J.J. Conway
Everyone should have a boss like Coletta Estes at least once in their career. During her many years of employment with the City of Detroit, Estes understood, on an almost intuitive level, what employees needed to succeed. She understood the importance of listening, offering assistance that actually helped, and providing support during challenging times. Estes knew that employees who are heard and feel that someone “has their back” always perform better. When Estes served as manager, good things followed.
Estes was good at her job because she started working as an hourly unionized employee and worked her way up through the ranks to the position of supervisor in the city’s water department, one of its largest departments. Estes understood the concerns of the city’s employees. She brought that unique understanding into her role when she joined management. The city benefited because its unionized employees trusted her, and the usual management-labor tension that undermined productivity was gone.
So, when Estes spotted problems with the management of the city’s pension funds, she knew who would be hurt financially – the average worker who was toiling away day after day in a city job with the promise of one day retiring comfortably. What Estes understood, too, is that a retirement benefit is a form of deferred compensation. An employee works today and part of the payment for that work is paid later. Estes was right. A retirement benefit is like being paid $20 per hour with $4 of each hour put into savings and paid in the future. Busy employees have jobs to do, so they must leave the management of that savings to others – the trustees of the city’s two pension funds.
Historically, Detroit’s pension funds have always been considered a little sketchy. It is not just a Detroit problem. Many public pension funds have questionable practices and they are largely unregulated. When vast sums of money are sitting around, corruption often follows. In the mid-aughts, the city’s pension funds were around $5 billion, and the trustees of those funds were afforded near total discretion as to where those funds would be invested.
There were some modest state rules but, for the most part, the trustees could deploy the pension funds as they pleased. And one area that interested them greatly was known as “Alternative Investments.” Alternative investments are unregulated private investments with little oversight. The trustees of the City of Detroit’s General Retirement System and the Police and Fire System would listen to pitches from investment marketers and then vote to deploy massive sums into these unregulated funds.
Mayor Kwame Kilpatrick knew of this massive amount of cash in the pension funds, and he also knew that he had the power to appoint several of the “ex officio” board seats on both pensions. Kilpatrick took the graft and corruption to another level by stacking the boards with his personal friends and cronies. They, along with other corrupt trustees, started pushing more and more money into schemes and deals that were marketed by their friends and family. The hard-earned pension money was being pushed into untraceable investments in the Cayman Islands, into loans with little or no collateral, and other crazy investment schemes. All the while, the mayor and others were pocketing kickbacks.
While the city’s water workers were literally working in sewers making sure residents had water and sanitation services, many of the trustees were partying it up in exotic locations and fancy restaurants signing away the retirements of these workers. It was, in a word, gross.
So, Estes sued.
Suing trustees of any government pension is tough. Most have qualified immunity as did the city’s trustees. But in this instance, the trustees conduct was so grotesque that Estes’ claims overcame governmental immunity at the trial court and the trial court’s ruling was upheld on appeal in Estes v. Anderson, 2012 WL 5857283(Mich. App. Nov. 15, 2012).
In its ruling on her case, the Court of Appeals analogized her case to the much more commonly litigated ERISA statute and held:
“Like ERISA, the PERSIA requires that fiduciaries of employee pension plans ‘act with the same care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with those matters would use in the conduct of a similar enterprise with similar aims.’ MCL 38.1133(3)(a); see, also, 29 USC 1104(a)(1)(B). And the PERSIA requires that fiduciaries give appropriate consideration to the facts and circumstances relevant to the particular investment or investment course of action and act accordingly. MCL 38.1133(3)(d). Estes v. Anderson, 2012 WL 5857283, at *3.”
The trial court held that Estes had pled sufficient facts to show that the trustees violated that duty and many others. Following this, the Estes case was certified as a class action along with a companion case, Foy v. Bandemer, which covered participants in the city’s Police and Fire Retirement System.
The case was a textbook example of a fiduciary’s breach of trust. There were multiple bad deals that cost the pension funds millions in losses and contributed to the underfunding crisis which, in turn, contributed to the city’s bankruptcy. (Indeed, one investment decision was so bad that that the trial court granted summary disposition to the plaintiffs finding the deal to be so risky and undercapitalized, that the investment was grossly negligent as a matter of law.)
Eventually, the trustees settled Estes and Foy and agreed to a settlement class. The trustees of both funds agreed to pay back millions to the funds and agreed to a form of non-monetary relief that was actually greater in value – an independent outside neutral analysis of all non-public investments. As for the trustees, many went to jail ending a difficult chapter in the city’s history. Estes, for her part, cleaned up the funds and put them on a much better footing. In the end, Coletta Estes not only protected her coworkers but the city’s future workers for years to come. Like every other aspect of her career as a manager, she had their backs.
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John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and litigator and founder of J.J. Conway Law in Royal Oak.
Estes was good at her job because she started working as an hourly unionized employee and worked her way up through the ranks to the position of supervisor in the city’s water department, one of its largest departments. Estes understood the concerns of the city’s employees. She brought that unique understanding into her role when she joined management. The city benefited because its unionized employees trusted her, and the usual management-labor tension that undermined productivity was gone.
So, when Estes spotted problems with the management of the city’s pension funds, she knew who would be hurt financially – the average worker who was toiling away day after day in a city job with the promise of one day retiring comfortably. What Estes understood, too, is that a retirement benefit is a form of deferred compensation. An employee works today and part of the payment for that work is paid later. Estes was right. A retirement benefit is like being paid $20 per hour with $4 of each hour put into savings and paid in the future. Busy employees have jobs to do, so they must leave the management of that savings to others – the trustees of the city’s two pension funds.
Historically, Detroit’s pension funds have always been considered a little sketchy. It is not just a Detroit problem. Many public pension funds have questionable practices and they are largely unregulated. When vast sums of money are sitting around, corruption often follows. In the mid-aughts, the city’s pension funds were around $5 billion, and the trustees of those funds were afforded near total discretion as to where those funds would be invested.
There were some modest state rules but, for the most part, the trustees could deploy the pension funds as they pleased. And one area that interested them greatly was known as “Alternative Investments.” Alternative investments are unregulated private investments with little oversight. The trustees of the City of Detroit’s General Retirement System and the Police and Fire System would listen to pitches from investment marketers and then vote to deploy massive sums into these unregulated funds.
Mayor Kwame Kilpatrick knew of this massive amount of cash in the pension funds, and he also knew that he had the power to appoint several of the “ex officio” board seats on both pensions. Kilpatrick took the graft and corruption to another level by stacking the boards with his personal friends and cronies. They, along with other corrupt trustees, started pushing more and more money into schemes and deals that were marketed by their friends and family. The hard-earned pension money was being pushed into untraceable investments in the Cayman Islands, into loans with little or no collateral, and other crazy investment schemes. All the while, the mayor and others were pocketing kickbacks.
While the city’s water workers were literally working in sewers making sure residents had water and sanitation services, many of the trustees were partying it up in exotic locations and fancy restaurants signing away the retirements of these workers. It was, in a word, gross.
So, Estes sued.
Suing trustees of any government pension is tough. Most have qualified immunity as did the city’s trustees. But in this instance, the trustees conduct was so grotesque that Estes’ claims overcame governmental immunity at the trial court and the trial court’s ruling was upheld on appeal in Estes v. Anderson, 2012 WL 5857283(Mich. App. Nov. 15, 2012).
In its ruling on her case, the Court of Appeals analogized her case to the much more commonly litigated ERISA statute and held:
“Like ERISA, the PERSIA requires that fiduciaries of employee pension plans ‘act with the same care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a similar capacity and familiar with those matters would use in the conduct of a similar enterprise with similar aims.’ MCL 38.1133(3)(a); see, also, 29 USC 1104(a)(1)(B). And the PERSIA requires that fiduciaries give appropriate consideration to the facts and circumstances relevant to the particular investment or investment course of action and act accordingly. MCL 38.1133(3)(d). Estes v. Anderson, 2012 WL 5857283, at *3.”
The trial court held that Estes had pled sufficient facts to show that the trustees violated that duty and many others. Following this, the Estes case was certified as a class action along with a companion case, Foy v. Bandemer, which covered participants in the city’s Police and Fire Retirement System.
The case was a textbook example of a fiduciary’s breach of trust. There were multiple bad deals that cost the pension funds millions in losses and contributed to the underfunding crisis which, in turn, contributed to the city’s bankruptcy. (Indeed, one investment decision was so bad that that the trial court granted summary disposition to the plaintiffs finding the deal to be so risky and undercapitalized, that the investment was grossly negligent as a matter of law.)
Eventually, the trustees settled Estes and Foy and agreed to a settlement class. The trustees of both funds agreed to pay back millions to the funds and agreed to a form of non-monetary relief that was actually greater in value – an independent outside neutral analysis of all non-public investments. As for the trustees, many went to jail ending a difficult chapter in the city’s history. Estes, for her part, cleaned up the funds and put them on a much better footing. In the end, Coletta Estes not only protected her coworkers but the city’s future workers for years to come. Like every other aspect of her career as a manager, she had their backs.
—————
John Joseph (J.J.) Conway is an employee benefits and ERISA attorney and litigator and founder of J.J. Conway Law in Royal Oak.
