Judge Allows Detroit to Keep Casino Revenue; Won't Rule on Elibility, Pension Rights Yet(1)

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By Nora Macaluso

DETROIT--The judge overseeing Detroit's bankruptcy case Aug. 28 ruled the city may keep collecting casino revenue tied to swaps contracts that are subject to a disputed settlement, denying bond insurer Syncora Guarantee Inc. the right to capture the revenue while the court considers whether to approve the settlement (In re City ofDetroit, Bankr. E.D. Mich., No. 13-53846).

Separately, Judge Steven Rhodes said he won't consider challenges to the bankruptcy that involve “issues of material fact,” such as whether the bankruptcy filing violates pension protections enshrined in the Michigan constitution, as part of his determination as to whether Detroit is eligible to file for bankruptcy, saying those questions may be raised later in the process.

Dispute Over Swaps Contracts
In the swaps dispute, Syncora had argued that the monthly revenues were similar to money going into an escrow account, and were not subject to an automatic stay of all legal proceedings against the city during the bankruptcy process, and that Syncora, as a counterparty to the swap contract between the city and its banks, could trap the funds pending resolution of the dispute.

“There is no legal support for either of Syncora's arguments,” Judge Steven Rhodes said at the start of a status hearing on the issue. “Syncora is not a swap participant as that term is defined by the bankruptcy code,” nor does the company have a lien on the casino revenue, he said. The casino revenues are city property and therefore subject to the stay, he said.

The city is seeking court approval of a settlement with the banks, UBS AG and Bank of America, that would allow it to keep the revenue in exchange for a reduced payout. Syncora argues that it should not be forced to accept the settlement amount, since it was not a party to the settlement agreement.

Rhodes said he will hear arguments on the issue Sept. 23 and 24; he originally scheduled a hearing for Sept. 9, but agreed to give attorneys more time to assemble testimony. The city will have four hours to make its case, and the objecting parties will have five hours. Rhodes directed the two sides to work together on a joint presentation explaining the swap contracts.

City attorneys also agreed to remove a requirement that creditors sign non-disclosure agreements before being allowed access to a “data room” containing financial information, and renegotiated a contract with its pension actuary, Milliman Inc., to remove a confidentiality clause. Rhodes, at an earlier hearing, questioned the need for the requirement (25 BBLR 1185, 8/29/13).

City attorneys said the casino revenue will provide economic benefit to the city as it restructures and attempts to meet its obligations to creditors, including pension plans.

Eligibility to Be Considered Sept. 18; Thornier Arguments Put on Hold
Rhodes, in an Aug. 26 order, said he would not consider the issue of pension rights in determining Detroit's eligibility to file for bankruptcy. He set a Sept. 18 hearing date for eligibility objections “that raise only legal issues,” and said objections that “require the resolution of genuine issues of material fact” -- including those raised by unions and retirees about whether the city negotiated in good faith with its creditors and whether the bankruptcy filing is in violation of the Michigan Constitution -- will be considered at a later date.

“The court fully recognizes and appreciates the extraordinary importance of the pension rights of the city's employees and retirees in this case and of how the city will ultimately propose to treat those rights,” Rhodes wrote in the order. However, he said, the city does not need to “prove that any particular plan that it might later propose is confirmable” in order to be eligible to file for bankruptcy.

“The court fully preserves the opportunity of all parties to present their positions relating to the city's treatment of pension rights when the debtor requests confirmation of a plan, or, perhaps, in some other appropriate context,” Rhodes wrote.

More information on the Detroit bankruptcy is available at http://www.mieb.uscourts.gov/apps/detroit/DetroitBK.cfm.

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