One of the most outspoken, visible and controversial creditors in the city’s bankruptcy case is bond insurer Syncora. They’ve objected at seemingly every chance, arguing to Judge Steven Rhodes that the Detroit Institute of Arts collection should be sold to pay debt, pensioners are unfairly getting much better of a deal than financial creditors and that at least one of the city’s settlement agreements violates state law.
In court today, one of Syncora’s attorneys argued that one of the city’s deals with other creditors violates Michigan law. During the ongoing negotiations to reduce$18 billion of debt, attorneys for the city of Detroit are striking deals with creditors. One of those agreements is for the refinancing of almost $400 million of bonds approved by voters and backed by property taxes. As part of that deal, some bondholders would receive about three-quarters of their value. The remaining bonds would go to the city’s pension systems, which could use taxes to pay off the debt.
Ryan Bennett, representing Syncora, argued against the deal in front of Rhodes. “If the plan is confirmed, your Honor, the city will be permitted in fact required to unlawfully tax its property tax payers where such taxation would not be permitted under Michigan law,” he said.
An attorney for the city says only the state can challenge the deal. An attorney from the state told the judge he supports the settlement. Judge Rhodes did not immediately rule on Syncora’s objection.
Syncora also has filed legal documents alleging bias of the case’s mediators.
Earlier, WDET’s Quinn Klinefelter spoke with one of Syncora’s attorneys, James Sprayregen, who is a restructuring partner in the Chicago and New York offices of Kirkland & Ellis law firm.
Here’s a transcript of that full conversation:
James Sprayregen: We do want to make it clear, we wish the city of Detroit well. We wish all of its employees and former employees well and we have no beef whatsoever with the pensioners. We were involved with a transaction that put $1.4 billion into the city’s pension funds because those funds were underfunded and we actually helped make those pension funds much better funded. Then the city turns around and says that that transaction was illegal and they want to keep the money and not pay us anything back. We believe under the bankruptcy code that we are very similarly situated with the pensioners and should be treated in a similar way rather than under the current plan where we’re getting virtually zero and the pensioners, after you adjust for all the actuarial calculations, are recovering nearly 100 cents on the dollar. Now we’re sympathetic to one dollar in cuts to any pensioner’s check and we understand that that can be difficult for anybody but under the bankruptcy code, we and the pensioners need to be treated similarly.
QK: In fact to an extent you’re charging that the mediators that are in this case are biased to an extent, correct?
JS: Yes, we didn’t charge that, we just quoted what they said publicly. And look, understandably they’re from the city of Detroit. They have great sympathy as do we for the claims of the pensioners. They have a love of the art museum and the assets there. We have no problem with any of that. It’s just when a city goes bankrupt, it has to comply with Chapter 9 in the way it distributes its assets, and you can’t take assets that are of very substantial value to the city, like the art, and sell it at a fire-sale price to a private foundation. You have an asset of the city that has been valued at anywhere from $800 million to $8 billion.
QK: The art at the Detroit Institute of Art museum.
JS: Exactly, and so that art is being transferred out of the city’s coffers not only to our detriment but to the great detriment of all of the city’s creditors for a price that is far below anything anybody has valued this art at.
QK: You’ve mentioned the municipal bond deal that helped shore up the pension system back in 2005. The city has argued that that deal was illegal and should not count. The judge even from the bench has said he was iffy about it, that maybe Detroit should sue over it and they might win. I’m very much a lay person, but in your experience, is that unusual to have a judge from the bench argue in that kind of way?
JS: Yes, we found that to be unusual. Our point on that was we were asked to help the city out of a pension jam which we did. We don’t think that transaction was illegal but it put $1.4 billion into the pension fund so if somebody thinks it’s illegal and they want to unwind the transaction, they can’t just say ‘Thank you for the money’ and keep the money, unwind the transaction and get the money back. I think anybody who is putting money into municipalities needs to be looking at the Detroit case very closely to determine whether the rule of law is going to apply here. We are in the United State of America and we do believe that ultimately the rule of law is going to be vindicated. But if it turns out that we can put $1.4 billion into a pension fund and then be told we have no claim, that will definitely impact the willingness of financial creditors to help out pensioners in the future.
QK: You’ve mentioned in some other reports as well that it’s seems almost as if the city is setting up kind of unfair Detroit v. Wall Street scenario, that the whole situation is in effect being politicized. Why do you argue that?
JS: Because we think that’s exactly what’s happened. Unfortunately it’s been set up like that and again, we think it’s very inaccurate and very unfair. Again, the money that caused us to be a creditor went to the pensioners and we think appropriately so. For whatever reason, Kevyn Orr when he came into his position called us and others ‘the Huns of Wall Street’ and started out the process that way. Obviously the state of Michigan, Judge Rosen himself and Kevn Orr have made number of public statements that are not friendly to financial creditors and we think that’s unfortunate because we think there’s a partnership amongst financial creditors, city, municipalities, workers in order to help bring Detroit back.
QK: Are you getting any, I don’t know if feedback is the right word, but a sense from some of these people, “gee, why are you guys arguing about this, you’re standing in the way.’ This bankruptcy seems to be moving fairly fast for bankruptcy cases. They’ve set up these deals with pensioners, etc., getting all these people in line as they go through to argue the Plan of Adjustment and then here’s Syncora of Financial Guaranty and you’re the obstacles holding the whole process up. Why not just play ball and get out of the way?
JS: That’s definitely the way it’s being attempted to be portrayed. All we’re asking for is that we be treated fairly, just like the other creditors are being treated fairly and if that happens we could have a consensual resolution this afternoon, and our door is wide open to do that and we’re still hopeful that that can occur.
QK: How far is Syncora prepared to go if the judge would approve Detroit’s Plan of Adjustment. Can you appeal it to other courts?
JS: We’re hopeful the judge will see this plan is not confirmable and send the city and Kevyn Orr back to discussions with us to reach a consensual resolution. But if not, and he were to confirm the plan, yes, we can appeal it to the district court and if we lose there we can appeal to the Sixth Circuit and if we were going to lose there, we could appeal to the U.S. Supreme Court. This is the largest municipal bankruptcy in United States history, and we believe it deserves the scrutiny a case of this size should get and we intend to go all the way to protect our rights.
QK: Do you think Syncora would be a little bit reluctant to try to look at municipal bonds in the future now after all this?
JS: The unfortunate thing here is there have been some people who have said, ‘Syncora, what were you thinking? You knew Detroit was in trouble and they were potentially going bankruptcy. Why did you do this transaction in the first place?’ I don’t think the type of conduct we want to encourage in America is to say that financial players should not be helpful to cities in trouble, and if you help a city in trouble, that’s your fault because then you’re just going to cause people to stay away from helping cities in trouble and you’re going to cause more municipal bankruptcies. I think we actually want to encourage financial creditors to be helpful in difficult situations and the way to do that is to have the rule of law apply.
WDET’s Bankruptcy Reporter and Next Chapter Detroit Blogger Sandra Svoboda joins Detroit Today co-hosts Laura and Saeed to discuss the latest in Detroit’s bankruptcy trial, what might be next and who has “bankruptcy fatigue.” Give a listen.
Judge Steven Rhodes decided the largest municipal bankruptcy trial in history should not start until the debtor — the city of Detroit — files another Plan of Adjustment. So he moved the start date from next week to Aug. 29.
(We discussed this possibility on WDET’s Detroit Today program. Listen here.)
The city has filed six previous Plans of Adjustment, “blueprints” it will use to restructure debt and city services. But city attorneys told the judge in court earlier this week that they plan to file yet another plan that will reflect a deal announced last week to potentially refinance $5 billion worth of Detroit Water and Sewerage Department bonds. Some creditors’ attorneys objected, saying they could not adequately represent their clients in the trial, also called a “confirmation hearing,” without seeing the city’s overall plan.
Judge Rhodes in his order today that “the Court concludes that this constitutes extraordinary cause to adjourn the dates and deadlines that it previously established.”
Under questioning from Judge Rhodes earlier this week, city attorney Heather Lennox, of the Jones Day law firm, admitted one reason the city did not want to delay the confirmation hearing was because the current Plan of Adjustment requires Detroit Emergency Manager Kevyn Orr to execute some of its provisions by order, a power granted to him by state law. When Orr’s term is up at the end of September, elected leaders won’t have the same ability. Lennox said those orders related to settlements on the Unlimited Tax General Obligation bonds and Limited Tax General Obligation bonds.
Here’s part of the exchange in court between Judge Rhodes and city attorneys on Tuesday.
Judge: It’s a question I’ve asked before, but I feel the need … To what extent is the urgency that the city feels about beginning and ending this trial motivated by the prospect of Mr. Orr’s leaving his emergency manager position? And if so, why?
City attorney Gregg Shumaker, of Jones Day: I know we’ve gone back and forth on this in the past, but a lot of it has to do with the implementation of the plan. …
Lennox: … The point of the proceeding is it does really impact more about what the plan does and the settlements we have and the timeframe for getting them done … if the plan is going to be confirmed, there are some critical things that need to be happening in the near term. … For example, retiree health care. The settlement that we reached with the Retirees’ Committee on retiree health care back in April is that at the end of this year, the city will exit the retiree health care business and it will be taken up by two VEBAs. They have to appoint trustees, contract with providers and administrators, develop programs, notify retirees, all before Jan. 1, 2015. That process takes a few months. We are coming dangerously close on being very tight on time for that. … We’re not sitting around waiting. There is a lot of work that is being done. But we don’t have VEBAs officially and we don’t have trust officers, and we can’t until the plan has an effective date. … there are some real world issues based on settlement that we accomplished months ago. …
Judge Rhodes: That’s an urgency that’s unrelated to Mr. Orr’s transfer out of his current position?
Lennox: There’s not much Mr. Orr can do about that state statute. … With respect to the plan, there are settlements and agreements in the plan that require powers and orders under PA 436 (Michigan’s emergency manager law). … For example, the LTGO and UTGO settlements, those require emergency manager orders. Those are orders that can’t be ordered until after confirmation.
Here’s the judge’s full order delaying the trial and setting new dates and deadlines for other happenings in the case: