcy.

Brader was an attorney and later a partner with Bodman’s Detroit and Ann Arbor offices when she joined the Snyder administration.  As a deputy legal counsel for the governor, she was selected to become involved with the Detroit case. Prior to her time with Bodman, she was a clerk for U.S. District Court Judge John Feikens and had been intimately involved with a landmark case involving the Detroit Water and Sewerage Department over which Feikens presided. She continued her work with that case when she joined Bodman in 2007.
She is a graduate of Harvard College, the University of Oxford, the Georgetown University Law Center, and is a Rhodes Scholar.

Brader acknowledged that she “knew Detroit was broke, but the level of brokeness I had not appreciated.”

At the time she became involved, all efforts were aimed at avoiding bankruptcy.

“But in the next few weeks of my involvement, it became clear that was not going to happen —especially when (Emergency Manager Kevyn) Orr made a proposition to creditors on June 14,” said Brader.

She explained that the city had a debt of $18 billion and took in only a billion and half a year. Of the $18 billion in debt, $8.4 billion was secured (protected in bankruptcy) leaving $11.4 billion “up for grabs,” she said. The bulk of that, $9.1 billion, represented employee-related expenses particularly health care and pensions for retirees.

“The average pension was about $19,000 — so these were not rich pensions but there were a lot of them. Detroit was a lot bigger and had a lot of employees; now it was a much smaller city: fewer residents, fewer employees, far less revenue. It was discovered that Detroit had just four percent of what it needed in the bank to meet its non-pension employee-related obligations, like health care.”

Detroit’s troubles also were obvious from infrastructure statistics, Brader noted. Police response time averaged 58 minutes, when the national average is 11 minutes; cases solved by police numbered 8.7 percent versus 30.5 percent statewide; only a third of the city’s ambulances were functional on a given day, an average of 11 or 12; 40 percent of street lights were not functioning, half due to vandalism, the other half due to age. In addition, she noted that there were 78,000 abandoned structures with an average cost of $10,000 apiece to demolish them.

“Those were the sorts of infrastructure challenges the city was facing,” she said, and given the creditors’ initial responses, it quickly became obvious that bankruptcy was the city’s only option.

She said there was a good deal of opposition to filing for bankruptcy.

“Everyone believed if the city was not in bankruptcy, there was no way it could cut pensions. There were lots of questions about that and pensioners argued strongly that the city was not eligible for bankruptcy.”

Also, insurers of the city’s debt opposed bankruptcy as did other sets of creditors in the complicated case. At one point, Brader said there were some 20 lawsuits connected with the filing.

A key dispute at the time of the filing was whether filing the case could be conditioned on not cutting pensions.

“That’s where we found the state’s attorney general and the governor not on the same page because Gov. Snyder did not want to have any conditions on the bankruptcy — including one saying that pensions could not be cut — while the attorney general felt that pensions could not be cut even in bankruptcy,” Brader said. “We had to find alternate counsel but have them work through the attorney general’s office. You can imagine the complications that can lead to.   Dickinson Wright was selected and we never had a problem but it took a complicated case and made it even more complicated.”

She said Judge Steven Rhodes ruled the city was eligible for bankruptcy, and that Snyder’s decision not to put any conditions on the bankruptcy had been crucial to allowing the city to meet that legal hurdle.

“Some people argued that some experts weren’t sufficiently qualified but the judge said things were so bad you don’t even need an expert. Another key initial ruling by the judge was that the pensions could be compromised in the bankruptcy,” Brader said.

Key resolutions in the case included finding new sources of revenue, solving the health care and pension liabilities, and not selling the art owned by the Detroit Institute of Arts, Brader noted.

She said U.S. District Judge Gerald Rosen, appointed by Rhodes as chief of a panel of mediators in the case, “had a brainstorm” and developed a plan to bring in outside money primarily from foundations.

“I was privately skeptical,” said Brader. “(Former state Attorney General) Mike Cox had sued the Ford Foundation and they were now going to bring in money to save Detroit? But in fact Judge Rosen did get the Ford Foundation to contribute $125 million and Kresge put in $100 million. There was a strong response from a large number of foundations, although they conditioned their contributions on several things including that the money they contributed would go to pensioners, and the DIA art not be sold.  They also conditioned it on the state putting in a large contribution and  I was nervous about that.”

Brader said many of the people involved in the bankruptcy were surprised that out-county politicians — and their constituents —supported contributing to save Detroit. They thought it would be a hard sell.

“We never expected people to say, we have to do this,” said Brader. “Where pensioners live played a part. There are a fair number outside of Michigan and many around the state. Lots of them live in Oakland and Macomb Counties.”

Once the financial mechanisms were put in place, the complicated set-up had to be approved by pensioners. If approved, pensions would only be cut by 4.5 percent, not the 24 percent originally forecasted as necessary, Brader said.

“But there would be approximately a 90 percent cut of health care. We recognized this was a gigantic sacrifice to ask pensioners to make. We had to try to explain all of this on a ballot and supporting materials that would be readable but was 20 pages long. We had to explain it to all the other creditor classes. Folks hit by a police car, civil rights violations, they all got votes too.

“We saw amazing leadership from the retirement community. Shirley Lightsey, president of the Detroit Retired City Employees Association, began talking to people about why they should vote yes. During balloting she had to have knee surgery but still made it to Lansing and to several events urging people to vote yes. She kept saying, you can’t eat principles. Don Taylor of the fire and police retirees made similar pleas.”

“After the vote, approximately 70 percent of pensioners voted yes. They understood the package.”

Brader said once the vote was in, it was “beautiful to see how other creditors came to the table. They felt attracted now to negotiate. Bond insurers were some of the most litigious from the beginning. They said give us an option on property down the road for redevelopment.”
Brader noted the bankruptcy concluded in December. 

“Detroit was in bankruptcy for 18 months, 20 months under emergency management,” she said. “It’s an extraordinary time frame and it was extraordinary for me to be a part of it. I think we are seeing the turn around of the city.”

She noted that homicides have fallen 18 percent and case closure rates for homicide is now 72 percent. Police response times are down to 18 minutes, ambulance responses to 12 minutes.

“Things have changed to improve Detroit lives” she said. “Did the bankruptcy give Detroit a chance to get on its feet and meet its burden to its citizens? Absolutely. Is it anything like the rest of the state? No, but there is a path now to get there.”