How Detroit’s grand bargain leaves out little guys with lawsuits

Retirees approved the city’s bankruptcy plan this week, but some vulnerable creditors stand to lose more than others

After two months of tense court-mandated balloting, the results came in late Monday: Retired city workers approved Detroit's ambitious bankruptcy plan, bringing the city one step closer to its goal of emerging from bankruptcy by year's end.

Hailed as a grand bargain, the deal prevents the sale of Detroit Institute of Art masterworks while giving city retirees smaller pension cuts than they would be offered had they turned it down.

But as a five-month investigation by “America Tonight” showed in April, hundreds of people with lawsuits against the city — some with judgments and others as yet unresolved — have been excluded from these negotiations, left to take bigger hits than more high-profile groups of unsecured creditors.

If U.S. Bankruptcy Court Judge Steven Rhodes approves the plan at a trial set to begin Aug. 14, police officers and firefighters would get every penny of their pensions, though they could see smaller-than-expected cost-of-living adjustments. Civilian employees would get 95.5 percent of pensions after eliminating some cost-of-living adjustments. And in exchange for signing on to the plan, certain bond insurers will get 74 percent of what they are owed.

However, individuals with lawsuits against the city would get just 10 to 15 percent of what they are due, depending on the claim, payable over 30 years.

In 2012, Jessie Payne, 70 at the time, was on her way to a doctor's appointment when a city bus ran her over.
America Tonight

Their grievances cover everything from police abuse and wrongful death to employment discrimination and personal injury, like 72-year-old Jessie Payne.

Payne was on her way to a doctor's appointment in February 2012 when a Detroit city bus ran her over. The accident, which was captured on security footage from a nearby mall, "de-gloved" her legs, splitting skin from body tissue.

Before passing out, Payne remembered, she looked down.

"It looked like maggots was crawling in my leg," she said.

Last July, Payne's lawyer was on his way to pick up a check for the nearly $3.5 million in judgments and settlements she had won, when he got the call to turn around. 

Now, Payne, who undergoes physical rehabilitation five days a week, will have to wait 30 years for about 12 percent of that payout.

Dwayne Provience spent nearly a decade in prison for a murder he didn't commit. Now he stands to lose big in Detroit's bankruptcy.
Leisa Thompson Photography

At least 90 of the suits are civil rights claims, like that of Dwayne Provience, who spent nearly a decade in prison for a murder he didn't commit because Detroit police suppressed evidence that could have helped prove his innocence. His case against the city was so strong that in the summer of 2011 an independent settlement panel recommended the city award him $5 million.

The city rejected the amount and tried but failed to get the case dismissed.

"We got all the way to the 6th Circuit Appellate Court in Cincinnati, and we won that," Provience said. "We were on the verge of either settling or going further, taking it to trial, so we was, like, right there at the goal line."

Less than a month later, Detroit filed for bankruptcy, and his case stopped in its tracks. So did 500 others, now subject to the bankruptcy. 

Walter Swift, who was wrongfully convicted of rape in 1982 and spent 26 years in prison before the Innocence Project helped exonerate him, also has a lot to lose.

"These are folks who are often in disfavored classes and categories, people who've been in prison, like Mr. Provience," said Bill Goodman, a lawyer who represents four civil rights claims affected by the bankruptcy. "The system is in favor of the powerful and the wealthy and to some extent the labor unions. And there's little pressure to help regular, ordinary individuals whose rights have been violated."

Emergency manager Kevyn Orr can make critical decisions about the city's financial plan, its labor contracts and the sale of its assets, independent of city and state officials.
University of Michigan

The man tasked with developing the city's bankruptcy plan is Detroit's emergency manager, Kevyn Orr. He has yet to speak publicly about creditors like Provience and Payne, or the  treatment they face under the current plan.

Despite repeated requests, Orr would not comment for this story. In May, his spokesperson Bill Nowling told “America Tonight” only that "tort claims are being treated in compliance with federal bankruptcy law." The city's lawyers at the Jones Day law firm also would not comment despite repeated requests.

Laura Bartell, a Wayne State University professor specializing in bankruptcy law, isn't surprised by the indifference.

"These are not people who have a strong lobbying position with the city," she explained. "They're not necessary to the city's reorganization. They're not representing the bond market or the people the city will be dealing with in the future. These are the classic disempowered."

Even though an individual tort creditor like Payne has a bigger claim in dollars than an individual pensioner does, the sum of the lawsuits is a small fraction of the total claims of all of the city's pensions.

"Everyone who's gotten more," Bartell explained, "has had legal leverage against the city."

These are not people who have a strong lobbying position with the city ... These are the classic disempowered.

Laura Bartell

Bankruptcy expert

In a bankruptcy, getting creditor groups with enough of a stake in the bankruptcy to vote yes on the plan sets the stage for a so-called cramdown, which would allow Judge Rhodes to approve a forcible restructuring plan in August over the objections of other creditors.

Key agreements the city struck with police and firefighters, as well as settlements with the banks UBS and Bank of America Merrill Lynch, helped bring these major creditor groups on board and prevented them from challenging the bankruptcy in court. 

Still, limited tax general obligation bondholders, who would receive 34 percent recovery rates, have vowed to fight the plan.

"We understand why the retirees and unions voted in favor of the city's plan — if we were offered a similar deal we, too, would approve the plan," bondholder Financial Guaranty Insurance Co. said in a statement. "Unfortunately, the city's current offer to FGIC … is completely inferior, and until the city treats us fairly, we are compelled to fight for the fair and equitable treatment that is our right under the bankruptcy code."

But creditors like Payne and Provience don't have the same negotiating power. Because each tort claim is vastly different, it's more difficult for tort creditors to act in unison. They also have fewer resources at their disposal. Many of them are low-income and pay their lawyers only if they receive compensation.

"It doesn't look good — everybody pulls for Dwayne and he just keeps getting screwed," said his lawyer Wolfgang Mueller. "There's not much I can do to control what's happening with the bankruptcy."

And with their credit payable over 30 years, it could be a long time before any of them see their due.

"I don't think Jessie's going to make it another 30 years," said Payne's lawyer, Leonard Miller. "We made an offer to take a reduced amount in order to get it sooner, and got no response from the city."

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