HomeMy WebLinkAboutResolutions - 2018.03.08 - 23351REQUESTING SUSPENSION
OF THE BOARD RULES FOR
IMMEDIATE CONSIDERATION
UNDER NEW BUSINESS
MISCELLANEOUS RESOLUTION #18072
BY: Commissioners Eileen KowaII, District #6; Shelley Taub, District #12; Bob Hoffman, District #2;
Michael Spisz, District #3; David Bowman, District #10; Tom Middleton, District #4; Michael Gingell,
District #1; Wade Fleming, District #16; InAffV-Lo'‘,
IN RE: BOARD OF COMMISSIONERS — TRANSPARENCY AND ACCOUNTABILITY CONCERNS
INVOLVING THE GREAT LAKES WATER AUTHORITY'S RECENT CLASS ACTION SETTLEMENTS
To the Oakland County Board of Commissioners
Chairperson, Ladies and Gentlemen:
WHEREAS class action settlements agreed to by Great Lakes Water Authority (GLWA) Administration
officers and staff involving the conduct of retail operations of the Detroit Water and Sewer Department
prior to the formation of the Great Lakes Water Authority (GLWA) and later involving the operation of the
Detroit Water and Sewer Department Retail (DWSD-R) subsequent to the formation of GLWA have been
revealed to the members of the Oakland County Board of Commissioners Finance Committee via the
attached memorandum entitled, "Class Action Settlements by Great Lakes Water Authority" dated
February 5, 2018; and
WHEREAS several of the current GLWA Administration officers and staff who agreed to said settlements
without advance notice to the GLWA Board are the same individuals who, acting as Detroit Water and
Sewer Department (DWSD) Administration and staff acting prior to the activation of the GLWA were
responsible for the challenged conduct underlying the legal complaints that gave rise to the liability
supporting the settlement of $29.5 million between the Michigan Warehousing Group, LLC v DWSD; and
WHEREAS the GLWA Administration, without the knowledge, notice or approval of the GLWA Board of
Directors, negotiated a settlement with DWSD-R to fund half of the above settlement relating to the
DWSD retail operations in the amount of $14.75 million charging GLWA 'common-to-all' assets; and
WHEREAS the agreement between the GLWA Administration and DWSD-R became known to the
Oakland County GLWA Board member through a news article forwarded to the Oakland County
Executive who in turn inquired of his representative on the GLWA Board as to the nature of the
settlement; and
WHEREAS the resulting GLWA Board member's inquiries uncovered the then three-month old settlement
details as cited in the attached memorandum, which settlement was withheld by the GLWA Administration
from the full GLWA Board of Directors; and
WHEREAS as subsequent facts and circumstances involving the Michigan Warehousing Group, LLC
litigation became known, a second, similar litigation matter entitled United House of Prayer v. DWSD was
discovered as having been settled and paid without GLWA Board approval in calendar 2016; and
WHEREAS the United House of Prayer litigation was settled by the DWSD-R for $5.0 million, paid by
DWSD-R, and substantially funded at the recommendation of GLWA Administration using $4.0 million of
GLVVA 'common-to-all' assets; and
WHEREAS the GLWA lease agreements define 'common-to-all" in Section 1.1 (m) as: "common-to-all
means the method or methods for allocating to Retail Customers and wholesale customers of the
Regional Water System and Regional Sewer System the cost of Water Services and Sewer Services
provided by the Regional Systems that benefits BOTH wholesale AND Retail Customers, which
allocation is determined on a case-by-case analysis of the benefits derived by each customer
class from such service." (Emphasis added); and
WHEREAS while facts are clear as to the benefits derived by the DWSD-R system arising from the
improper DWSD billings and related collections and while it is clear that those proceeds were used to
fund both DWSD and DWSD-R operations, it is equally clear that no such benefits inured to the suburban
wholesale water and sewer customers making it evident that common to all charges are not appropriate
here; and
WHEREAS the failure to identify or secure benefits to the suburban wholesale customers as defined in
the lease agreement means that the entire settlement funding should be provided by and charged to the
DWSD-R; and
WHEREAS under the State Bar of Michigan's Rules of Professional Conduct the General Counsel of
GLWA and the attorney Chief Operating Officer had specific duties and responsibilities to notice and
involve the GLWA Board (the 'client') under Section 1.4(a) which states "A lawyer shall keep a client
reasonably informed about the status of a matter and comply with reasonable requests for information.
The lawyer is also required to notify the client promptly of all settlement offers....."; and
WHEREAS both the General Counsel and Chief Operating Officer of GLWA failed in their professional
duties and responsibilities to keep the full GLWA Board of Directors informed of settlement offers,
settlements and agreements related to the Michigan Warehousing Group, LLC and United House of
Prayer matters; and
WHEREAS the then GLWA Chairman of the Board of Directors requested a legal opinion from an outside
law firm that had been involved in the negotiations of the lease and other related agreements establishing
the GLWA with respect to the funding responsibilities related to the two settlements of $29.5 million for
the Michigan Warehousing Group, LLC and $5.0 million for the United House of Prayer (with GLWA
funding $14.75 million and $4.0 million, respectively); and
WHEREAS the law firm submitted that legal opinion to the GLWA General Counsel; and
WHEREAS the Oakland County GLWA Board representative and other Board members requested
access to that legal opinion, but were denied access to that record by the GLWA Administration; and
WHEREAS the Oakland County Board representative issued a Freedom of Information Act request of the
General Counsel to secure access to that legal opinion but such access was formally denied again by the
GLWA General Counsel; and
WHEREAS Article 9, Section 23 of the Michigan Constitution of 1963 provides that all financial records,
accountings, audit report and other reports of public moneys shall be public records and open to
inspection; and
WHEREAS GLWA is a public entity and its moneys are public moneys that must be transparently
accounted for under the Michigan Constitution; and
WHEREAS the improper payment of the two settlements from 'common-to-all' GLWA assets in the
combined amount of $18.75 million impermissibly injure the suburban GLWA wholesale customers; and
WHEREAS an agreement entitled "One Water Partnership" between the GLWA member community
customers and GLWA calls upon the commitment of both parties to 'continuing, strengthening and
improving a long-term partnership based on the critical success factors of mutual trust, collaboration,
respect and open and honest communication for the benefit of the public and all signatories to this
commitment.'; and
WHEREAS the One Water Partnership agreement mandates and compels the GLWA Administration and
Board to fully disclose to all GLWA Board members and GLWA customers all records and documents
relating to the disputed settlement actions undertaken by GLWA staff.
NOW THEREFORE BE IT RESOLVED that the Oakland County Board of Commissioners expresses its
deep concerns involving the lack of 'open and honest communication' by the GLWA Administration to its
Board of Directors, its member communities and its water and sewer ratepayers.
BE IT FURTHER RESOLVED that the Oakland County Board of Commissioners objects to the improper
use of GLWA 'common-to-all' assets to fund the Michigan Warehousing Group, LLC and United House of
Prayer to cover the improper actions of DWSD in the billing methods and practices.
BE IT FURTHER RESOLVED that the Oakland County Board of Commissioners assert that any and all
amounts paid by GLWA to fund these two litigation settlements must be properly accounted for and
charged to the DWSD-R in conformity with the GLWA lease agreements.
BE IT FURTHER RESOLVED that this Oakland County Board of Commissioners resolution and related
attachment be submitted to each legislative body and elected executive within Oakland County that relies
on the water and sewer services of GLWA.
BE IT FURTHER RESOLVED that the Oakland County Clerk/Register of Deeds is requested to forward
copies of this adopted resolution to the Governor of the State of Michigan, the members of the Oakland
County delegation to the Michigan Legislature, the elected leaders of the Charter Township of
Commerce, the elected leaders of the City of Farmington, the elected leaders of the City of Farmington
Hills, the elected leaders of the City of Ferndale, the elected leaders of the City of Hazel Park, the elected
leaders of the City of Keego Harbor, the elected leaders of the City of Madison Heights, the elected
leaders of the City of Northville, the elected leaders of the City of Novi, the elected leaders of the City of
Oak Park, the elected leaders of the Charter Township of Royal Oak, the elected leaders of the City of
Sylvan Lake, the elected leaders of the City of Troy, the elected leaders of the City of Walled Lake, the
elected leaders of the Charter Township of West Bloomfield, the elected leaders of the City of Wixom, the
members of the North Oakland County Water Authority Board, the members of the Southeastern Oakland
County Water Authority Board, the Oakland County Water Resources Commissioner, and the Oakland
County Board of Commissioners' legislative lobbyists.
Chairperson, I move the adoption of the foregoing Resolution.
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Commissioner Tom Middleton
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COAKLAND;
L. BROOKS PATTERSON, OAKLAND COUNTY EXECUTIVE
COUNTY MICHIGAN
Robert J. Daddow
Special Projects Deputy County Executive
TO: Oakland County Community Representative of the Great Lakes Water Authority (GLWA)
/FROM: Robert Daddow, Oakland County GLWA Board Representative
RE: Class Action Settlements by Great Lakes Water Authority
DATE: February 5, 2018
The Oakland County Water Resources Commissioner (WRC), Jim Nash, previously sent to you
information concerning several class action legal settlements that could impact the upcoming GLWA
water and sewer rates and charges under consideration by the GLWA Board of Directors. The WRC Nash
memorandum is attached as Exhibit A and was briefly discussed at the recently held rates and charges
community meeting on January 25, 2018 by GLWA administration.
While the GLWA administration indicated that they do not currently intend on seeking recovery from
the communities for these settlements at the January 25, 2018 community meeting. The depth of the
issues surrounding these settlements and their profound manner in which the GLWA Board operates
and fulfills its fiduciary duties calls out for a much more detailed understanding by the communities of
these matters.
Accordingly and in addition to the WRC Nash's original letter, an updated extract from a much larger
document many of you have entitled "Current and Legacy Business Issues", dated January 7, 2018
(Exhibit B), has been attached to this document as well. This updated extract covers the detailed
business issues involving the two settlement offers and settlements that were not communicated to the
GLWA Board for consideration and approval before payments occurred or commitment to do so was
made by GLWA administration. The GLWA settlement payments made and anticipated are $18.75
million ($14.75 million for Michigan Warehousing Group, LCC and $4.0 million for United House of
Prayer) and are expected to come from common-to-all cash, in doing so, the suburban wholesale water
and sewer operations have funded a significant part of the common-to-all payments when at the same
time several communities have funded similar legislation out of their retail operations.
Several of the more significant business issues cited in Exhibit B to this memorandum follow —
• The GLWA administration provided the settlement offers and settlements to DWSD-R without
having been granted the authority to do so by the GLWA Board.
• The then General Counsel participated in these settlement offers and settlements and had,
under the Michigan Rules for Professional Conduct, the responsibility to notice the GLWA Board
of these matters. No such notification occurred.
• The Michigan Warehousing Group, LLC settlement was uncovered the settlement by an attorney
who is a friend of the Oakland County Executive and provided a news article on this matter. In
EXECUTIVE OFFICE BUILDING 41 WEST • 2100 PONTIAC LAKE RD DEPT 409 • WATERFORD MI 48328-0409 • (248)858-1650 • FAX (246) 452-9215
EMAIL: daddowr@oakgov.com
turn, the Oakland County Executive noticed his Board member representative. Upon inquiry of
the GLWA administration by the Oakland County representative, the settlement offer and
settlement was discovered roughly three months after the DWSD-R Board of Water
Commissioners approved the settlement and the DWSD-R director (who is also a GLWA Board
member) signed the court-filed settlement.
• in the third GLWA Board meeting covering the Michigan Warehousing Group, LLC matter (two
closed session and one open), the United House of Prayer (UHOP) settlement was discovered
through a comment made by either a DWSD-R Board representative or the GLWA
administration. The UHOP settlement of $5 million ($4 million from GLWA common-to-all
funds) was paid in calendar 2016 with no notice or approval provided by the GLWA Board. The
underlying plaintiff's assertions in the UHOP and Michigan Warehousing Group, LLC were very
similar in nature. The plaintiff's attorney for both these litigation matters was the same
attorney.
• Despite the Lease Agreements' definition of 'common-to-all' expenses having a requirement
that both GLWA and DWSD-R benefit from common-to-all transactions before common-to-all
resources would be paid, no GLWA benefits have been cited in either of these two settlements
by GLWA administration or DWSD-R representatives.
• An opinion from the legal firm that assisted in the development of the GLWA Lease and Services
Agreements was sought on this matter and received by GLWA administration. Despite GLWA
Board members requesting this opinion be shared, the GLWA administration has refused to
share the legal opinion with the GLWA Board. It is difficult to understand how Board members,
having a fiduciary duty to the ratepayers and public in general can fulfill their due diligence on
these matters when the GLWA administration continues to withhold information.
• Related to the above, the Oakland County representative introduced a GLWA Board resolution
to require GLWA administration to release the legal opinion at a January 10, 2018 Board
meeting. The motion failed on a 3 to 3 vote with Oakland, Macomb and Wayne Counties voting
to release the memorandum; Detroit and the Governor's representative voted to withhold the
legal opinion. A Freedom of Information Act (FOIA) request was filed with the GLWA
administration on February 5, 2018 in this matter by Oakland County, Board members should
not have to pass policy resolutions or seek a FOIA request from the administration that reports
to that Board in order to secure material to perform their fiduciary duties.
The above business issues are by no means the only concerns relating to the two settlements.
Additional concerns are outlined in Exhibit B of this memorandum. At the December 2017 and January
2018 GLWA Board meetings, the GLWA Board voted to have the cost allocation reviewed by an outside
arbiter in the coming months. The cost allocation arbitration would determine who has the
responsibility for paying for the two settlements: GLWA, DWSD-R or a combination of both. In a recent
letter to the GLWA Board, DWSD-R has placed the Board on notice that they no longer believe that
arbitration is appropriate. There will be more to follow on this continuing saga over the next several
months.
WRC
EXHIBIT A
WATER RESOURCESCOMMISSIONER
fini Nash
January 18, 2018
Re: Class Action Settlements Potentially Impacting GLWA Water and Sewer Rates
Dear Community Representative:
There have been several developments over the past few months regarding pending and future
settlements and the respective obligations of the Detroit Water and Sewerage Department
(DWSD) and the Great Lakes Water Authority (GLWA). With this letter, I'd like to share
information we have now and tell you how you can make a difference. I will continue to
provide updates as more information develops.
The current issues of concern arise from interpretations of the lease agreements launching the
new GLWA as they were applied to DWSD' s settlement of class action lawsuits. A settlement
agreement for one specific lawsuit was signed by DWSD on August 31,2017. This
$29,500,000 settlenient was intended to be used to refund drainage charges to commercial
sewer customers (Michigan Warehousing LLC r City of Detroit),
Leading up to this settlement agreement, GLWA's administration participated in mediation
with DWSD and the class representatives. They agreed that, per their interpretation of the
lease agreements, 50 percent of the settlement would be paid by GLWA.
A second $5,000,000 settlement was negotiated and paid in a case involving fireline charges
(United House of Prayer) where GLWA's administration agreed to pay $4,000,000 of the
settlement costs without GLWA Board's approval. In this case, GLWA water customers
funded the settlement costs.
Our concerns are twofold and have been articulated to the GLWA administration and its
Board by Oakland County representatives.
First, GLWA Board members, with the exception of the Director of DWSD, initially were not
aware of this August 31, 2017 settlement and did not receive a copy of the signed agreement
until November 8, 2017 and only after the Oaldand County repreientative brought this matter
to the Board's attention. Once received, we raised several questions about the manner in
which the settlement was reached as well as how costs would be allocated. As a result of
questions raised by the Board, the GLWA administration requested a legal opinion from the
law firm of Dickinson Wright, At issue was whether the terms of the lease agreement were
properly applied by having GLWA pay 50 percent of the settlement and also how that liability
should be allocated. As of writing this letter, that legal opinion has been prepared but the
GLWA administration has refused to share it with their client, the GLWA Board, contending
that it is subject to attorney-client privilege even as the Board is the client
One Public Works Drive • Building 95 West • Waterford, MI 48328-1907
Phone: 248.858.0958 • Fax: 248.858.1066 • www.oalcgcmcomlwater
Second, depending on how GLWA ultimately allocates this liability (i.e., common-to-all,
Detroit, or to the suburbs only), the water and sewer rates of Oakland County customers may
be impacted.
The settlement agreement stipulated that $10 million be deposited by December 31, 2017 for
the benefit of the class attorneys, Kickham Hanley PLLC. The remaining $19,5 million would
be refunded to the class over a period of time using a process and procedure detailed in the
settlement agreement.
On December 21, 2017, the GLWA Board voted to authorize GLWA's Chief Financial
Officer to pay 50 percent of the $29,5 million settlement total, of which $5 million would be
paid by GLWA before the December 31, 2017 deadline, That action passed despite opposition
from both Oakland and Macomb Counties.
Further, the GLWA Board voted unanimously directing its General Counsel to file a demand
for arbitration in the Michigan Warehousing Group, LLC matter to determine the following:
a. GLWA's liability for DWSD pre-Effective Date litigation liabilities as well as post-
Effective Date litigation liabilities under the Leases and other agreements
b. Whether the Leases proscribe, in any way, GLWA's ability to allocate litigation
liability costs and expenses amongst DWSD-R (the City of Detroit customers) and
GLWA as well as the appropriate method of allocation
e. The subsequent recovery of litigation liability costs and expenses by GLWA or
DWSD-R
A similar GLWA Board vote was taken to direct General Counsel to file a demand for
arbitration involving the United House of Prayei.
It is important to note that decisions made in this arbitration will set a precedent for handling
other DWSD liabilities, In fact, several third party actions already have been filed alleging
that the settlement amount should have been much greater. Furthermore, there is an
outstanding risk for additional commercial claims and/or claims based on drainage charges
made to residential customers by the City of Detroit.
At this time, I am asking for your support in reaching out to the GLWA Board to demand that
the allocation for DWSD settlement liabilities be allocated solely to DWSD-R and not as
common-to-all, which would affect your rates. I've provided a letter for your convenience and
to use as a template if you'd like, If you have any questions please feel free to contact my
staff attorney, Kelsey Cooke. Her direct phone number is: 248-452-2013.
EXHIBIT B
UPDATED EXTRACT FROM CURRENT AND LEGACY BUSINESS ISSUES DATED JANUARY 7, 2018 —
MICHIGAN WAREHOUSING GROUP, LLC AND UNITED HOUSE OF PRAYER LITIGATION
GREAT LAKES WATER AUTHORITY (GLWA)
February 5, 2018
On November 7, 2017, the evening before the November 8, 2017 GLWA Board of Directors meeting,
County Executive Patterson sent the Oakland County Board representative an inquiry concerning the
DWSD-R v. Michigan Warehousing Group, LLC lawsuit settlement of $29.5 million, A friend of the
County Executive saw a legal newspaper notice of a settlement of this litigation between the plaintiff
and DWSD-R and GLWA. Given that the GLWA Board had no prior briefing on this settlement offer and
settlement itself, inquiries of GLWA administration were made in advance of the November 8, 2017
Board meeting. The below is a discussion of the history of this litigation and actions taken by the GLWA
Board and administration through the date of this Update,
In 2015, the Michigan Warehousing Group, LLC (a class action lawsuit) sued DWSD-R over the
methodology and other issues used in billing for stormwater charges. GLWA was not named in the
lawsuit itself. Among the plaintiff's assertions were that not all non-residential customers were being
billed and / or billed properly resulting in a disparity of those DWSD-R customers actually billed fully
funding the underlying stormwater costs while other customers have a reduced or no bill at all. In
October 2016 and using the City's geographic information system, the City apparently discovered
impervious surfaces tied to roughly 22,000 acres not being billed for stormwater costs.
The lawsuit was settled between the Michigan Warehousing Group, LLC and DWSD-R in early August
2017 and the DWSD-R Board of Water Commissioners (BOWC) approved that settlement in mid-August
2017. Subsequently, the detailed settlement filed with the Court was signed off by Mr. Gary Brown as
DWSD-R CEO on August 31, 2017 (who is also a GLWA Board member). In a side agreement (either
orally or in writing and yet to be determined), the DWSD-R and GLWA administration without the
knowledge, concurrence of and approval from the GLWA Board of Directors agreed to split the cost of
the settlement of $29.5 million on a 50 / 50 basis (meaning GLWA, under their assumptions, would pick
up half of the settlement costs, or $14.75 million as a 'common-to-all' cost).
Given that the suburban wholesale sewer customers cover roughly 52% to 60% of the common-to-all
costs, the GLWA administration's agreement would be paid, in large part, by the suburban interests.
Nothing has been received to date in writing that would suggest that the suburban wholesale custoMers
have benefitted in any way from this settlement agreement by GLWA administration. GLWA had no
responsibilities whatsoever in the manner and methodology of the City's billing of stormwater costs.
The $29.5 million settlement was to be funded in two parts: 1) a $10.0 million payment was due to the
Settlement Trust on December 31, 2017 and 2) the remaining $19,5 million being paid in eariy July 2018.
The latter payment is to be either credited to the DWSD-R customer accounts based upon the claims to
be filed by the various customers in either cash refund or credit against future sewer bills. The $29.5
million settlement includes the plaintiff's legal fees of $7.75 million. The GLWA Board of Directors voted
on a 4-2 basis (two dissenting votes from Oakland and Macomb Counties) to pay half of the amount due
by December 31, 2017 from GLWA resources ($5 million).
The GLWA Board of Directors to date has not provided any settlement offer or settlement authority on
the Michigan Warehousing and discussed subsequently, the United House of Prayer litigation. Simply
1
put, the GLWA administration had no authority to sign off on the settlement offer let alone the
settlement itself absent approval by the GLWA Board. No discussions were held with the GLWA Board
whatsoever until the issue was raised by the Oakland County Executive in early November 2017. From
the time of the settlement being approved by the DWSD-R BOWC in mid-August 2017 and signature of
the court settlement filing shortly thereafter, the GLWA Board of Directors held a half dozen meetings
where the matter might have been discussed.
In addition, the GLWA Board has a Legal Committee to address just such matters as the Michigan
Warehousing Group, LLC litigation. The Legal Committee was not informed of the settlement offer or
ultimately the settlement. Nor, was there any notice to the Board that GLWA wholesale customers
(based on the GLWA administration assumptions and DWSD-R) would assume a sizable portion of the
$14.75 million in the litigation settlement as 'common-to-all' costs arising from Detroit's excess
stormwater charges now being refunded to the DWSD-R customers.
In fact, the legal representation for GLWA has been asked to respond to their breach of professional and
ethical responsibilities under the following legal canons —the reference to 'client' in this case is the
Board of Directors of GLWA:
• Michigan Rules of Professional Conduct (MRPC) Section 1.4 (a) — "A lawyer shall keep a client
reasonably informed about the status of a matter and comply with reasonable requests for
information. The lawyer is also required to notify the client promptly of oll settlement offers,
" Emphasis Added.
• MRPC 1.4, (b)— 'A lawyer shall explain a matter to the extent reasonably necessary to permit
the client to make informed decisions regarding the representation."
Finally, even as this matter was unfolding as of November 8, 2017, the GLWA Board approved the One
Water Partnership Agreement with its communities that promised `...open and honest
communications...' to its members. in this case, the communications were withheld from the
communities and their Board representatives for at least 90 days. The first Board discussions held on
the Michigan Warehousing Group, LLC matter occurred roughly 30 minutes after the Board approved
the One Water Partnership Agreement in a closed session of the Board.
During the course of discussing the Michigan Warehousing Group, LLC litigation, roughly a dozen other
settlements involving GLWA's funding of the litigation settlements were discovered. The GLWA
administration had approved and paid $5.4 million in settlements from the inception of GLWA. The
largest single settlement of this group was United House of Prayer (UHOP) V. DWSD. The UHOP
litigation involved DWSD retail water billing matters in dispute,
The UHOP settlement was identified at a Board meeting one month after the Michigan Warehousing
Group, LLC litigation was first identified through a comment of the GLWA administration during the
latter litigation's discussions. The plaintiffs in the UHOP litigation used the same attorneys as Michigan
Warehousing Group and asserted similar claims, was settled for $5 million, with GLWA paying $4 million
in calendar 2016 of the settlement to DWSD-R customers from 'common-to-all' resources, The GLWA
Board had no knowledge of this settlement offer, settlement or payment prior to inquiries arising from
the Michigan Warehousing Group matter,
2
The Lease Agreements / Service Agreement indicate that the liabilities of DWSD and assets as specified
carry-over to GLWA and not the DWSD-R. Under this notion, the assertions proffered by GLWA
administration and as asserted in the underlying lawsuit indicated that because of the requirement of
GLWA to assume the DWSD liabilities as of December 31, 2015, the funding for these obligations for this
loss would become a 'common-to-all' cost. Therefore, under this theory, GLWA would be obligated to
pay the settlement loss and it would be shared between the DWSD-R and suburban wholesale
customers. Oakland and Macomb Counties reject this theory completely.
The Michigan Warehousing Group, LLC lawsuit against GLWA (as well as UHOP) has assumed that the
assets received would cover the settlement agreement which is factually incorrect for at least two
reasons:
0 The audited financial statements as of December 31, 2015 for the sewer system (which were
received on or about July 31, 2017) reflect a $171.3 million accumulated deficit plus a negative
equity position in the line-item of 'net investment in capital assets' of $155.2 million for a total
of $326.5 million — defined as liabilities in excess of assets, Given that GLWA assumed the
assets and liabilities as audited, it was placed in a disadvantaged position by DWSD for many of
the reasons outlined in the underlying Business Issue Listing dated January 7, 2018 and shared
with Oakland County utility parties in interest. There were insufficient assets transferred to
GLWA to cover the liabilities assumed.
Similarly, the audited financial statements as of December 31, 2015 for the water system
reflected an unrestricted deficit of $98.3 million with the 'net investment in capital assets' in a
negative position of $224.1 million —for a total of $322.4 million in deficits assumed by GLWA.
• The DWSD-R charges for retail and wholesale sewer services, regardless of whether the amounts
billed to individual DWSD-R customers were correct, were used solely to cover the operating,
debt service and capital costs and restricted bond covenant requirements for the periods
collected of DWSD-R, not GLWA. Said differently, whatever DWSD-R assets arose from
customer collections for billings both prior to January. 1, 2016 and after December 31, 2015 -
have been spent for DWSD-R's operations, debt service and capital costs and restricted bond
covenants requirements. DWSD-R received the financial benefits of the correctly and
incorrectly billed charges.
In the spring of 2017, the Michigan Warehousing Group, LLC filed a lawsuit against GLWA as by this time
believed that assets and respective liabilities of DWSD had been transferred to GLWA, even as the
liabilities exceeded assets as noted above. Related to this lawsuit, there seems to be a notion that the
DWSD-R collections of its accounts receivable due from DWSD customers transferred to GLWA effective
January 1, 2016 are benefitting the GLWA operations.
Just recently, the GLWA Audit Committee was informed that because of the delinquencies of DWSD-R
customers, the water and sewer receipts collected under the Lease Agreements / Service Agreements
were roughly $100 million delinquent from DWSD-R as of June 30, 2017 (effectively, the lack of
collection from DWSD-R customers at any point in time shorts the receipts deposited in GLWA accounts
used for covering its costs). Effectively, GLWA has covered the underlying costs related to the amounts
not collected from DWSD-R,
3
The notion that the DWSD-R lawsuit settlements should be charged to the suburban wholesale
customers is also flawed. The DWSD customer billings and method relating thereto involved
transactions before January 1, 2016 were under a BOWC with 4 representatives from the City and 3
representatives from the three Counties voting margin. It should also be noted that several of the
current GLWA administrators were in similar DWSD positions before the launch of GLWA while the
underlying bill errors occurred.
In addition, lawsuits of a similar nature filed by the DWSD-R plaintiffs attorneys in the suburbs have
resulted in the communities' retail operations standing the cost of the loss, with no reimbursement from
DWSD-R or GLWA. The suburban customers stood the loss out of their retail operations even as the
GLWA administration has offered up wholesale 'common-to-ail' resources to fund the retail billing
issues of DWSD-R.
As of the June 30, 2015 audited financial statements issued in early June 2016, the DWSD chief financial
officer (who is currently the GLWA CFO) recorded a $12.0 million liability for the Michigan Warehousing
Group litigation. The liability was recorded within the DWSD financial statements roughly five months
into the operation of GLWA.
As of December 31, 2015, the DWSD liability was increased to $16.0 million (even as GLWA was not a
party to the underlying DWSD lawsuit). Given the significant delay in assembling auclitable financial
statements, the recording of this increase in the DWSD liability occurred in July 2017 —just about the
time that the ultimate settlement was agreed-upon by GLWA and DWSD-R administration,
As this liability was accrued and not paid until December 31, 2017, no costs related to the Michigan
Warehousing Group, LLC settlement have been formally allocated to either party for purposes of the
development of the rates / charges billable to their respective customers for this settlement in FY-2018
or prior. This $16.0 million charge Is solely accrual-based and has not been reflected in The Foster
Group rates / charges analyses. Similarly, the UHOP litigation settlement of $4 million was paid from
'common-to-all' assets but was never included in the rates / charges billed to the communities. As
such, NO assets exist in GLWA to cover these litigation payments in whole or part as they were never
included in the rates / charges to the communities.
While the DWSD and GLWA Lease and Services Agreements state that the liability for these lawsuits are
to be assumed by GLWA upon the split into DWSD-R and GLWA effective January 1, 2016, neither the
Lease Agreements or Service Agreements address the funding of the liabilities directly. However, there
is a second test that needs to be considered that has been completely omitted. The second test involves
the debit associated with the liability recorded.
Because the litigation accrual entries were recorded after the operating budgets were created upon
which the rates / charges were based and because of the lack of timely and accurate financial
information of DWSD, it was convenient to record the accrual with no reference to the funding as part
of the audited financial statements. This lack of consideration of the funding source whether it should
have been an asset receivable from DWSD-R or a charge to DWSD-Rffis position of the operations (and
subsequently funded over time) was completely omitted from the recording of the litigation for the June
30, 2015 financial statements and beyond.
The problem with the assumption that the litigation loss is somehow chargeable to the suburban
wholesale customers must be subjected to the second test — namely, which entity benefitted from the
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underlying transactions and therefore, is responsible for funding the litigation costs. One needs to
review the definition of 'common-to-all' in the Lease Agreements which states the following —emphasis
added:
Section 1,1 (m): "common-to-all" means the method or methods for allocating to Retail
Customers and wholesale customers of the Regional Water System and Regional Sewer System
the cost of Water Services and Sewer Services provided by the Regional Systems that benefits
BOTH wholesale AND Retail Customers, which allocation is determined on a case-by-case
analysis of the benefits derived by each customer class from such service."
The suburban wholesale customers received no benefits from the excess stormwater charges billed and
collected by the retail operations of DWSD prior to January 1, 2016 or subsequent to December 31, 2015
and therefore have no responsibility whatsoever in assisting in funding this obligation. As clearly stated,
common-to-all assets cannot be used to fund a DWSD-created obligations even if assumed by GLWA
unless benefits inures to BOTH parties.
The DWSD-R operation incorrectly billed stormwater charges, received them and used them in its
operating, debt service and capital activities and for its responsibility under the bond covenant
agreements, The fact that years later the DWSD-R and Michigan Warehousing Group, LLC and UHOP
agreed that the DWSD billings were inappropriate does not then require the suburban water and sewer
wholesale customers to step in the shoes of DWSD-R, in part, because of actions taken by DWSD or
DWSD-R.
No programmatic or financial benefits inured to the suburban wholesale customers whatsoever from
the initial, erroneous billing and therefore the suburban wholesale customers have no obligation to fund
the return of these excess fees. In fact, since this is a DWSD-R only charge it begs the question as to why
GLWA would even be involved in the loss in the form of recording it on its records but for the fact of the
untimely issuance of the DWSD audited financial statements.
At the December 21, 2017 GLWA Board meeting, the Board approved the funding and other questions
relating to the Michigan Warehousing Group, LLC settlement be addressed through arbitration.
Similarly, the Board approved arbitration for the UHOP settlement as well. At the January 24, 2018
GLWA Board meeting the Oakland County Board representative asked GLWA administration to address
the protocols relating to several open questions, including; how the arbitration panel will be selected,
legal represented, access to files, and other process issues. However, a recently received letter from
Mr. Brown, DWSD-R director and GLWA Board member, is asserting that arbitration is the wrong venue
and should be terminated. The resolution of whether the matter will be taken to arbitration is
uncertain.
At the January 10, 2018 GLWA Board meeting the following actions were taken and voted upon:
• The Oakland County Board representative proposed a resolution addressing the present lack of
authority the GLWA administration has in addressing litigation, particularly as it relates to
settlement offers and final settlements, with this following limitations: 1) those settlement
offers/ settlements below $25,000 would be resolved by GLWA administration with no further
approval necessary; 2) those settlement offers / settlements between $25,000 and $100,000
would be approved by the GLWA Legal Committee with no further Board action necessary; and
3) those settlements above $100,000 would require GLWA Board approval.
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The resolution was postponed until the next regularly scheduled Board meeting (February 14,
2018) for GLWA administration's further consideration on a 5-1 vote with the Oakland County
Board representative voting no.
• On January 10, 2018 and before the above resolution was presented to the Board, GLWA
administration's request was that all settlement offers / settlements of less than $1 million
would allow GLWA administration to settle the litigation with no GLWA Board action.
• During December 2017, the Board and GLWA administration sought a legal opinion on the
Michigan Warehousing Group, LLC matter from an outside attorney on the funding and other
questions relative to the Lease Agreements /Service Agreements, The opinion was received just
prior to the January 10, 2018 Board meeting. Despite the GLWA Board being the 'client' as
noted in the 'common-to-all' definition, the GLWA administration refused to release the outside
attorney's opinion to the GLWA Board members.
Realizing that GLWA administration may withhold this opinion, the Oakland County Board
representative brought a resolution to the January 10 1 2018 meeting calling on the GLWA
administration to release any and all documents upon the request of a Board member. After
some lengthy discussion, the Board voted on the resolution: the two Detroit representatives
and the Governor's appointment for those units outside the tri-county area voted no and the
Oakland, Macomb and Wayne County representatives voted yes on this resolution. The motion
died. To date, the opinion on this matter is sequestered with the GLWA administration outside
the purview of the GLWA Board who represents the ratepayers and communities.
At a GLWA community meeting involving the assignment of rates / charges on January 25, 2018, the
GLWA administration addressed a letter to the community from Water Resource Commissioner Nash on
this matter. The details noted above were not provided in the roughly 5 to 10 minutes of discussion
ending with the notion that the FY-2019 rates! charges would not be impacted by the payment of the
$14.75 million for the Michigan Warehousing Group, LLC and $4.0 million relating to UHOP — a total of
$18.75 million in common-to-all assets used to fund these settlements. That final funding
determination has yet to be resolved. However, it is clear that no amounts have yet to be collected for
either of these two legal matters as they have never been included In the rates / charges. GLWA cannot
pay 'common-to-all' resources that it never received from the communities (or DVVSD-R) without it
impacting the ability to use these resources for the extensive deferred maintenance facing the water
and sewer systems sometime in the future.
The FY-2019 rates / charges may not be adjusted in the short-term not because of any matters involving
this litigation but by the fact that as of June 30, 2017 GLWA has approximately $625 million set aside in
cash / investments relating to the unexpended bond proceeds of prior bond issues and revenue
financed capital (i.e. the "Improvement and Extension Fund" amounts set aside) all while the capital
spending rate is at a pace of roughly $79 million for the year ended June 30, 2017. The original need for
bonds to be issued in FY-2019 (other than State Revolving Fund debt) has been delayed as the amounts
already set aside for capital needs far exceed the ability to use those resources.
Shortly, the Oakland County GLWA Board representative will file a Freedom of Information Act request
of GLWA administration relating to the release of the outside attorney opinion. Whether the GLWA
administration will release the memorandum relating to this FOIA request is presently unknown.
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As a practical matter and based upon the above, the solution to this issue involves one of the following
options —
• DWSD-R treats this as a charge to DWSD-R operations (reduction of revenue, as appropriate)
with no recording on the GLWA books not unlike much of the other operating costs for retail
operations. This treatment would be wholly consistent with the manner in which suburban
communities have been placed relative to the sewer charges for similar losses.
• A liability in GLWA is recorded on the books of GLWA with a corresponding receivable from
DWSD-R. However, in doing so, since GLWA has no cash on its books from the rates / charges
relating to these two litigation settlements and the assets assumed by GLWA are in a net deficit
position, the cash to be paid by GLWA needs to be fronted first by DWSD-R or at a minimum,
reimbursed.
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UPDATE TO "CLASS ACTION SETTLEMENTS BY GREAT LAKE WATER AUTHORITY", DATED
FEBRUARY 5, 2018
March 5, 2018
The below are updated actions and information involving the Michigan Warehousing Group LLC and
United House of Prayer matters as noted in the attached memorandum entitled Class Action
Settlements by Great Lakes Water Authority, dated February 5, 2018:
• The GLWA administration has denied the Freedom of Information Act request as the
information requested was 'privileged' and not subject to FOIA. The information requested
involved the Dickinson opinion letter on the lease, cost allocation and funding responsibilities
relating to the above referenced litigation.
• It is the County's understanding based on discussions with the GLWA administration that DWSD-
R has engaged Miller Canfield to produce a written opinion as well on the same subject matter.
It is the intention of the GLWA administration to mediate a discussion between Miller Canfield
and Dickinson involving the two, as yet to be released, opinion letters.
• At a recent GLWA Board meeting, the Board passed a resolution on the responsibilities of
noticing the Board involving future litigation with third parties and / or litigation involving
DWSD-R. Among other requirements, all future litigation that might settle for amounts greater
than $125,000 must seek approvals from the Board prior to settlement. In addition, the periodic
reporting responsibilities to the Board and the Board's Legal Committee have been defined as
well.
• The dates, protocol, representation and other matters involving the arbitration approved by the
GLWA Board for the Michigan Warehousing Group, LLC matter on December 31, 2017 and the
United House of Prayer arbitration approved on January 10, 2018 has yet to be formally
communicated to the Board. Requests for this information were made by the Oakland County
Board representative at the January 24, 2018 Board meeting, roughly a month and a half ago.
• Oakland County has engaged an outside attorney in the pursuit of the Dickinson opinion letter
and to protect the rights of Board members in their fiduciary responsibilities to their ratepayers.
Resolution #18072 March 8, 2018
Moved by Kowa11 supported by Zack to suspend the rules and vote on Miscellaneous Resolution #18072 -
Board of Commissioners — Transparency and Accountability Concerns Involving the Great Lakes Water
Authority's Recent Class Action Settlements.
Vote on motion to suspend the rules:
AYES: Hoffman, Jackson, Kochenderfer, KowaII, Long, McGillivray, Middleton, Quarles, Spisz,
Taub, Weipert, Woodward, Zack, Berman, Bowman, Crawford, Dwyer, Fleming, Gershenson,
Gingell. (20)
NAYS: None. (0)
A sufficient majority having voted in favor, the motion to suspend the rules and vote on Miscellaneous
Resolution #18072 - Board of Commissioners — Transparency and Accountability Concerns Involving the
Great Lakes Water Authority's Recent Class Action Settlements carried.
Moved by KowaII supported by Zack the resolution be adopted.
AYES: Jackson, Kochenderfer, KowaII, Long, McGillivray, Middleton, Quarles, Spisz, Taub,
Weipert, Woodward, Zack, Berman, Bowman, Crawford, Dwyer, Fleming, Gershenson, Gingell,
Hoffman. (20)
NAYS: None. (0)
A sufficient majority having voted in favor, the resolution was adopted.
YCJ
HEREBY APPROVE THIS RESOLUTION
CHIEF DEPUTY COUNTY EXECUTIVE
ACTING PURSUANT TO MCL 45.559A (7)
STATE OF MICHIGAN)
COUNTY OF OAKLAND)
I, Lisa Brown, Clerk of the County of Oakland, do hereby certify that the foregoing resolution is a true and
accurate copy of a resolution adopted by the Oakland County Board of Commissioners on March 8, 2018,
with the original record thereof now remaining in my office.
In Testimony Whereof, I have hereunto set my hand and affixed the seal of the County of Oakland at
Pontiac, Michigan this 8th day of March, 2018.
Lisa Brown, Oakland County