Syncora’s Strategy in Detroit Bankruptcy Proceedings Backfires

By Bill Rochelle and Sherri Toub | September 3, 2014

Syncora Guarantee Inc., an opponent of Detroit’s municipal debt-adjustment plan, saw a legal strategy backfire when a judge ruled that the company made “scandalous and defamatory” allegations about the local chief U.S. district judge and mediator in the city’s bankruptcy.

U.S. Bankruptcy Judge Steven Rhodes not only struck portions of Syncora’s court papers and narrowed the issues at the trial that begins today for approval of the city’s plan. He also gave the bond insurer until Sept. 12 to explain why he shouldn’t impose sanctions for filing papers that included false statements which “impugn the mediators’ moral character and question their integrity.”

Rhodes was spurred to hand down his 21-page opinion by a supplemental objection to the plan that Syncora filed in mid- August.

In the August objection, Syncora alleged that the mediators were biased, had conflicts and sought to benefit pensioners unfairly while transferring Detroit’s art collection to the detriment of all other creditors. Those mediators include Gerald Rosen, chief judge of the Eastern District of Michigan, which covers Detroit.

Syncora said Rosen “colluded” with the city to carry out his “personal vision” favoring city workers over bondholders. Another mediator, Eugene Driker, didn’t disclose that his wife had been on the board of the city’s art museum, which can keep its collection if the plan goes through, New York-based Syncora said.

Saying it was “readily apparent” that those claims were false, Rhodes struck them from Syncora’s papers. The judge said Driker disclosed in writing to the company at the outset that his wife had been on the museum’s board.

Rhodes said it would be impossible for Rosen to collude because as a mediator he’s unable to impose his will on anyone. Rhodes said no other financial institution joined in Syncora’s allegations, even though they made concessions in mediation that dealt with billions of dollars.

“We respectfully disagree with Judge Rhodes,” James Sprayregen, an attorney for Syncora, said in an e-mailed statement. “We still have concerns about the fairness of the mediation process. These issues will be addressed more specifically in further court proceedings.”

Rhodes said he was entitled to strike Syncora’s pleadings because they were false and “would cause a reasonable person to alter his opinion” of Rosen and Driker.

Still, Rhodes gave Syncora a long list of issues it can argue at trial in its effort to show that Detroit’s plan is unfair and discriminatory.

The trial will run for more than a month, barring a settlement. Syncora already has taken four appeals from decisions by Rhodes.

Detroit began the largest-ever municipal bankruptcy in July 2013, listing $18 billion in debt, including $5.85 billion in special revenue obligations, $6.4 billion in post-employment benefits, $3.5 billion for underfunded pensions, $1.13 billion on secured and unsecured general obligations and $1.43 billion on pension-related debt. Debt service consumes 42.5 percent of revenue.

The city has 100,000 creditors and 20,000 retirees.

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

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