CHICAGO -- The bankruptcy judge overseeing Detroit’s Chapter 9 case delayed a ruling on a $160 million borrowing plan to repair the city’s lighting system due to a possible conflict of interest by public finance firm Miller Canfield Paddock and Stone PLC.
Judge Steven Rhodes was expected to rule on the borrowing Wednesday after listening to arguments from Detroit and creditors fighting the plan.
But the judge said he would postpone a decision by at least a week to give attorneys time to argue whether Miller Canfield should be disqualified. The firm represents both the city of Detroit in its bankruptcy case and the newly created Public Lighting Authority, which would borrow the funds.
“It was most unfortunate that this issue came to the court in the way that it did because it is going to allow an unnecessary delay,” Rhodes said.
He warned that the possible conflict could require a new financial deal, according to local reports from the courtroom.
During the hearing, Rhodes asked how the agreement between the city and the public lighting authority could have been reached in good faith if Miller Canfield represented both sides.
“How can I find arms-length negotiations when your firm is on both sides of this transaction?” Rhodes asked Miller Canfield attorney Jonathan Green.
“We are not representing the city of Detroit in this case with respect to this transaction,” Green said.
The firm is not acting as the lighting authority’s bond counsel -- only as its counsel in the bankruptcy and during the negotiations with the city -- and that makes it a “waivable conflict,” Green told Rhodes, according to reports.
“Your firm is representing both sides of a transaction and that’s a waivable conflict of interest?” the judge replied.
Rhodes said attorneys on both sides would have a week to make arguments for whether the firm should be disqualified.
Miller Canfield acts as local counsel to Detroit on the bankruptcy and Jones Day serves as the city’s national counsel.
Miller Canfield has long acted as Detroit’s bond counsel, and Detroit Mayor Dave Bing hired the firm in 2012 to handle all lawsuits and other issues tied to the now-defunct financial stability agreement between the city and the state. The Detroit City Council initially rejected Miller Canfield’s contract, accusing the firm of having a conflict of interest because it helped the state write its emergency management law. The council later approved the contract under pressure from the state.
Rhodes’ decision will mean another delay in the city’s long-planned proposal to borrow up to $160 million to finance repairs to its famously broken down lighting system.
The lighting plan sets up the new bond-issuing authority that is allowed to borrow up to $160 million of bonds to finance upgrades. Detroit’s plan, filed with the bankruptcy court on Oct. 23, calls for the Michigan Finance Authority to privately place the debt with Citibank NA, and lend the proceeds to the authority.
The structure includes an intercept feature that places all utility tax revenue with a trustee, who will set aside debt service payments.
Detroit said in court filings it believes it does not formally need the approval of the bankruptcy court, but that Citibank or any other purchaser will not close the deal without court approval.
Bond insurer Syncora Guarantee Inc. was joined by Ambac Assurance Corp. as well as a European bank that holds some of the city’s pension certificates, the Michigan Council 25 of the American Federation of State, County and Municipal Employees, and a committee representing 23,000 Detroit retirees, is fighting the borrowing plan.
The creditors argued that the city had not proved it was the best plan to repair the system and that the borrowing would tie up utility tax revenue. Syncora said the proposal should be introduced as part of a larger plan of adjustment, assuming the city is found legally eligible to enter into Chapter 9. Rhodes will announce his eligibility decision Dec. 3.
Jones Day attorney Robert Hamilton argued Wednesday that the utility taxes can only go to the new public lighting authority and not to the city’s general fund, so the pledge would not mean a loss to creditors.
“The only thing we’re asking this court to approve is our pledge of that $12.5 million for securing and repaying bonds,” Hamilton told Rhodes.
When creditors asked Rhodes to extend discovery and a hearing on the issue for two weeks, the judge responded: “How many more citizens will be victims of crime in that two weeks?”
The plan to repair Detroit’s lighting system — nearly half of its streetlights reportedly don’t work — began more than a year ago and required passage of a new state law. Emergency manager Kevyn Orr signed an order creating the Public Lighting Authority less than two months into office.
Also Wednesday, Rhodes pushed back by one week a key trial on the city’s proposed $350 million debtor-in-possession financing and a long-simmering battle over a proposed settlement of its interest-rate swaps.
A trial on the issues is now set for Dec. 17-19. It had been scheduled for Dec. 10-12, but Rhodes pushed it back to give the city and creditors fighting the deal -- which include bond insurers, pension certificate holders, unions and pension systems -- more time to prepare.