In Mediation, Ignore The “F” Word: “Final Offer”

“I have an opening statement that I give at the beginning of every mediation, and it goes like this”:

“I don’t have a lot of rules but I have one firm rule and that is nobody uses the ‘F’ word—“final offer.”

“And it’s very true. If I had listened to the parties in the Detroit bankruptcy when they said, ‘This is our final offer,’ and banged their laptops shut, Detroit would still be in bankruptcy. So ignore the ‘F’ word.”

Such are the words of Judge Gerald Rosen, who served as Chief Judicial Mediator in the City of Detroit bankruptcy. [Fn. 1]

What follows are examples given by Judge Rosen in an interview [fn. 2] of highly-persuasive and compelling expressions of “final offers” in the Detroit bankruptcy. Though compelling, these “final offers” are ignored, with alternatives pursued that turn into highly-successful results for everyone.

Background

Every creditor, in the Detroit bankruptcy, thinks it holds priority over every other creditor for gaining access to funds.

Every one of the financial creditors thinks they are secured and have the highest tenor of bonds. And their insurers, the ones who were ultimately on the hook, certainly think so.

–Constitutional Protection

But the retirees also believe they are first in line—and with good reason.

A provision in the Michigan State Constitution prohibits the impairment of retiree benefits and purports to guarantee municipal and state worker pensions.

Article IX, § 24, of the Michigan State Constitution reads:

“The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.” (Emphasis added)

The retirees think this constitutional protection is unassailable—that they win!

–Difficult Legal Issues

But the legal issues were very difficult because: (i) on the one hand you have the state constitutional provision, and (ii) on the other hand, the constitutional language is couched as a contractual right—and contracts get impaired in bankruptcy all the time.

So, this is a big issue . . . a threshold issue. And it has “a very, very large human dimension to it”:

if you impair the pension rights of all retirees, a very significant impact occurs for many, many people.

Meeting with Retiree Representatives

“I’ll never forget our first meeting with retiree representatives,” says Judge Rosen, and the “final offers” they make.

The context is this:

the City has one valuable asset—only one—it’s the Detroit Institute of Arts (“DIA”); and
the question is whether the DIA should be sold so that retiree benefits can be paid.

So, a narrative develops that the bankruptcy solution is either:

liquidate the art, and retirees go away happy; or
if the art is not liquidated, retirees will take a 30 or 40 percent cut to their pensions—these are not plush pensions, with civilians (clerks, garbage workers, non-uniforms) getting around $19,000 and uniforms getting around $32,000 (but they don’t get social security).

–President of Civilian Retirees

The president of civilian retirees, at 77 years of age, is a very elegant African-American woman. Very smart. Very eloquent and articulate.

She stands up, looks right at me and says, “Judge, I love the DIA. I take my grandchildren to the DIA. But if it’s a question of some pictures hanging on the wall or feeding my family, that’s not a hard question.”

Such is a “final offer” with no room for negotiation.

–President of Association of Police and Firefighters

The president of the uniform association—police and firefighters association—has been a street cop for 30 years.

He stands up and, if you go to central casting and want a character that looks like a 55 year old street cop, they will send back this officer. He has a shock of white hair, a bull neck and kind of a gravely voice.

He looks me right in the eye and says:

“Judge, I represent people who run down dark alleys trying to get people with guns, in one of the most violent cities in the world” . . . then he pauses and says, “and their widows”;
Then he adds, “And I represent people who run into burning buildings to pull women and children and their pets out . . . and their widows”; and
Then he concludes with, “And the city’s going to tell me they’re going to cut my pensions – I don’t think so!”

“Just like that. I mean – boom! And it is pretty graphic.”

That’s a “final offer.”

Conclusion

The initial meeting with pensioner representatives provides a compelling example of “final offers.”

Efforts by the mediator team, thereafter, reveal that these “final” offers are rejected and that alternatives are pursued, resulting in the best possible deal for both the DIA and the retirees.

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Footnote 1: Hon. Gerald E. Rosen (Ret.) now serves as mediator, arbitrator and neutral evaluator in high-level business cases for the JAMS office in Detroit. Previously, Judge Rosen served as Chief Judge of the U.S. District Court for the Eastern District of Michigan. He was serving in such role when the City of Detroit filed its Chapter 9 bankruptcy—shortly thereafter, the presiding Bankruptcy Judge appointed Judge Rosen as Chief Judicial Mediator in the City of Detroit bankruptcy case.

Footnote 2: Immediately below is a link to a YouTube video of the interview with Judge Rosen from which the information and stories described herein are taken (beginning at the 22:00 time mark).

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