Bond insurer Syncora has apologized to mediators in the Detroit bankruptcy case. Because of that, Judge Steven Rhodes decided attorneys for the Bermuda-based company will not face sanctions. Here’s what he said:
The court had entered an order to show cause directed to Syncora and its attorneys why they should not be sanctioned for the scandalous and defamatory aspect of their second supplemental objection to the plan. In the meantime, Kirkland and Ellis, on behalf of itself and Syncora, has apologized to Judge Rosen and to Mr. and Mrs. Driker for its conduct. The court concludes that those apologies in the interest of justice resolve the issue of sanctions and accordingly, the court here today will be entering and order that vacates the order to show cause and dispose of that issue.
Last month, Syncora’s attorneys in a court filing criticized Chief U.S. District Judge Gerald Rosen for showing “naked favoritism” toward pensioners while leading negotiations between the city and the creditors. Syncora has argued for months that the Detroit Institute of Arts collection should be monetized to pay all creditors, not protected as it is in the “grand bargain” which also brings outside funding to the city’s pension funds.
Syncora accused Rosen and an additional mediator, Eugene Driker, of being “agenda driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors.” The city asked the judge to strike Syncora’s filing from the record and to sanction the creditors’ attorneys.
Rhodes rejected Syncora’s claims and ordered the creditor’s objection be struck from the case docket. “Syncora’s highly personal attack on Chief Judge Rosen in the objection was legally and factually unwarranted, unprofessional and unjust,” Rhodes wrote. “Justice requires the court to strike the attack from its record.” The judge had also ordered Syncora attorneys to explain to him why they should not face sanctions.
Now, with the settlement reached and the apology filed, Rhodes won’t force the bond insurer attorneys to do that. Here’s the order he issued late today.
Detroit’s bankruptcy trial is postponed until Monday because of a tentative agreement between the city and one of its biggest creditors: bond insurer Syncora.
During a 10-minute hearing this morning, attorneys for the city and the Bermuda-based company told Judge Steven Rhodes they need a few days to finish details of their new agreement. They filed a joint motion Tuesday evening asking for today’s hearing.
They asked for a postponement of the trial until they can finish terms of the deal. Syncora would no longer be objecting to the city’s restructuring plan, which could significantly shorten the trial, currently scheduled into October.
“There are other factors with the settlement that would have to be put into the plan,” said city attorney Heather Lennox, of the Jones Day firm. “We are in the process of redrafting the plan. There are a few mechanical issues that need to be worked out.”
Emergency Manager Kevyn Orr gave a copy of the preliminary terms to the city council last night. They include Syncora receiving some cash, a lease to operate the Detroit-Windsor Tunnel and a downtown parking garage as well as credit toward purchase of future assets the city might sell.
Ryan Bennett, a Syncora attorney, told the judge the agreement requires two banks, UBS and Bank of America, to release Syncora from its insurance obligations related to a pension financing deal. The banks in April settled with the city as part of the case for $85 million on about $280 million of debt.
“This intended result is not just a partnership for the plan but a partnership for the future of Detroit,” Bennett said.
After the hearing Bennett said other riverfront property might become part of the deal, which would also include Syncora withdrawing its current appeals in the case.
In court, attorneys representing other creditors in the case, including retirees, told Judge Rhodes they weren’t yet sure if they would object to the deal because they haven’t had time to review it.
Alfredo Perez, who represents another bond insurer, Financial Guaranty Insurance Co. (FGIC), told the judge he learned about the agreement the night before and had seen some documents related to it but he hadn’t had time to analyze it or talk to his client about its effect on their case.
“We would request that the trial be continued until Monday. At that time we’ll be able to assess what we’re going to tell you,” he said. “I’ve read it twice and I’m still having a hard time understanding it. … We don’t have any values. We’re trying to figure out what the values are.”
Claude Montgomery, who represents the Official Committee of Retirees, said the Syncora agreement COULD negate the committee’s support of the Plan of Adjustment.
“We are, as you know, a plan supporter,” Montgomery told the judge. “We do not know what our positions are with respect to this document that circulated last night.”
Rhodes granted their request for a postponement of the bankruptcy trial until Monday so the city and Syncora can continue to negotiate … and everyone else can determine what the deal means to the historic bankruptcy case.
The city and bond insurer Syncora are asking Judge Steven Rhodes to delay the bankruptcy case because they’ve reached a tentative agreement, according to documents filed tonight in federal court.
In a Joint Motion filed at 7 p.m., the Bermuda-based bond insurer and the city said they “have reached an agreement in principle and need 48 hours to address certain conditions and logistics.” They also noted that “if this agreement is finalized within this time period as we expect, it will profoundly alter the course of the proceeding and litigation plans of the remaining parties.” (The motion appears below.)
Just 86 minutes later, Judge Rhodes granted the request. Instead of resuming the bankruptcy trial for its seventh day at 8:30 a.m. Wednesday, he will hold a hearing on the request to postpone the trial until Friday.
Syncora stands to lose hundreds of millions of dollars in Detroit’s bankruptcy, and the bond insurer’s attorneys have been among the most aggressive in the 15-month-old case. An agreement between the city and the Bermuda-based insurer would remove one of the biggest obstacles to confirmation of the city’s plan of adjustment.
But the Detroit Free Press’s Nathan Bomey reports that for the deal to go through, UBS and Bank of America need to “agree to release the insurer from its insurance on the swaps,” the controversial pension financing deal engineered by the Kilpatrick administration. In 2005 and 2006, the city secured $1.4 billion in pension financing, insured by Syncora, that later had its floating interest rate converted to a fixed rate in the deal that’s known as the “interest rate swaps.” Casino tax revenue, worth about $16 million monthly, was pledged as collateral.
In April, as part of the bankruptcy case proceedings, Rhodes approved an agreement for the city to pay $85 million of the $285 million owed on the swaps deal and keep the casino tax revenue instead of paying it to banks. (The city, under Emergency Manager’s Kevyn Orr’ direction, is suing the service corporations, challenging the legality of their existence.) Now, according to Bomey’s story today, the banks need to release Syncora from insuring the deal for the company’s deal with the city in the bankruptcy case to be consummated.
The Detroit Free Press bankruptcy reporting team wrote that the deal with Syncora included getting 26 cents on the dollar as well as other conditions. The Detroit News reported that among the agreement’s terms was a 20-cents-on-the-dollar payment to Syncora.
Bond insurer Syncora hasn’t had many courtroom victories in Detroit’s bankruptcy case as its attorneys fight for the hundreds of millions of dollars the Bermuda-based company stands to lose. But last week the Sixth Circuit Court of Appeals ordered a lower court to not delay any longer and decide within days an issue Syncora raised before the city filed for bankruptcy nearly a year ago.
Syncora argues the city should use casino tax revenue to pay creditors instead of being allowed to keep it for operations, as has been ruled in earlier decisions in the Chapter 9 case. The roughly $170 million collected annually from three casinos is the third largest source of revenue for Detroit, behind income and property taxes, so it’s a significant part of the city’s balance sheet.
Whether the Appellate Court order turns into a type of “win” for Syncora or not, the 13-page ruling, issued at Syncora’s request, contains several noteworthy admonishments from the appellate court to the lower courts in Detroit. For example,
“Without a final decision on that question, the city will not know what amount its coffers will contribute to the bankruptcy estate, the creditors cannot know the size of the pie they are being asked to share, and the bankruptcy court cannot be confident that it is considering a legally and financially viable plan. An orderly bankruptcy process depends on a concomitantly efficient appeals process, and the district court’s stay of Syncora’s appeal improperly thwarts both processes.”
“Insofar as a debtor’s plan of adjustment incorporates final decision reached by the bankruptcy court, any appeals from those decisions should generally be reviewed before the bankruptcy court confirms the plan,” the panel wrote. “The question presented in Syncora’s appeal — whether a substantial revenue stream is rightly considered property of the bankruptcy estate — is precisely the type of issue that should be reviewed before the bankruptcy court confirms the plan of adjustment.”
Court observers have noticed some other interesting phrases and perhaps innuendos in the ruling that relate to the case’s ambitious timetable, which has been supported and promoted by local and state political leaders. One interpretation is that perhaps this order serves as an indication the Cincinnati-based Sixth Circuit is willing to flex its power in reviewing — and possibly overturning — what’s happening in the Detroit courts.
While that may prove to be a stretch, the appellate panel clearly took issue with how the Detroit courts have handled this particular issue involving the casino tax revenue. Until the Sixth Circuit’s ruling last week, it could have remained undecided at the city’s bankruptcy trial where Judge Steven Rhodes will rule on the city’s Plan of Adjustment and how it restructures debt and future revenues for operations and services for residents.
The appellate panel found such a potential delay in deciding the question about the casino tax funds “presents the specter that Syncora may be forced to abandon its appeal and instead to seek appellate review of the bankruptcy court’s decision in the form of an emergency motion for a stay on the confirmation plan. In a bankruptcy case of such scope and complexity, that is not the proper way to adjudicate appeals that implicate legal questions of fundamental importance to the bankruptcy proceedings.”
The issue in Syncora’s appeal dates back to 2005, when Detroit borrowed $1.4 billion to fund pensions. In doing so, two nonprofit service corporations were set up as pass throughs for the money because the deal pushed the city’s debt above the state-allowed limit. The debt was issued through what’s called “Certificates of Participation,” (COPs) which the service corporations sold. The proceeds went to the city and then to the two pension funds: one for police and fire, another for general service workers. The city periodically gave the service corporations money to cover the debt payments for the COPs. Some of the debt was at a fixed interest rate, some had a floating rate.
The city eventually sought to convert the floating interest rate to fixed in the deal that’s known as the “interest rate swaps.” The appellate court wrote, “Because of the city’s dire finances, however, investors were unwilling to buy the certificates and banks were unwilling to execute the interest-rate swaps unless an insurer guaranteed the city’s obligations. Syncora, a monoline insurer, enhanced the city’s creditworthiness by insuring some of the city’s obligations under both the certificates and the swaps.”
Then in 2009, a credit downgrade and rising interest rates meant the city owed $300 million under the terms of the deal. To avoid the payment or termination of the agreement, the city and the swap counterparties, including Syncora, made an arrangement involving casino tax revenue, which is the issue involved in the appeal: The city and the swap counterparties bypassed the service corporations by creating two accounts at U.S. Bank.
The casino taxes would be paid directly into one of the accounts (about $15 million a month), and the city would make payments to the second account under the terms of the interest rate swaps deal (about $4 million a month). U.S. Bank would release the funds from the second account on a quarterly basis to the swap counterparties and from the first account to the city if all obligations were met.
In June 2013, Syncora, as one of the counterparties with obligations of about $276 million in the deal, notified U.S. Bank there was “an event of default” and asked the bank not to release casino tax revenue to the city. The city sued in Wayne County Circuit Court to force the release of the funds, but Syncora moved the case to U.S. District Court. The issue became part of the bankruptcy case in July 2013, and the funds were frozen while the Chapter 9 case proceeded.
In August 2013, Judge Rhodes ruled that the casino tax revenue were city property and therefore protected by the bankruptcy filing from payment at that time. Syncora appealed Judge Rhodes’s decision in U.S. District Court, and the case was assigned to Judge Friedman. He received briefs from both parties in the case, but as the appellate court wrote, “…the district court never adjudicated the appeal, and it has languished in that court for seven months.”
In December, Judge Rhodes ruled the city was eligible for bankruptcy, a decision that was appealed by several parties including Syncora. In February the Sixth Circuit said it would consider the eligibility appeals, and last week scheduled arguments for July 30. Meanwhile, the city reached an agreement to pay $85 million of the $285 million owed on the swaps deal and keep the casino tax revenue instead of paying it to banks. (The city, under Emergency Manager’s Kevyn Orr’ direction, is suing the service corporations, challenging the legality of their existence.)
In April the district court stayed Syncora’s appeal of the bankruptcy eligibility determination, and a month later Syncora filed the writ of mandamus asking the appellate court to order Judge Friedman to decide on the issue of whether the casino tax should be part of the city’s assets in the bankruptcy case and counted among available funds to pay creditors.
The Appellate Decision
The Sixth Circuit Court of Appeals last week ordered Judge Friedman to decide by July 14 on Syncora’s request for release of the funds. A three-judge panel (including Raymond Kethledge, a University of Michigan Law School grad) granted Syncora’s writ of mandamus – that’s a party’s request to a higher court to force a lower court to make a decision, in case you don’t remember that lesson from the landmark Marbury v. Madison case in civics class.
Such a ruling isn’t common. Of the 10 cases found in the Sixth Circuit online database since the beginning of 2013, just two were granted.
The appellate panel justified its ruling for two reasons. One was “to protect this court’s future appellate jurisdiction and to ensure that the district court’s stay order does not deprive Syncora of a meaningful opportunity to obtain timely review of the bankruptcy court’s decision.” The other was because the “deprivation of meaningful and timely appellate review itself constitute substantial and irreparable prejudice … and we undertake no inquiry at this point as to whether or not the bankruptcy court correctly decided the underlying dispute.”
The Sixth Circuit panel went on to say that one of Judge Friedman’s reasons for staying Syncora’s appeal — that if a Sixth Circuit decision related to eligibility “rendered moot” any decision of the bankruptcy court — was “no reason to say other appeals that present independent questions of law.” In other words: deciding whether the casino tax revenue is part of the city’s assets for the bankruptcy case should not be postponed until a separate appeal on the bankruptcy’s eligibility is adjudicated.
In the simplest of terms: Do your job when it should be done.
In its ruling on Syncora’s writ of mandamus, the Sixth Circuit did recognize the prospect that it might ultimately uphold all the lower and bankruptcy court decisions. Still, the panel wrote, “Whether a substantial revenue stream is rightly considered property of the bankruptcy estate, is precisely the type of issue that should be reviewed before the bankruptcy court confirms the plan of adjustment,” the appellate court said. “The problem posed by the district court’s stay is that it fails to account for all of the potential implications of that court’s inaction.”
With the trial scheduled to begin Aug. 14, that timetable is getting tight.
-By WDET’s Sandra Svoboda
@WDETSandra on Twitter and email@example.com
The attorneys for Detroit bond insurer Syncora, whom no one would describe as shy or reserved nor particularly successful, thus far, in their approach to the bankruptcy case, had a small victory in court today: They’ll get to see a series of communications between officials at the Detroit Institute of Arts and the Michigan Attorney General’s office as they asked for in a massive subpoena.
Why do they want the documents?
Syncora, which insured part of the $1.4 billion loan to the city’s pension funds in 2005, is advocating that the city sell some of the museum’s artwork to pay as-yet-unresolved debt. Making nearly full payments to pensioners and proposing pennies on the dollar as owed to financial creditors, as the city is currently doing, is unfair, Syncora’s argument goes. Syncora, according to a Detroit Free Press review of court documents, is owed about $240 million.
“The art has been a sort of noteworthy, highly publicized part of the case, and from our standpoint, a very important part of the case because of what we’ve all been doing here,” said Stephen Hackney, a Syncora attorney who works at the Kirkland & Ellis firm in Chicago. “The city is proposing to address the issues surrounding the art collection in a way, from our standpoint, that yields far less value.” He called the DIA collection “one very powerful asset” that could be sold to provide a more fair settlement to all creditors.
In pursuing that argument, the Bermuda-based bond insurer wants to examine the communications between the museum and the state attorney general for the two months prior to Attorney General Bill Schuette’s opinion that the DIA collection “is held by the City of Detroit in charitable trust for the people of Michigan, and no piece in the collection may thus be sold, conveyed, or transferred to satisfy City debts or obligations.” Schuette’s opinion, of course, has no force of law in the federal bankruptcy court handling the city’s Chapter 9 case, but it is part of the evidence and arguments Bankruptcy Judge Steven Rhodes could consider in his final determination about the fairness of the city’s financial plans and debt management in emerging from bankruptcy.
Attorneys for the DIA and the AG argued the documents Syncora wants are “privileged” — that’s the legal term that deems some documents confidential and therefore protected from opposing parties in cases. The city also objected.
But Judge Rhodes disagreed with the museum and the state, as represented today by Arthur O’Reilly, from the Detroit law firm of Honigman, Miller, Schwartz and Cohn, and Eric Restuccia, from the Attorney General’s office, respectively.
Here’s what Judge Rhodes said in granting Syncora’s request. WARNING: It gets into some legal-speak, but it also gives some insight about the judge’s thoughtfulness and fair-minded approach to the case as many legal observers have described:
The basis of the objection to the request for these documents is the common interest privilege. The court concludes that the claim of privilege should be overruled and that Syncora’s request for an order compelling the production of these documents should be granted.
Plainly, the extent to which the art held by the Detroit Institute of Arts should be taken into account in evaluating whether the city’s plan meets the best-interest test of the bankruptcy code is a substantial issue in the case, one that has not been prejudged or determined by the court at all, and, of course, this ruling should not be construed to suggest one way or another how the court will or may rule on that substantive issue of confirmation. The common interest privilege, however, requires a common legal interest, and the court is unpersuaded that at the time these documents were exchanged there was any common legal interest between the Attorney General of the State of Michigan and the Detroit Institute of Arts. The client, on whose behalf the Honigman firm produced these documents or received them from the Attorney General is the corporate entity that maintains and manages the collection for the city as a result or a contract with the city. Nothing in the record, to this point, anyway, in any event, suggests that he contract requires this entity to take a position one way or another on the issue on which the Attorney General expressed in his opinion ultimately.
More fundamentally, the fact that parties align in presenting their arguments to the court does not by itself mean that they have common legal interest. Much more has to be shown than that, and whatever that more is has not been shown on the record here. More than that, at the time these documents were produced, before there was even an alignment of positions. So for all these reasons, the claim of privilege is disallowed and overruled and the motion is granted.
One little open issue, were documents inadvertently produced and should have been destroyed? I’m going to trust counsel to work all of that out.
In that final statement, Judge Rhodes was referring to what DIA Attorney O’Reilly had mentioned during the attorneys’ arguments about the issue. The museum had inadvertently turned over material to the AG’s office, O’Reilly said. The AG’s office had said those documents would be destroyed. They weren’t. And now the attorneys for the museum, the AG and Syncora will settle that issue themselves.
UPDATE, April 29, 2014: Here’s what they worked out.
-By WDET’s Sandra Svoboda
@WDETSandra and firstname.lastname@example.org
The last day of February was the deadline for creditors to object to the ambitious schedule set by Bankruptcy Judge Steven Rhodes for Detroit’s case. And object they did.
Reuters reports that one creditor, Syncora Guarantee Inc. “warned that lawsuits will be filed over the Detroit Institute of Arts’ collection, which the city is not selling at this point to help pay its $18 billion in debt.” In its filing, Syncora also threatened a long legal battle over the Detroit Institute of Arts collection, according to The Detroit News.
While all that was going on in federal court, the city was mailing ballots to 170,000 creditors, the Detroit Free Press reports, seeking their approval on the Plan of Adjustment filed Feb. 21 and how it would restructure the city’s debt.
Also Friday, citing the millions of dollars it would cost the city, Judge Rhodes granted the city’s request to disband a creditors committee, set up by the U.S. Trustee in December. The panel included bond insurer Financial Guaranty Insurance Co and the city’s two pension systems.
Earlier this week, our Detroit Journalism Cooperative partner through New Michigan Media, The Michigan Citizen, analyzed the Plan of Adjustment finding:
Activists say what is most significant in Orr’s plan is the transfer of assets, which includes Belle Isle, the Detroit Institute of Arts and Detroit’s Water and Sewerage department. The plan protects the banks, but does little to adequately improve city services or improve quality of life for Detroit residents.