southern division united states of america city of …

UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

CITY OF DETROIT’S MOTION FOR SANCTIONS AND DISGORGEMENT OF FEES

On July 18, 2003, the Court appointed Kroll, Inc. (“Kroll”) and Sheryl Robinson Wood

(“Wood”) to serve as the independent federal monitor to implement two Consent Judgments that

were entered in the instant case with respect to the policy and practices of defendant City of

Detroit through the Detroit Police Department (collectively the “City of Detroit”). Soon after

accepting this appointment, and despite Kroll’s assurance that the federal monitor would be

“truly independent and unbiased,” Wood began a secret, personal relationship with the former

City of Detroit Mayor, Kwame Kilpatrick (“Kilpatrick”). By the time the Court learned of this

relationship, nearly six years had passed and $10,049,493.33 of taxpayer money had been paid to

the “independent” federal monitor. The citizens of Detroit deserve better.

On July 23, 2009, Wood tendered her resignation as the federal monitor following the

Court’s in camera review of certain documents and subsequent conclusion that Wood “had

engaged in conduct which was totally inconsistent with the terms and conditions of the two

UNITED STATES OF AMERICA Plaintiff, vs. CITY OF DETROIT, MICHIGAN and the DETROIT POLICE DEPARTMENTS Defendants. _____________________________________/

Case No.:03-72258

Honorable: Julian Abele Cook

Magistrate Judge: Donald A. Scheer

Case 2:03-cv-72258-JAC Document 491 Filed 11/09/10 of 26

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Consent Judgments in this litigation.” (Ex. A, Dkt. 401.) Specifically, the Court concluded that

Wood had “engaged in undisclosed communications, as well as meetings of a personal nature,

with the former City of Detroit Mayor Kwame Kilpatrick during the term of the Consent

Judgments, which included inappropriate discussions with him about this lawsuit.” The Court

was left with no choice but to take immediate action consistent with the conduct of the

supposedly independent federal monitor and accept her resignation.

In short, Wood betrayed the Court, the judicial process, and the citizens of Detroit.

Wood breached her duty to remain disinterested, loyal, and free of even the appearance of bias.

Based on this conflict, the City of Detroit now requests that the Court use its inherent powers to

sanction improper conduct and order the immediate disgorgement of $10,049,493.33 paid to

Wood and her three former employers during the relevant time period (Kroll, Saul Ewing, LLP,

and Venable, LLP).1

Date: November 9, 2010

Respectfully submitted,

DYKEMA GOSSETT PLLC By: /s/ James P. Feeney __________

James P. Feeney (P13335) Andrew J. Kolozsvary (P68885) Attorneys for Defendants 400 Renaissance Center Detroit, MI 48243 (313) 568-6800 [email protected] [email protected]

1 In accordance with E.D. Mich. LR 7.1(a), on October 28, 2010, the City of Detroit

requested but did not obtain concurrence in the relief sought.


UNITED STATES DISTRICT COURT EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

CITY OF DETROIT’S BRIEF IN SUPPORT OF ITS MOTION FOR SANCTIONS AND DISGORGEMENT OF FEE S

UNITED STATES OF AMERICA Plaintiff, vs. CITY OF DETROIT, MICHIGAN and the DETROIT POLICE DEPARTMENTS Defendants. _____________________________________/

Case No.: 03-72258

Honorable: Julian Abele Cook

Magistrate Judge: Donald A. Scheer


i

TABLE OF CONTENTS

STATEMENT OF QUESTION PRESENTED.............................................................................. ii

CONTROLLING AND MOST APPROPRIATE AUTHORITY ................................................. iii

I. INTRODUCTION ...............................................................................................................1

II. FACTS .................................................................................................................................2

A. The Investigation .....................................................................................................2

B. The Lawsuit .............................................................................................................2

i. The Complaint .............................................................................................2

ii. The Federal Monitor ....................................................................................3

iii. The Consent Judgments ...............................................................................6

C. The Text Messages, The Mayor, And The Monitor’s Resignation .........................7

III. LAW AND ARGUMENT ...................................................................................................9

A. The Court Has The Inherent Authority To Sanction The Improper Conduct Of The Former Monitor And Order Immediate, Total Fee Disgorgement ..............9

i. The Court’s Authority..................................................................................9

ii. Fee Disgorgement ......................................................................................11

B. Alternatively, The All Writs Act Provides The Court The Ability To Order Immediate, Total Fee Disgorgement From The Former Monitor..........................15

IV. CONCLUSION..................................................................................................................18


ii

STATEMENT OF QUESTION PRESENTED

Whether the Court should use its inherent authority (or, alternatively, its powers under

the All Writs Act) to sanction the improper conduct of the former federal monitor and order the

complete disgorgement of $10,049,493.33 in fees paid to the former federal monitor.


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CONTROLLING AND MOST APPROPRIATE AUTHORITY

Page(s) CASES

Chambers v. NASCO, Inc., 501 U.S. 32 (1991)...............................................................................................................9, 10

First Bank of Marietta v. Hartford Underwriters Ins. Co., 307 F.3d 501 (6th Cir. 2002) .........................................................................................9, 10, 11

Gray v. English, 30 F.3d 1319 (10th Cir. 1994) .................................................................................................12

In re Baldwin-United Corp., 770 F.2d 328 (2d Cir. 1985).....................................................................................................16

In re Big Rivers Elec. Corp., 355 F.3d 415 (6th Cir. 2004) .......................................................................................11, 12, 14

In re Stabile, 436 F.Supp.2d 406 (E.D.N.Y. 2006) .......................................................................................16

Mapother & Mapother P.S.C. v. Cooper (In re Downs), 103 F.3d 472 (6th Cir. 1996) .................................................................................11, 12, 13, 14

Maynard v. Nygren, 332 F.3d 462 (7th Cir. 2003) ...................................................................................................11

Pennsylvania Bureau of Corr. v. U.S. Marshals Serv., 474 U.S. 34 (1985)...................................................................................................................15

Syngenta Crop Protection, Inc. v. Henson, 537 U.S. 28 (2002)...................................................................................................................15

United States. v. Beckner, 16 F.Supp.2d 677 (M.D. La. 1998)....................................................................................16, 17

United States v. Venneri, 782 F. Supp. 1091 (D. Md. 1991) ............................................................................................16

United States v. Johnson, 327 F.3d 554 (7th Cir. 2003) .............................................................................................10, 11

United States v. New York Telephone Co., 434 U.S. 159 (1977).................................................................................................................15


iv

STATUTES

All Writs Act, 28 U.S.C. § 1651(a)................................................................................................15

Violent Crime Control and Law Enforcement Act of 1994, 42 U.S.C. § 14141.....................1, 2, 3


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I. INTRODUCTION

On June 12, 2003, the United States Department of Justice (the “DOJ”) filed a lawsuit

against defendant City of Detroit through the Detroit Police Department (the “City of Detroit”)

based on the Violent Crime Control and Law Enforcement Act of 1994, 42 U.S.C. § 14141. The

DOJ alleged, among other things, that the City of Detroit “. . . through their acts and omissions,

are engaging in a pattern or practice of conduct by Detroit Police Department officers of

subjecting individuals to uses of excessive force, false arrests, illegal detentions, and

unconstitutional conditions of confinement.” (Dkt. 1.) To remedy these past alleged violations,

the parties agreed to the entry of two Consent Judgments that included a provision for the

appointment of an independent federal monitor.

On July 18, 2003, the Court appointed Kroll, Inc. (“Kroll”) and Sheryl Robinson Wood

(“Wood”) to serve as the independent federal monitor in this lawsuit. Over the next six years,

Kroll and Wood (and later Wood’s subsequent employers, Saul Ewing, LLP (“Saul Ewing”), and

Venable, LLP (“Venable”)) were paid $10,049,493.33 by the City of Detroit. But during this six

years, Wood was keeping a secret from the Court.

On July 24, 2009, Wood tendered her resignation after the Court confronted her

following its in camera review of certain documents, which included numerous text messages

between Wood and the former City of Detroit Mayor Kwame Kilpatrick (“Kilpatrick”). The

Court concluded that Wood “had engaged in conduct which was totally inconsistent with the

terms and conditions of the two Consent Judgments in this litigation.” (Ex. A, Dkt. 401.)

Specifically, the Court found that Wood had “engaged in undisclosed communications, as well

as meetings of a personal nature, with the former City of Detroit Mayor Kwame Kilpatrick

during the term of the Consent Judgments, which included inappropriate discussions with him

about this lawsuit.” (Ex. A, Dkt. 401.)


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Wood’s failure to disclose the conflict of interest created by her relationship with

Kilpatrick was a clear breach of her duty to remain disinterested and loyal. Her motivation in

keeping this relationship secret seems obvious—money. Over six years, Wood and her three

employers submitted approximately $10 million in invoices to this Court despite Wood being

involved in an undisclosed, inappropriate, and unethical relationship with Kilpatrick. Justice

now demands additional action above and beyond Wood’s resignation, which was necessary at

the time to preserve the integrity of the judicial process.

II. FACTS

A. The Investigation

In September 2000, the Mayor of Detroit, Dennis W. Archer and “other interested

persons,” requested that the DOJ review the City of Detroit’s use of force.2 (Dkt. 22 and Dkt.

23.) As a result of this request, in December 2000, the DOJ initiated an investigation into the use

of force and conditions in the City of Detroit holding cells pursuant to its authority under the

Violent Crime Control and Law Enforcement Act of 1994, 42 U.S.C. § 14141 (“Section 14141”).

(Id.) In May 2001, the DOJ expanded its investigation to include the City of Detroit’s arrest and

detention policies and practices. (Id.) The DOJ’s investigation was conducted with the full

cooperation of the City of Detroit. (Id.) In less than 36 months, the DOJ was ready to act.

B. The Lawsuit

i. The Complaint

On June 12, 2003, the DOJ filed its Complaint against the City of Detroit. (Dkt. 1.) In its

Complaint, the DOJ alleged, among other things, that “[t]he defendants, through their acts and

omissions, are engaging in a pattern or practice of conduct by Detroit Police Department officers

2 Kilpatrick was elected as Mayor of Detroit and took office in 2001.


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of subjecting individuals to uses of excessive force, false arrests, illegal detentions, and

unconstitutional conditions of confinement.” (Id.) Based on these alleged acts and omissions,

the DOJ sought “declaratory and equitable relief to eliminate a pattern or practice of law

enforcement officer conduct that deprives persons of rights, privileges, or immunities secured or

protected by the Constitution or laws of the United States.” (Id.)

ii. The Federal Monitor

On May 13, 2003, Kroll submitted its Statement of Qualifications to the DOJ and City of

Detroit. In the Executive Summary section, Kroll stated that:

. . . success for the Monitor depends not on a sophisticated investigative strategy, the creation of oversight protocols, or on the creation of new innovative policing strategies. Rather the success of the Independent Monitor will be measured by its ability to:

1. Ensure all parties and the public that the Independent Monitor’s oversight is truly independent and unbiased . . . .

*****

Ms. [Wood], Managing Director and Office Head of Kroll’s Washington, DC office, offers unique expertise in police integrity practices in both the litigation and policy development areas.

(Ex. B.)

Based on Kroll’s own stated criteria, the Monitor failed. The City of Detroit and its

citizens paid the Monitor more than $10 million, and in return, Kroll and Wood have managed to

cast doubt on the judicial process and its own performance irrespective of merit.

On June 12, 2003, the DOJ and the City of Detroit filed a Joint Motion to Appoint a

Monitor. (Dkt. 2.) The parties first stated they had “entered into two Settlement Agreements for

the implementation of needed improvements in the operation of the Detroit Police Department in

the above captioned case.” (Id.) These “Settlement Agreements provide for the appointment of

an independent monitor to provide technical assistance and evaluate compliance with the terms


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of the Settlement Agreements. The parties have agreed to select [Wood] assisted by Kroll, Inc.

(hereinafter ‘Kroll’) as the Monitor for both Settlement Agreements . . . .” (Id.) That very same

day, Kroll issued a press release that provided, in part:

NEW YORK – (BUSINESS WIRE) – June 12, 2003 – Kroll Inc. (NASDAQ: KROL), the global risk consulting company, announced today that it been chosen by the U.S. Department of Justice and the City of Detroit to serve as the independent federal monitor responsible for overseeing reforms in the Detroit Police Department . . . . Contractual terms of Kroll’s appointment, which requires approval by a federal court, have not yet been finalized. Pending court approval, Sheryl L. Robinson, managing director of Kroll’s Washington office, will serve as the independent monitor of the consent decrees. The monitorship, which will last five years, involves overseeing the implementation of the decrees, providing technical assistance to the police department, and issuing regular public reports assessing the police department’s progress.

(Ex. C.)

On July 18, 2003, the Court officially appointed Kroll and Wood to serve as the

independent federal monitor in this lawsuit. (Dkt. 20.) (From July 18, 2003 through July 24,

2009, Wood worked for three different firms: (1) Kroll; (2) Saul Ewing; and (3) Venable. Wood,

Kroll, Saul Ewing, and Venable will hereinafter be referred to as the “Monitor.”) Lest there be

any doubt that the Monitor was not Wood in her individual capacity, but instead Wood and her

various employers, Wood was interviewed by the Detroit City Council and stated:

I am managing director and office head of Kroll, Inc.’s Washington, D.C. office . . . . Kroll works in a team concept for the monitoring assignments. I would be the named primary monitor, but will work with a team of experienced individuals who are subject-matter experts and monitoring experts in all of the areas that are relevant in these two consent judgments.

(Ex. D.)

Additionally, payments of fees and expenses were made by order of the Court to Wood’s

employers—not to Wood individually. The Monitor was required to submit a motion to the


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Court seeking disbursement of money that was held by the Court in a non-interest bearing trust

account. See, e.g., November 5, 2003 Motion for Payment of Monitor’s Fees and Expenses.

(Dkt. 52.) Typically, the Court would review the motion and grant the requested relief. For

example, on November 14, 2003, the Court entered its first Order regarding payment:

Accordingly, the Clerk of the Court is authorized to remit the sum of two hundred twenty thousand five hundred twenty six dollars and sixty three cents ($220,526.63) to Kroll Associates, Inc., Accounting Department, 7th Floor, 900 Third Avenue, New York, New York 10022-4751, which will reflect the payment of the Monitor’s fees and expenses between July 23, 2003 to September 22, 2003.

(Dkt. 55.) Over the next six years, the City of Detroit and its citizens paid Wood, Kroll, Saul

Ewing, and Venable (again, collectively the “Monitor”) over $10 million. (Ex. E, Summary of

Payments.)

First, from July 18, 2003, through approximately October 1, 2007, the City of Detroit

paid Kroll $6,210,326.83 while Wood was employed there. (Ex. E.)

Second, from October 1, 2007, through approximately January 13, 2009, Wood worked

for Saul Ewing. (Ex. F, October 1, 2007 Press Release from Saul Ewing) (“Robinson Wood is

the federal court-appointed independent compliance monitor of two consent judgments resulting

from a complaint filed by the U.S. Department of Justice against the City of Detroit. She will

continue in this role at Saul Ewing.”) During this time the City of Detroit paid Saul Ewing

$2,483,402.65. (Ex. E.)

Third, from January 13, 2009, through August 31, 2009, Wood was a partner in Venable.

(Ex. G, January 13, 2009 Press Release from Venable) (“In 2003, Ms. Robinson Wood was

appointed Independent Monitor by a U.S. District Court Judge of two consent judgments against

the City of Detroit and Detroit Police Department brought by the U.S. Department of Justice . . . .


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Her appointment is scheduled to continue until 2011.”) During this time the City of Detroit paid

Venable $1,355,763.85. (Ex. E.)

Needless to say, Kroll, Saul Ewing, and Venable each benefitted handsomely from

Wood’s employment and the payments they received for their services as the Monitor. In fact,

Venable continues to seek payment as evidenced by a July 2, 2010 motion seeking fees and

expenses up to and even beyond the date Wood tendered her resignation to the Court. (Dkt.

460.) Venable does not explain why it seeks payment nearly a year after Wood was forced to

resign as monitor and (apparently) as a partner from Venable, but the filing came suspiciously

one day after the City of Detroit filed its motion seeking the relevant text messages in this matter.

iii. The Consent Judgments

On July 18, 2003, the Court approved two Consent Judgments, (i) Consent Judgment –

Use of Force and Arrest and Witness Detention, and (ii) Consent Judgment – Conditions of

Confinement (collectively the “Consent Judgments”). (Dkt. 22 and Dkt. 23.) The Consent

Judgments generally provide for the eradication of the following alleged patterns or practices of

conduct by the City of Detroit: (i) use of excessive force; (ii) false arrests; (iii) illegal detentions;

and (iv) unconstitutional conditions of confinement. (Id.) The Monitor was responsible for

providing technical assistance and evaluating compliance with the Consent Judgments.

The Consent Judgments also speak to the selection of the Monitor and the importance of

the Monitor having the utmost integrity and being free from any bias or even the appearance of

bias. Specifically:

The DOJ and the City shall select a Monitor with law enforcement experience, a reputation for integrity and an absence of bias, including any appearance of bias, for or against the DOJ, the City or the DPD, who shall review and report on the City and the DPD’s implementation of this Agreement . . . .


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(Dkt. 22, ¶124 and Dkt. 23.) (emphasis added.)3

Wood was well aware of the duty to remain independent and avoid conflicts of interest,

telling the Detroit City Council on July 22, 2003:

[H]ow we see success of a monitor is that we must gain the confidence, of course, of the parties, the public, and the court by being independent and unbiased, and how we do that is based upon our reputation as being so, and also professionalism and quality of our staff – our monitoring team.

(Ex. D.) This statement, of course, mirrors Kroll’s May 13, 2003 Statement of Qualifications.

This statement, of course, also highlights the fact that the Monitor failed based on their stated

criteria.

The Consent Judgments also provided that the City shall bear all reasonable fees and

costs of the Monitor, that the Court retains authority to resolve any fee disputes, and that the

Monitor is an agent of the Court and is subject to the supervision and orders of this Court. (Dkt.

22, ¶¶129, 131 and Dkt. 23.)

C. The Text Messages, The Mayor, And The Monitor’s Resignation

Unbeknownst to the Court, or to the persons charged with reviewing and approving the

invoices of the Monitor with respect to the Consent Judgments, Wood was involved in an

inappropriate and unethical relationship with Kilpatrick. Kilpatrick’s scandal-ridden tenure was

plagued by, among other things, rampant accusations of abuse of public office and corruption.

Most notoriously, in 2008, Kilpatrick was charged with multiple felony counts, including perjury

and obstruction of justice. After pleading guilty to a felony and resigning as Mayor of Detroit,

Kilpatrick was sentenced to four months in prison.4 As this Court is painfully aware, Kilpatrick

3 Citations to paragraph numbers are to the consent judgment entered in Dkt. 22. The

substance of these paragraphs is virtually identical to those contained in the consent judgment entered in Dkt. 23.

4It is important to note that the City of Detroit is governed by two, co-equal branches of


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remains a thorn in the side of the City of Detroit and the State of Michigan. This case twists that

thorn once more.

On July 22, 2009, the Court reviewed numerous text messages between Wood and

Kilpatrick and immediately thereafter contacted Wood concerning her status as the Monitor. On

July 24, 2009, the Court issued an order concluding that Wood “had engaged in conduct which

was totally inconsistent with the terms and conditions of the two Consent Judgments in this

litigation.” (Ex. A, Dkt. 401.) That order also provided, in pertinent part:

On July 18, 2003, the Court appointed Sheryl L. Robinson, now known as Sheryl Robinson Wood, with the assistance of Kroll, Inc., to serve as the Monitor in this case. During a status conference with the parties on July 22, 2009, the Court had an opportunity to review certain documents in camera that, in its judgment, were necessary in order to evaluate the then-current status of the Monitor and her continued role in this case. Immediately thereafter, the Court contacted the Monitor by telephone to discuss her ability to remain effective in this highly sensitive position. Following this telephone conversation with the Monitor and based upon its thorough review of these documents, the Court has accepted her resignation, effective as of 5:00 p.m. on July 23, 2009. In accepting the Monitor’s resignation, the Court concluded that she had engaged in conduct which was totally inconsistent with the terms and conditions of the two Consent Judgments in this litigation. Specifically, it has now become readily apparent to the Court that the Monitor had engaged in undisclosed communications, as well as meetings of a personal nature, with the former City of Detroit Mayor Kwame Kilpatrick during the term of the Consent Judgments, which included inappropriate discussions with him about this lawsuit.

(Id.) The Court also determined that it was “absolutely necessary to suspend all monitoring of

this case immediately.” (Id.) government. The City Council is the legislative body and possesses the powers and duties provided by law or the City Charter; the Mayor is the chief executive of the city and heads and controls the executive branch. Any authority that the City of Detroit has to act is derived from these two branches of government. As the “client” is the City of Detroit, approval of all contracts, actions, etc., must be presented to the City Council and the Mayor. Thus, the City Council and the Mayor, on behalf of the client, i.e., City of Detroit, must both consent to the waiver of any conflict of interest. Clearly, that did not occur in this situation.


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On August 11, 2009, the Court issued an order continuing the suspension of monitoring

and requiring the former monitoring team to submit a closing memorandum to facilitate the

transition to a successor monitor. (Dkt. 403.) The former monitoring team at Kroll submitted its

closing memorandum on September 10, 2009. (Dkt. 404.).

On October 5, 2009, after much work, vetting, and consultation among the parties, the

Court appointed Police Performance Solutions, LLC and Robert Warshaw as the new

independent federal monitoring team. (Dkt. 407.) Police Performance Solutions, LLC and Mr.

Warshaw continue that work today.

III. LAW AND ARGUMENT

A. The Court Has The Inherent Authority To Sanction The Improper Conduct Of The Former Monitor And Order Immediate, Total Fee Disgorgement

i. The Court’s Authority

It is axiomatic that courts have the inherent authority to sanction improper conduct.

Chambers v. NASCO, Inc., 501 U.S. 32 (1991); First Bank of Marietta v. Hartford Underwriters

Ins. Co., 307 F.3d 501 (6th Cir. 2002). “[A] court’s reliance upon its inherent authority to

sanction derives from its equitable power to control the litigants before it and to guarantee the

integrity of the court and its proceedings.” First Bank of Marietta, 307 F.3d at 512 (citing

Chambers, 501 U.S. at 43). In Chambers, the Supreme Court explained the boundaries of a

federal court’s exercise of its inherent power in the following terms:

[A] court may assess attorney’s fees when a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons. In this regard, if a court finds that fraud has been practiced upon it, or that the very temple of justice has been defiled, it may assess attorney’s fees against the responsible party, as it may when a party shows bad faith by delaying or disrupting the litigation or by hampering enforcement of a court order. The imposition of sanctions in this instance transcends a court’s equitable power concerning relations between the parties and reaches a court’s inherent power to police itself, thus serving the dual purpose of vindicat[ing] judicial


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authority without resort to the more drastic sanctions available for contempt of court and mak[ing] the prevailing party whole for expenses caused by his opponent’s obstinacy.

Id. at 45-46 (internal quotations and citations omitted).

The exercise of inherent authority is particularly appropriate for impermissible conduct

that adversely impacts the entire litigation. First Bank of Marietta, 307 F.3d at 516. The more

serious the misconduct to be sanctioned, the more extensive the range of options available to the

court. See United States v. Johnson, 327 F.3d 554, 563 (7th Cir. 2003).

This Court, in accepting the Monitor’s resignation, has already concluded that Wood

engaged in inappropriate conduct that was inconsistent with the terms of the Consent

Judgments—the very Consent Judgments that call for “a Monitor with law enforcement

experience, a reputation for integrity and an absence of bias, including any appearance of bias,

for or against the DOJ, the City or the DPD.” (Dkt. 22 and Dkt. 23.) There is simply no

disputing this fact. Indeed, by tendering her resignation as the Monitor after meeting and

discussing the text messages with the Court, Wood acknowledged this fact. Case law holds that

the Court has the inherent authority to sanction such improper conduct, especially given that the

Monitor requested and received over $10 million in fees without ever disclosing the

inappropriate and unethical relationship between Wood and Kilpatrick. Replacing the Monitor

was only the first step in rectifying this situation.

There is little question that the former Monitor’s impermissible conduct has adversely

(and seriously) impacted the entire litigation. For example, the Court accepted the former

Monitor’s forced resignation after six years of work. This resignation stopped the monitoring

process for months until the Court and the parties could vet and retain another Monitor. And

even though this motion does not address the effectiveness or quality of the Monitor’s work, the

conduct of the former Monitor—which has been the subject of numerous national news stories—


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necessarily calls into question the legitimacy of the entire process and the work that was

performed during Wood’s six-year tenure leading the monitorship. This impact is incredibly

damaging.

ii. Fee Disgorgement

The appropriate sanction for the Monitor’s improper conduct and breach of ethical duties

is complete disgorgement of fees. While there is no case law that speaks directly to a federal

monitor in this situation, there is case law that addresses the appropriate sanction for the

improper and unethical conduct of court-appointed agents, such as the Monitor. Specifically, the

Sixth Circuit has upheld the use of a court’s inherent sanctioning authority to order disgorgement

of fees without an express finding of bad faith where attorneys or court-appointed professionals

failed to disclose conflicts of interest.5 In re Big Rivers Elec. Corp., 355 F.3d 415 (6th Cir.

2004); Mapother & Mapother P.S.C. v. Cooper (In re Downs), 103 F.3d 472, 478 (6th Cir.

1996).

In Big Rivers, the Sixth Circuit held that the court-appointed examiner (an agent of the

court like the Monitor in the instant case)—and his law firm—were required to disgorge all fees

because, after his appointment by the court, he violated his fiduciary duties to remain

disinterested and loyal and violated his duty to disclose payments promised to him:

Because the Code permits only “reasonable compensation” and because that requirement necessarily implies loyal and

5 In other contexts, the Sixth Circuit has held that “bad faith” is a requirement for the use

of the district court’s inherent authority to impose sanctions. First Bank of Marietta, 307 F.3d at 519. However, other circuits have determined that remedial sanctions, such as disgorgement of fees, do not require a finding of bad faith. See Maynard v. Nygren, 332 F.3d 462, 470-71 (7th Cir. 2003) and United States v. Johnson, 327 F.3d 554, 563 (7th Cir. 2003) (affirming disgorgement of fees under inherent authority without finding of bad faith). Either way, and for example, the former Monitor’s conduct equates to bad faith because she regularly submitted signed motions to the Court requesting millions of dollars for fees even though she knew or should have known that her secret relationship with Kilpatrick was improper, destroyed her impartiality, was a clear conflict of interest, and violated the Consent Judgments.


12

disinterested service in the interest of those for whom the claimant purported to act, a fiduciary may not receive compensation for services tainted by disloyalty or conflict of interest.

Id. at 436 (internal quotations and citations omitted). The court went on to note that the fact that

the examiner may have provided value to the estate was of no import:

No doubt the sanction in this case is a harsh and unforgiving one. [The court appointed examiner’s] efforts, he claims, brought approximately $145 million of new value into the estate. Rather than the thanks of a grateful court and the thanks of grateful parties, he received an order to reimburse the debtor nearly $1 million in fees. Steep as the sanction may be, it represents the price of disloyalty, a price the courts have not hesitated to charge in dealing with similar breaches of trust. Serving as an examiner, as with “trusteeship,” is serious business and is not to be undertaken lightly or so discharged. When it comes to loyalties and conflicts of interest, we do not ask whether harm has resulted, because the[ ] effect is often difficult to trace. Where an actual conflict of interest exists, no more need be shown in this type of case to support a denial of compensation. [See also] Mosser [v. Darrow, 341 U.S. 267, 273], (“[E]quity has sought to limit difficult and delicate fact-finding tasks concerning its own trustee by precluding such [self-dealing] transactions for the reason that their effect is often difficult to trace, and the prohibition is not merely against injuring the estate-it is against profiting out of the position of trust.”); Ross v. Kirschenbaum (In re Beck Ind.), 605 F.2d 624, 636 (2d Cir. 1979) (“Courts do not take kindly to arguments by fiduciaries who have breached their obligations that, if they had not done this, everything would have been the same.”) (Friendly, J.).

In re Big Rivers Elec. Corp., 355 F.3d at 437 (some citations omitted) (emphasis added).

Similarly, in In re Downs, the Sixth Circuit held that the bankruptcy court “properly

exercised its authority in issuing sanctions against” the debtors’ attorney and the attorney’s law

firm for failure to disclose his fee arrangement and for failure to disclose a conflict of interest in

accordance with the Bankruptcy Code and Rules of Bankruptcy Procedure. “Bankruptcy courts,

like Article III courts, enjoy inherent power to sanction parties for improper conduct . . . . It

follows that the bankruptcy court is vested with the inherent power to sanction attorneys for


13

breaches of fiduciary obligations.” In re Downs, 103 F.3d at 477 (emphasis added.) See also

Gray v. English, 30 F.3d 1319, 1324 (10th Cir. 1994) (affirming bankruptcy court’s decision to

deny compensation to bankruptcy trustee who was not “disinterested” and noting that “[i]n

exercising the discretion granted by the statute we think the court should lean strongly toward

denial of fees, and if the past benefit to the wrongdoer fiduciary can be quantified, to require

disgorgement of compensation previously paid that fiduciary even before the conflict arose”).

The lower court in In re Downs initially disallowed all compensation to the debtors’

attorney and ordered disgorgement of all fees and costs already paid. The lower court then

modified the order to allow the debtors’ attorney to retain a portion of the compensation. The

Sixth Circuit held that the district court abused its discretion in affirming this modification:

[T]he bankruptcy court should deny all compensation to an attorney who exhibits a willful disregard of his fiduciary obligations to fully disclose the nature and circumstances of his fee arrangement under § 329 and Rule 2016. The authority to do so is inherent, and in the face of such infractions should be wielded forcefully.

[W]e conclude that a complete denial of fees is the only appropriate sanction in the instant case. We are not faced with a simple “technical breach” of § 329 and Rule 2016 here. Friedman acted affirmatively to conceal his fee arrangement . . . . Friedman further refused to extricate himself from a patently obvious conflict of interest by continuing to make appearances on Hardscrabble’s behalf in state court while representing the Downses in bankruptcy court. He also misled the trustee and SAIC regarding his withdrawal from the state proceedings. Only at the last possible instance, under pain of court order, did Friedman disclose the source of his retainer. Such conduct by its very essence constitutes a willful disregard of the fiduciary duties imposed by statute . . . . While we recognize the court’s duty to fashion a sanction that is not unduly burdensome, we also believe that the bankruptcy court erred in reducing the sanction here. Section 329 and Rule 2016 are fundamentally rooted in the fiduciary relationship between attorneys and the courts. Thus, the fulfillment of the duties imposed under these provisions are crucial to the administration and disposition of proceedings before the bankruptcy courts. Friedman, by his conduct in these proceedings, demonstrated a


14

“callous disregard” for those duties. Under these circumstances, we believe that the bankruptcy court abused its discretion in allowing Friedman and Mapother to retain any fees. For these reasons, we reverse the district court’s decision with regard to the amount of sanctions imposed.

Id. at 479-80 (citations omitted). (emphasis added.)

Here, as in In re Big Rivers Elec. Corp. and In re Downs, the former Monitor’s

appointment was expressly predicated on impartiality and a lack of conflict of interests. In fact,

the Consent Judgments called for the selection of a Monitor with “an absence of bias” or even

the “appearance of bias.” (Dkt. 22 and Dkt. 23, ¶124). Complete fee-disgorgement is warranted

here based on the Court’s inherent authority to sanction misconduct and the former Monitor’s

blatant conflict of interest stemming from her secret, personal relationship and improper

communications with Kilpatrick. Had the City of Detroit known of the relationship between

Wood and Kilpatrick, it would have, at a minimum, objected to the payment of her fees. That is

undoubtedly one of the reasons why Wood kept the relationship a secret from this Court and one

of the reasons why she resigned after the relationship came to light. Given this Court’s July 24,

2009 Order accepting Wood’s resignation, it is not a stretch to deduce that this Court would not

have approved any fees to the Monitor had it known of the inappropriate relationship between

Wood and Kilpatrick.

The Monitor will undoubtedly argue that their work provided value and that some

compensation should be retained.6 However, In re Big Rivers and In re Downs make clear that,

in situations where there is a blatant conflict of interest or breach of a fiduciary duties, the value

provided by the court-appointed agent is irrelevant. Such is the price for disloyalty and violation

of the prohibition against conflicting relationships. In re Big Rivers, 355 F.3d at 437. This

6 Indeed, Venable has already made such arguments in support of its recent request for

fees. (Dkt. 471.)


15

misconduct, coupled with the subsequent harm that has befallen this entire process, e.g.,

retaining a new monitor and the public’s lack of confidence in the process, requires remedial

action from the Court in the form of fee disgorgement in the amount of $10,049,493.33.

B. Alternatively, The All Writs Act Provides The Court The Ability To Order Immediate, Total Fee Disgorgement From The Former Monitor

The All Writs Act, 28 U.S.C. § 1651(a), provides that federal courts “may issue all writs

necessary or appropriate in aid of their respective jurisdictions and agreeable to the usages and

principles of law.” Id. The Act authorizes the issuance of “such commands . . . as may be

necessary or appropriate to effectuate and prevent the frustration of orders it has previously

issued in its exercise of jurisdiction otherwise obtained.” United States v. New York Telephone

Co., 434 U.S. 159, 172 (1977). The Act is designed to provide a “source of procedural

instruments designed to achieve the rational ends of law” when necessary in the federal court’s

“sound judgment to achieve the ends of justice entrusted to it . . . .” Id. at 172-173. The All

Writs Act is to be applied “flexibly in conformity with these principles.” Id. at 173.

There are two general limitations on the All Writs Act. First, it is well-settled that the All

Writs Act, by itself, “does not confer jurisdiction on the federal courts . . . .” Syngenta Crop

Protection, Inc. v. Henson, 537 U.S. 28, 29 (2002). Rather, the All Writs Act may only be used

in the context of an already-existing case or controversy that is within the subject-matter

jurisdiction of the federal court. See id.

Second, use of the All Writs Act has been limited to a stop-gap measure for those

situations where no existing law provides the necessary remedy. See Pennsylvania Bureau of

Corr. v. U.S. Marshals Serv., 474 U.S. 34, 40 (1985). “The All Writs Act is a residual source of

authority to issue writs that are not otherwise covered by statute. Where a statute specifically


16

addresses the particular issue at hand, it is that authority, and not the All Writs Act, that is

controlling.” Id. at 43.

In In re Stabile, 436 F.Supp.2d 406 (E.D.N.Y. 2006), a former court-appointed monitor

in the underlying criminal case (which had been dismissed with prejudice) brought a petition

pursuant to the All Writs Act to enjoin former defendants from harassing the monitor. The court

granted the motion, noting that a court may issue a writ against a third party as long as such

person has the “minimum contacts” with the forum necessary to the court’s exercise of personal

jurisdiction. Id. at 414 (citations omitted). As the Second Circuit has noted:

An important feature of the All Writs Act is its grant of authority to enjoin and bind non-parties to an action when needed to preserve the court’s ability to reach or enforce its decision in a case over which it has proper jurisdiction. The power to bind non-parties distinguishes injunctions issued under the Act from injunctions issued in situations in which the activities of third parties do not interfere with the very conduct of the proceeding before the court.

In re Baldwin-United Corp., 770 F.2d 328, 338 (2d Cir. 1985) (citations omitted). The In re

Stabile court also noted that use of the All Writs Act was appropriate because the appointment of

the monitor was not governed by statute and there was no statutory procedure for the relief

sought. In re Stabile, 436 F.Supp.2d at 415.

The All Writs Act has also been used to require reimbursement of funds. Specifically,

criminal defendants who had paid restitution as part of their sentence prior to having their

convictions vacated on appeal have successfully used the All Writs Act to obtain return of those

funds. See, e.g., U.S. v. Venneri, 782 F. Supp. 1091 (D. Md. 1991); U.S. v. Beckner, 16

F.Supp.2d 677 (M.D. La. 1998). Notably, in Venneri, the defendant had paid the funds directly

to the victim, who was not a party to the underlying criminal case. The court, nevertheless, held

that the All Writs Act gave it the authority to order the third party to repay the funds. In


17

Beckner, the defendant had paid the funds to the prosecutor’s office, which in turn distributed

them to the victims. The defendant sought repayment directly from the government. The court

rejected the government’s argument that it no longer had an obligation to repay because it no

longer had the funds, holding that “it was the government, not the victims, which exacted

payment from Beckner by filing the judgment and notice of lien. The government foolishly

disbursed Beckner’s money to third parties before there was a final judgment that such restitution

was due by Beckner. The government must therefore repay Beckner.” Id. at 679.

In this case, the two general limitations on the All Writs Act have been addressed. First,

there is an existing case or controversy, and second, the former Monitor was not appointed

pursuant to any statutory authority. Thus, there is no statutory procedure to deal with the

situation the City of Detroit currently faces. The aforementioned cases are analogous and require

the return of fees because it is “necessary [and] appropriate to effectuate and prevent the

frustration of orders [the Court] has previously issued” and necessary “to achieve the ends of

justice.”

Additionally, this Court entered numerous Orders compelling the City of Detroit to make

payment to the former Monitor. The Court did so not knowing that Wood and Kilpatrick were

engaged in a relationship that was “totally inconsistent with the terms and conditions of the two

Consent Judgments in this litigation.” (Ex. A, Dkt. 401.) The purpose of the Court’s previous

orders was to compensate what was believed to be a disinterested and unbiased Monitor;

however, the Court, the City of Detroit, and the public now know that the former Monitor was

not disinterested, but instead “had engaged in undisclosed communications, as well as meetings

of a personal nature, with the former City of Detroit Mayor Kwame Kilpatrick during the term of

the Consent Judgments, which included inappropriate discussions with him about this lawsuit.”


18

(Id.) Given this disclosure, which was not voluntarily revealed by Wood, but instead was

brought to the Court’s attention by attorneys for the DOJ, the only way to ensure that justice is

done is to order disgorgement of the $10,049,493.33 in fees paid to the Monitor.

IV. CONCLUSION

For the reasons stated above, the City of Detroit requests that the Court use its inherent

authority (or alternatively, the All Writs Act) to sanction improper conduct and order the

immediate disgorgement of $10,049,493.33 paid to Wood, Kroll, Saul Ewing, and Venable.

While this sanction may be harsh, it is well-supported in the case law and well-warranted given

the former court-appointed agent’s unethical conduct.

Date: November 9, 2010

Respectfully submitted,

DYKEMA GOSSETT PLLC By: /s/ James P. Feeney __________

James P. Feeney (P13335) Andrew J. Kolozsvary (P68885) Attorneys for Defendants 400 Renaissance Center Detroit, MI 48243 (313) 568-6800 [email protected] [email protected]


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CERTIFICATE OF SERVICE

I hereby certify that on November 9, 2010, I served via the electronic filing system the

foregoing paper to all counsel of record in this case.

By: /s/ James P. Feeney __ James P. Feeney (P13335) Andrew J. Kolozsvary (P68885) Attorneys for Defendants

39577 Woodward Avenue, Suite 300 Bloomfield Hills, MI 48304 Phone: (248) 203-0802 Fax: (248) 203-0763 E-mail: [email protected] [email protected]

BH01\1244735.2 ID\MSWE - 014201/0033


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