Detroit Offers Judge Bus Tour While Insurers Fight Debt Suit

May 16, 2014 10:58 am ET

(Updates with judge’s remarks in 14th paragraph.)

May 16 (Bloomberg) -- A bond insurer wants the chance to fight Detroit’s effort to cancel $1.4 billion in pension debt, while the city is asking a judge to take a bus tour of its blighted areas before ruling on its $18 billion bankruptcy plan.

The insurer, Financial Guaranty Insurance Co., along with investors who would be wiped out by the plan, wants to take part in a lawsuit Detroit filed to cancel the debt, which was issued in 2005 and 2006 to prop up public worker pensions. FGIC and the investors claim that a trustee now opposing the suit won’t represent their interests adequately.

FGIC faces $1 billion in claims over pension bonds if the city succeeds in throwing out the debt, Edward Soto, an attorney for the bond insurer, told U.S. Bankruptcy Judge Steven Rhodes in Detroit yesterday.

Canceling the debt will free up money to pay other creditors, said Chris DiPompeo, one of the city’s attorneys. Letting FGIC and the investors participate in the lawsuit would make the case more complex and may disrupt the city’s plan to seek approval of its debt-adjustment proposal in July, he said.

DiPompeo said keeping the lawsuit narrowly focused would allow key issues in the bankruptcy to be resolved before the July plan-approval trial.

Service Corporations

Two service corporations that the city set up to issue the debt and send the money to the city’s pension systems have asked Rhodes to dismiss the lawsuit. Rhodes said he would issue written decisions on whether to allow FGIC and the investors to join the bond-cancellation lawsuit and whether to dismiss the two service corporations from the case.

Detroit filed the largest U.S. municipal bankruptcy last July, raising alarms over the sanctity of municipal bonds and state-protected pensions.

The city has begun sending creditors ballots and documents explaining its debt-adjustment plan, soliciting votes through July 11. The plan is the product of agreements with retirees, employee unions and some bondholders.

State lawmakers have yet to approve Republican Governor Rick Snyder’s plan to give $350 million over 20 years -- or $195 million in a lump sum -- to Detroit’s employee pension systems. The money is necessary to secure an additional $466 million from private foundations and the Detroit Institute of Arts to bolster pensions while shielding the museum’s art collection from sale to pay creditors.

September Deadline

Rhodes yesterday told a lawyer for the state, Matthew Schneider, to ask lawmakers to avoid imposing a Sept. 30 deadline for him to approve the debt-adjustment plan.

“There are a bazillion things that could happen between now and Sept. 30,” Rhodes said.

That date would fall around the time Detroit’s emergency financial manager, Kevyn Orr, can be removed from office by a vote of the city council. Orr, who was appointed to his post by Snyder, has said he would like to leave office sometime in the fall, assuming the city’s plan has been approved.

Rhodes said lawmakers would complicate the court’s job if they tied the state funding to a strict deadline for plan approval.

“I would hate to have to deal with the consequences of failing to meet that deadline if it is in a piece of legislation,” he said yesterday in court. Such a deadline could only be lifted by more legislation, he said.

Art Inspection

Also yesterday, Rhodes denied FGIC permission to assess the value of city-owned art at the museum by removing as many as 3,000 works from the walls for experts to examine. He said the museum was willing to permit the inspection of art that isn’t on display, and the FGIC and museum officials will need to work out how to do that.

The insurer has put forth proposals under which the city could raise as much as $2 billion by selling or borrowing against its collection.

“We are pleased the judge will hold the DIA to its commitment to allow access to the art not on display, and hopefully this ruling will not impair the alternative proposals,” FGIC said in a statement.

The city yesterday asked Rhodes to open the July plan- approval trial by taking a bus tour of its blighted areas and those that are recovering. Rhodes didn’t respond to the suggestion.

Detroit and creditors objecting to the debt-adjustment plan have a list of 196 witnesses they want to testify at the trial, said Robert S. Hertzberg, an attorney for the city.

Rhodes scolded the lawyer who filed the longest witness list, Joseph Fischer, who represents the Detroit suburb of Oakland County, a water and sewer customer of the city.

“It’s outrageous, Mr. Fischer,” Rhodes said. “It undermines your credibility. You’re not going to call 48 witnesses.”

The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).