Legal experts question Detroit lawsuit threats

Christine Ferretti
The Detroit News

Detroit — Although two prominent contenders in Detroit’s mayoral race are threatening to sue the state over failures in city finances and public schools, legal and political experts say they make good campaign fodder but lousy lawsuits.

Mayor Mike Duggan said late last month he may sue the city’s lead bankruptcy law firm Jones Day on claims that Detroit’s former emergency manager Kevyn Orr and his team “concealed” assumptions used in the city’s court-approved debt-cutting plan to project future contributions to the city’s pension system. Jones Day told The Detroit News on Wednesday that it denied “there was any effort or intent to mislead anyone.”

At his candidacy announcement in late February, state Sen. Coleman A. Young II vowed to sue the state over the city’s troubled school system which, until recently, had state-appointed managers since 2009.

Douglas Bernstein, bankruptcy lawyer with Plunkett Cooney

Under the state’s emergency manager law that took effect in March 2013, Orr and other state-appointed managers were given broad powers over finances and the ability to reject, change or end contracts, amend and revise budgets, and spend federal, state and local funds.

If Detroit takes on the global firm Jones Day, it would face significant hurdles and legal bills, said Douglas Bernstein, a Bloomfield Hills bankruptcy lawyer.

Podcast: Howes on mayor’s lawsuit threat

“The review and the approval of the plan as proposed was, to me, not just a rubber stamp,” said Bernstein, noting the attorneys, actuaries, creditors, federal judges and experts who helped negotiate the deal. “Everybody knew the importance and that they had to get it right. There was too much risk to approve something that wasn’t feasible.”

Laura Bartell, Wayne State University law professor

Laura Bartell, a bankruptcy professor with Wayne State’s law school, doesn’t believe anything was hidden and said Duggan’s argument is “a loser.”

“It’s absolutely true that Detroit has a massive pension obligation that is going to come due in the future and they have to be planning for it. (Duggan) is doing that. It’s a very prudent thing to do, but he was not misled about it,” said Bartell, who suggested Duggan’s claims are political. “(Orr) disclosed it. Everything was disclosed.”

Joe DiSano, a Democratic consultant at Lansing-based DiSano Strategies, said there’s value in Duggan’s argument.

Taxpayers paid Orr during the bankruptcy and Jones Day collected about $57 million in fees for its restructuring work, DiSano said. The state Treasury Department paid Orr’s $275,000 annual salary, while Michigan Gov. Rick Snyder’s now-disbanded nonprofit NERD fund paid for the emergency manager’s expenses.

“Mayor Duggan going after them with a vengeance is good policy and good politics,” DiSano said.

Suing state ‘counterproductive’

Duggan, who first raised the concerns last year, said Orr’s team adopted the “most optimistic” assumptions in the plan and “it made the numbers work.” But those discussions, the mayor contends, were kept from him and Detroit’s Chief Financial Officer John Hill, leading him to question whether Orr had “a legitimate right to do this.”

Jones Day fired back at Duggan in a statement first provided to The News, warning it would “vigorously defend itself against any claim in this regard and pursue any and all remedies that are available as a result of these false claims.”

Young promises to pursue a similarly ambitious lawsuit. He told a group of supporters just over a week ago that if elected, he would sue the state of Michigan to hold officials accountable for the public school district’s failures.

The district continued to hemorrhage students, lose money, lay off employees and close schools under five emergency managers until the state approved in June a $617 million bailout that pays off $467 million in operating debt and provides $150 million in startup funding for a new debt-free district.

“I will use my office as mayor to sue the state to make sure that we hold them accountable for every single dime that they took from the city and every single school that they close,” Young said. “I will fight to the very end to make sure that justice is done for the city of Detroit.”

The threats of legal action come after Snyder’s Civil Rights Commission last month released a report proposing reforms to Michigan’s emergency manager law, implying it is focused on cutting costs at the expense of people’s well-being.

Suing the state over the Detroit school district would be “counterproductive” since the city still needs the state’s help to fix the problem, DiSano said.

Bernstein said it is difficult to weigh the strength of a potential Young lawsuit until the lawmaker reveals his legal justification, but noted any mayor has an interest in a viable school district because it is an important part of Detroit’s true renaissance.

“You wouldn’t get much argument that the school district has not performed well just by the results,” he said. “But the question is, what do you do differently and what’s actionable?”

Peter Hammer, a Wayne State University law professor who heads the Damon J. Keith Center for Civil Rights, said he had no opinion on the viability of the lawsuits because the litigation is complicated. But any effort to highlight the lack of checks and balances in the emergency manager law is welcome, he said.

“Anything that sort of brings the workings of an emergency manger into a greater system of transparency and accountability is a good thing,” he said. “In an election year, anything is fair game.”

Duggan denies political motives

Duggan has insisted the city will only proceed with a lawsuit if it has a strong chance of success, and he won’t be filing “for the purpose of scoring political credit.”

The Michigan Treasury Department said the emergency manager was a part of Detroit’s recovery.

“Emergency manager oversight helped the city return to fiscal stability supporting the revival taking place today in Detroit,” Treasury spokesman Ron Leix said.

Under the city’s bankruptcy plan, the pension payment projected in fiscal year 2024 was first contemplated at $113.9 million. But officials later said the estimates were off because they were based in part on outdated mortality tables.

If earnings meet the bankruptcy plan’s assumed return rate, the city’s contribution in 2024 will be closer to $167 million. If there are no earnings, it could soar to $344 million or more.

To prevent a problem, the Duggan administration is proposing a dedicated Retiree Protection Fund to pull together $377 million in the coming years to help address the shortfall that comes due in 2024. The mayor has said he wants to shift $50 million in surplus funding from the current fiscal year to the fund.

Martha Kopacz, the East Coast financial specialist appointed in 2014 by Detroit’s bankruptcy judge to assess feasibility and projections for city’s plan, said pension calculations are “assumptions piled on top of assumptions.” The city, she said, is doing what it should — dealing with the future problem now.

“The long and short of it is, any time you do a pension estimate, you are going to be wrong. It’s just a matter of how wrong you are,” Kopacz said. “They are aggressively trying to solve a problem before it becomes very difficult to solve.”