September 3, 2014 / 6:24 PM / 4 years ago

Detroit, creditors lay groundwork for fight over bankruptcy plan

DETROIT (Reuters) - Detroit claimed on Wednesday that its plan to adjust its debt and exit bankruptcy is feasible and fair to creditors, but a bond insurance company contended the plan calls for “historic levels of discrimination” among creditors.

The word "Bankruptcy" is painted on the side of a building in Detroit, Michigan October 25, 2013. REUTERS/Joshua Lott

Bruce Bennett, a Jones Day attorney representing Detroit, wrapped up his three-hour opening statement by disputing arguments from creditors who claim the city’s plan to adjust its $18 billion in debt is inadequate and should be scrapped.

“We think this is the city’s last best chance and we think it will work,” Bennett told Judge Steven Rhodes, who on Tuesday began a confirmation hearing on the Detroit plan that is scheduled to last for weeks.

But Marc Kieselstein, an attorney with Kirkland & Ellis who is representing hold-out Detroit creditor Syncora Guarantee Inc, blasted the city for crafting a plan that he said consistently skirts federal bankruptcy law.

“And today is the day of reckoning for a plan so flawed in its structure, so dismissive of basic fiduciary duties, and so lacking in evidentiary support that it cannot be confirmed without doing serious mayhem to the rule of law,” he said.

Detroit, which filed the biggest-ever Chapter 9 municipal bankruptcy in July 2013, has reached settlements with most of its major creditors, including the city’s retired workers and two pension funds.

Major objectors to the plan are the insurance companies Syncora and Financial Guaranty Insurance Co. Both guaranteed payments on $1.4 billion of pension debt the city is seeking to void, and both are facing recoveries of just pennies on the dollar or nothing if the debt is voided by the court.

A so-called “Grand Bargain” would tap into $366 million pledged by foundations and $100 million from the Detroit Institute of Arts (DIA) over 20 years, as well as a $195 million lump sum payment from the state of Michigan. The money would be used to ease pension cuts for city retirees and prevent the museum’s collection from being sold to pay creditors.

Kieselstein said the grand bargain allows the city to favor one group of creditors over others, including the insurers, resulting in “very significant” discrimination among similarly situated creditors.

Bennett had cited complex mathematical comparisons that he said show no more than mild differences in creditor recoveries under the plan.

“We couldn’t do any better for the creditors,” he said after noting that if Detroit does not reverse its downward spiral, it will not be in a position to pay anything to creditors.

Kieselstein said Detroit was trying to justify uneven treatment of creditors by citing the financial needs of its retired workers even though Rhodes has said the impact of the plan on individual creditors is not relevant to the confirmation process.

Kieselstein also said that while Kevyn Orr, Detroit’s state-appointed emergency manager, initially put all of the city’s assets on the table in the bankruptcy, he subsequently pulled the art work off the table “for a relative song” with the grand bargain. Syncora and FGIC have pushed to sell or monetize the art, which was valued at $8 billion in one appraisal, to improve creditor recoveries.

Arthur O’Reilly, the DIA’s attorney at law firm Honigman Miller Schwartz and Cohn, said the city does not have legal ownership of most of the DIA collection because a “great preponderance” of the art was given to the DIA Corp, a non-profit corporation responsible for museum operations. Case law and Michigan’s Attorney General both support the DIA’s contention that the art work cannot be sold to satisfy the city’s debts. A forced sale “would “chill philanthropic giving for generations to come,” O’Reilly said.

Additional reporting by Lisa Lambert in Washington

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