Detroit schools battles contractor over $31M debt
Detroit — Detroit Public Schools was supposed to spend $24 million authorized and earmarked by Michigan lawmakers on a court debt but instead used it to pay other bills, according to court documents.
Two years after an arbitrator ordered the district to pay contractor Sodexo Management, a $31 million court judgment over unpaid bills remains in dispute in federal court and is costing taxpayers more than $7,500 per day in interest while the district fails to clear the debt.
Attorneys for Sodexo, hired by DPS in 2011 for physical plant operations, alleged in court this week that Michigan Department of Treasury emails show that at least $24 million of the $150 million emergency loan authorized by Michigan lawmakers for Detroit’s school district in 2016 was specifically allocated to satisfy the court judgment in the case.
“Both Detroit papers ran a story today about DPS owing Sodexo $30m and asked why this debt wasn’t accounted for in last year’s legislation. IT was. The $30m debt was explicitly part of the transition dollars given by the State,” state Treasurer Nick Khouri wrote in a Jan. 20 email to John Walsh, a top adviser to Gov. Rick Snyder.
In the email, Khouri said former DPS emergency manager Steven Rhodes “was convinced the district didn’t legally owe the money and wanted to keep fighting in court. That’s their decision, as long as the district doesn’t come back now and try to hit taxpayers for the $30m twice by agreeing to a judgement levy. I’ll reach out to the city and the school today to reinforce that message.”
Treasury officials declined comment on Tuesday.
The district hired Sodexo in January 2011 on a five-year, $43.5 million contract to provide custodial, building repair, maintenance, engineering and grounds services through seven subcontractors.
By late 2011, the district had fallen behind on payments, court records show.
DPS originally owed $23 million in outstanding invoices to Sodexo, and now owes an additional $8 million in contractual interest.
Sodexo attorney Timothy J. Fazio told U.S. District Judge Mark Goldsmith on Monday that DPS is responsible for paying this debt through the legislation.
“And DPS spent all that money without paying Sodexo,” Fazio said.
DPS attorney Hans J. Massaquoi on Monday said the district has spent the entire $150 million on transitional costs from when the district changed to the Detroit Public Schools Community District. DPS remains to pay off the district’s debt.
Massaquoi denied that the legislation specifically required DPS to pay Sodexo.
“The transition took tens of millions for capital improvements to schools and pension costs. After that the vast majority of money was gone,” Massaquoi said. “The Legislature did not say the money was to be used to pay any certain vendor.”
The wording of the legislation states that “transitional operating costs” includes paying vendors, but it does not require it.
DPS had offered to pay Sodexo $8 million by June 30, Massaquoi said, telling Goldsmith “the payment is not made but is available.”
Asked why it hasn’t been paid, Massaquoi said both parties are in settlement talks. He said DPS told Sodexo it could pay another $16 million by the end of the year.
“How can you offer more than you can pay? We are working on it,” Massaquoi told Goldsmith.
Fazio asked Goldsmith to enforce the judgment for a second time. The first was in January.
Goldsmith on Monday asked both sides to continue settlement talks. No agreement has been reached.
The lawsuit is against DPS and does not involve DPSCD.
Spokeswoman Chrystal Wilson said on Tuesday the district will not comment on the case.
Sodexo said DPS has delayed and missed payments, leading to a payment agreement in July 2013 that called for arbitration to settle any disputes.
The arbitrator, retired Judge Valdemar Washington of Genesee County Circuit Court, entered an interim partial award in 2015 ordering DPS to pay $25.1 million.
Washington ruled DPS had failed to dispute and pay the invoices at issue within the allotted time period and therefore had waived its right to dispute the invoices. Payment was owed and past due, he said.
Goldsmith confirmed the arbitrator’s award in August 2016 and denied attempts by DPS to vacate the debt.
In January, Fazio told Goldsmith after he got “silence” from DPS on paying the judgment he got the court to certify the judgment and “took it to the city tax assessor.”
“They simply sat on it and did nothing,” Fazio said of the judge’s final judgment order.
Massaquoi has said Sodexo failed to follow a state law that says it must provide written notice that it was going to stop providing services to the school district.
Goldsmith has set a status conference by phone for Friday.