What happened in court today

**BankruptcyGuy** · July-24-13, 08:41 PM

From time to time, I'll use this as a venue to explain what happened today in court, in layman's terms.

When a person or company files for bankruptcy, a particular clause of the Bankruptcy Code provides for a "stay" of any litigation, court proceedings, collection attempts, even contact in an attempt to collect a debt. "Stay" means freeze--the actions are frozen, not cancelled, until the Bankruptcy Court says otherwise.

The issue before the Bankruptcy Court was whether to stay the state court litigation in Ingham County during the bankruptcy proceeding. The judge ordered the stay, meaning that the litigation in Ingham County must stop, not that either side in that litigation was the winner.

So, if the pensioners want to argue that the bankruptcy filing was improper, they cannot file state court litigation; they must file a motion in the bankruptcy court. I'm sure they will.

This ruling does not mean that the bankruptcy filing was proper, just that the venue for hearing that issue is the bankruptcy court.

Also, the judge is allowed to include related parties, and he chose to do so. The state court litigation didn't name the City of Detroit, but it did name Gov. Snyder and Mr. Orr. That litigation, and other litigation against them about the bankruptcy, is also stayed.

This is nowhere near a ruling that pensions may be cut in bankruptcy. That won't happen until a plan is proposed, and if or when an objection is had to those plans. Pensioners will have to consider whether they want to take the risk of objecting. Win, and you get 100%. Lose, and you will get less than you can get by consenting.

Once again, I am happy to take questions.

stevenh · July-24-13, 08:46 PM

Is the state of Michigan considered a cosigner to many of those bonds signed when Gov. Granholm was in office?

**Meddle** · July-24-13, 08:48 PM

Really? Another new thread? Maybe the 5th or more on this?

**BankruptcyGuy** · July-24-13, 08:52 PM

Originally Posted by stevenh

Is the state of Michigan considered a cosigner to many of those bonds signed when Gov. Granholm was in office?

That's what the pension funds will argue. The question might go to the Michigan or U.S. Supreme Court.

**compn** · July-24-13, 08:53 PM

which side will bill schuette be on ? states rights or federal rights?

**Meddle** · July-24-13, 08:57 PM

states rights or federal rights?

What about the residents? How about protecting them from the corruption and greed of the unions and city officials out to line their own pockets? And there's the money going to lawyers that could be spent in a multitude of better ways.

**BankruptcyGuy** · July-24-13, 09:39 PM

Originally Posted by compn

which side will bill schuette be on ? states rights or federal rights?

Well, Schuette is the Attorney General, which means he represents the State, officially. But what position will the State take?

a) no support for pension shortfalls;
b) some support for pension shortfalls; or
c) 100% support [[guarantee) for pension shortfalls.

I'm guessing it's B.

Meddle's point on lawyers is well-taken. 1000's of $/hr in that courtroom today.

**corktownyuppie** · July-24-13, 10:19 PM

Originally Posted by BankruptcyGuy

Well, Schuette is the Attorney General, which means he represents the State, officially. But what position will the State take?

a) no support for pension shortfalls;
b) some support for pension shortfalls; or
c) 100% support [[guarantee) for pension shortfalls.

I'm guessing it's B.

Meddle's point on lawyers is well-taken. 1000's of $/hr in that courtroom today.

I agree with that as well. But I'm preparing my clients to prepare for it to get ugly in negotiations. Sometimes the only way to have someone accept 80% is by arguing that he only deserves 50%.

By the way, there was a photo of a firefighter protesting outside the courthouse with a sign saying "Pension 96% Funded". Is it fair to presume that he had no idea what he was protesting about?

**Wesley Mouch** · July-24-13, 10:28 PM

Originally Posted by Meddle

What about the residents? How about protecting them from the corruption and greed of the unions and city officials out to line their own pockets? And there's the money going to lawyers that could be spent in a multitude of better ways.

But also could be spent in wasteful ways. That's the history. So some money spent to clean-up the city's finances is money well spent.

The residents had protection against greed and corruption. They didn't use it. They voted in favor of fools who were greedy and corrupt. They decided it was more important to be racially pure in mind, than effective in result. Bad choice. They are paying now -- and bringing down a lot of other innocent people.

**gvidas** · July-25-13, 01:31 AM

Originally Posted by BankruptcyGuy

Pensioners will have to consider whether they want to take the risk of objecting. Win, and you get 100%. Lose, and you will get less than you can get by consenting.

So really what you're saying is that we're just watching a big game of Pensioner's Dilemma played for keeps?

**Hermod** · July-25-13, 04:56 AM

I am wondering if they open up the hoods on those two pension funds after decades of "friends and family" trusteeship that they will find the pensions are funded at 90-plus per cent.

**BankruptcyGuy** · July-25-13, 06:47 AM

Originally Posted by corktownyuppie

By the way, there was a photo of a firefighter protesting outside the courthouse with a sign saying "Pension 96% Funded". Is it fair to presume that he had no idea what he was protesting about?

No, that is what the DPFPS actuarial calculation shows. The EM is using a more conservative [[realistic?) rate of return, and shows less funding.

DGRS is significantly less funded than DPFPS, because the former issued more of the "13th check" and gave a higher level of benefits.

**BankruptcyGuy** · July-25-13, 06:48 AM

Originally Posted by gvidas

So really what you're saying is that we're just watching a big game of Pensioner's Dilemma played for keeps?

Does the City side do worse by not cooperating? And it doesn't require simultaneous moves...

[[I love the Prisoner's Dilemma--lots of practical applications.)

**BankruptcyGuy** · July-25-13, 06:51 AM

Originally Posted by Hermod

I am wondering if they open up the hoods on those two pension funds after decades of "friends and family" trusteeship that they will find the pensions are funded at 90-plus per cent.

Two things:

Certainly, what they call discovery [[turning over documents and taking depositions) to determine what's in the pension funds would be allowed. Again, do the funds want to have that level of review. I know first-hand there are some things in there that are beyond head-scratchers.

Second, if the state is responsible for the shortfall, local control over pension investments will go away in short order.

**rondinjp** · July-25-13, 08:25 AM

So i've read this a couple of times and just curious to get your thoughts.

Section 24 of the constitution states :"The accrued financial benefits of each pension plan and retirement system of the state and itspolitical subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby."

To me it doesn't clearly state that Orr would violate this "contract clause" if he amends how much retiree's are allowed to withdraw from a particular pension plan.

For instance, if the pension plan has $200 Million and 2,000 retirees are drawing $10,000 for 10 years the fund would be depleted. However, if the EM comes in and says that the fund needs to be sustainable for 20 years, then the retirees are only going to be allowed to draw $5,000 a year. Under this example, the "accrued financial benefits of each pension plan and retirement system" have not been diminished, but instead the amount a retiree is allowed to withdraw from it has been modified.

Does anyone know if there is legislative history about this clause that would lock in the interpretation that the unions have been arguing? To me it just seems you could read this clause two ways and one way would justify a reduction of retiree's payment without violation.

**Novine** · July-25-13, 08:35 AM

"Second, if the state is responsible for the shortfall, local control over pension investments will go away in short order."

Many of the local units that offer pensions are with MERS, which isn't controlled by the state but functions as a statewide pension plan. The ones that are not in MERS are mostly the larger cities and counties, like Detroit.

**Novine** · July-25-13, 08:36 AM

"Does anyone know if there is legislative history about this clause that would lock in the interpretation that the unions have been arguing? To me it just seems you could read this clause two ways and one way would justify a reduction of retiree's payment without violation"

The terms of the pension payouts are determined at the point a person retires. Changing those after the fact is changing the terms of the contract to the detriment of the pensioner.

**Hermod** · July-25-13, 08:43 AM

Originally Posted by BankruptcyGuy

Two things:

Certainly, what they call discovery [[turning over documents and taking depositions) to determine what's in the pension funds would be allowed. Again, do the funds want to have that level of review. I know first-hand there are some things in there that are beyond head-scratchers.

Second, if the state is responsible for the shortfall, local control over pension investments will go away in short order.

Article in the paper today mentioning Detroit, but pointing out that states and localities across the country have taken unilateral "holidays" from making pension contributions to balance budget shortfalls. Most public pension funds have been using unrealistic rates of return in calculating the adequacy of pension funding using rates of return available from high risk investment strategies.

The article thinks that government entities should have to "privatize" their pension funds to insurance and annuity firms and pay the bill each year based on the insurance company's estimates of adequate funding of the pension liabilities.

Ref: Bloomberg News, Eileen Norcross and Roman Hardgrave, "To Rescue City Pensions, Oust Government", July 25, 2013.

**rondinjp** · July-25-13, 08:44 AM

Originally Posted by Novine

"Does anyone know if there is legislative history about this clause that would lock in the interpretation that the unions have been arguing? To me it just seems you could read this clause two ways and one way would justify a reduction of retiree's payment without violation"

The terms of the pension payouts are determined at the point a person retires. Changing those after the fact is changing the terms of the contract to the detriment of the pensioner.

Correct the terms are determined at the point of retirement, but that is not what is literally stated in the Section 24 of the Constitution. Changing the terms of what the pensioner was told he should be able to withdraw doesn't appear to be a violation of the "contract clause."

Again, the clause states that no person can diminish the "pension plan." Your statement is akin to my example where you modify the amount each retiree is allowed to withdraw from this plan. However, you still haven't "diminished" or reduced the amount in the pension plan.

**Cincinnati_Kid** · July-25-13, 08:49 AM

Originally Posted by Wesley Mouch

But also could be spent in wasteful ways. That's the history. So some money spent to clean-up the city's finances is money well spent.

The residents had protection against greed and corruption. They didn't use it. They voted in favor of fools who were greedy and corrupt. They decided it was more important to be racially pure in mind, than effective in result. Bad choice. They are paying now -- and bringing down a lot of other innocent people.

Why is race being brought up? The fact that nobody white ran for ANY position in Detroit government in at least 10 years that I can recall, leaves a lot to be desired. Whose to say things would have been any better if someone else were voted in? I agree that it probably couldn't be worse than the current state of affairs in Detroit. The citizens had to pick candidate's who were running and they all happened to be black, until this upcoming election. They also didn't have very much to choose from those that did run. They rolled the dice, and they came up "snake-eyes".

**Wesley Mouch** · July-25-13, 09:24 AM

Originally Posted by Cincinnati_Kid

Why is race being brought up? The fact that nobody white ran for ANY position in Detroit government in at least 10 years that I can recall, leaves a lot to be desired. Whose to say things would have been any better if someone else were voted in? I agree that it probably couldn't be worse than the current state of affairs in Detroit. The citizens had to pick candidate's who were running and they all happened to be black, until this upcoming election. They also didn't have very much to choose from those that did run. They rolled the dice, and they came up "snake-eyes".

I raise race because racial purity and fear of white takeover have been an impediment to election of competent leaders, IMO. Seems like that day is passing, thankfully.

**Novine** · July-25-13, 09:31 AM

"The fact that nobody white ran for ANY position in Detroit government in at least 10 years that I can recall, leaves a lot to be desired. "

Shelia Cockrel and Maryanne Mahaffey - not white? Who knew?

**Novine** · July-25-13, 09:35 AM

"Again, the clause states that no person can diminish the "pension plan." Your statement is akin to my example where you modify the amount each retiree is allowed to withdraw from this plan. However, you still haven't "diminished" or reduced the amount in the pension plan."

It doesn't say anything about the "amount in the pension plan". The "accrued financial benefits" applies specifically to the pensioners. They are the ones getting the benefits, not the plan, and they are the ones with which the contract exists. Using your logic, the state or a judge could give one retiree 99% of the plan's assets and divide up the remaining 1% among the rest and no one could claim their benefit was impaired because the plan still has 100% of the assets? Good luck with that.

**rondinjp** · July-25-13, 10:08 AM

Originally Posted by Novine

"Again, the clause states that no person can diminish the "pension plan." Your statement is akin to my example where you modify the amount each retiree is allowed to withdraw from this plan. However, you still haven't "diminished" or reduced the amount in the pension plan."

It doesn't say anything about the "amount in the pension plan". The "accrued financial benefits" applies specifically to the pensioners. They are the ones getting the benefits, not the plan, and they are the ones with which the contract exists. Using your logic, the state or a judge could give one retiree 99% of the plan's assets and divide up the remaining 1% among the rest and no one could claim their benefit was impaired because the plan still has 100% of the assets? Good luck with that.

See this is where I am having the problem. I keep hearing people say that the "accrued financial benefits" refers only to what the retiree's are to receive. But the full sentence of section 24 states "The accrued financial benefits of each pension plan and retirement system." Your argument incorrectly dismisses the remaining portion of this sentence. What is protected by the wording is the accrued benefits [[i.e., how much remains) in each pension plan. I do not see any wording directed or referring to protection for how much a retiree would receive from the plan.

I never indicated under my example that a judge would divide up the amount in a pension plan how you stated. Of course no bankruptcy judge would give 99% to one retiree and the remaining 1% to all the remaining retirees. My example indicated that a bankruptcy judge could reduce equally the amount percentage paid to all retirees.

Of course, now that you got me thinking about it, that might be unfair to a retiree that only earns $15,000/year vs. a retiree that ears $100,000/year. So based on your statement, I guess I could see a bankruptcy judge not equally reduce everyone's pension percentage by the same amount. But instead I could see a judge reduce a retiree's higher pension amount by a greater percentage than someone earning a much lower pension amount.

**Eber Brock Ward** · July-25-13, 10:32 AM

Interesting point. Under that reading, the Constitution may only prevent local governments and the state from raiding money that is already in pensions to pay for other stuff, as some entities have done in the past.

Basically, once the money's in the system it has to stay, but there is no constitutional protection for future funding or for payouts for particular individuals.