July 30, 2014 at 11:41 pm

Appeals court wary of Syncora bid to block Detroit casino cash

People play the slots at Greektown Casino in Detroit. Detroit's legal team and a holdout creditor are fighting over the city's best revenue stream — $15 million a month in casino taxes. (John T. Greilick / The Detroit News)

Cincinnati— A panel of federal appeals court judges Wednesday had some criticism for a bond insurer’s bid to block Detroit from accessing casino revenue, with one judge calling the creditor’s efforts “fairly Draconian.”

The panel was considering an appeal from Syncora Guarantee Inc., a holdout creditor in the city’s bankruptcy case that is fighting lower court rulings that $15 million a month in casino revenue belongs to bankrupt Detroit.

Judge Julia Smith Gibbons gave no timeline for a decision but said the three-judge panel would consider the arguments “carefully.”

The appeal by Syncora could determine whether Detroit can keep the casino cash — labeled by the city its best revenue stream — and spend it on public safety services and paying other creditors, including workers.

The hour-long hearing in the U.S. 6th Circuit Court of Appeals ended with no resolution for Detroit or Syncora, but the pace was at times frantic and mired in the complexities of a pension deal backed by ex-Mayor Kwame Kilpatrick.

“I’m sorry it’s so complicated,” Syncora lawyer Christopher Landau told the panel.

“No,” Judge Raymond Kethledge said, “I’m hanging with you.”

Syncora was in court Wednesday appealing orders from Detroit’s bankruptcy judge and a U.S. District Court judge that casino revenue belongs to the city while it is in bankruptcy court.

Outside the courtroom, Detroit bankruptcy lawyer Corinne Ball was asked if the judges signaled which way they were leaning.

“Hopefully the same way as the other two,” Ball said, referring to U.S. Bankruptcy Judge Steven Rhodes and U.S. District Judge Bernard Friedman.

Syncora’s lawyer declined to talk about the hearing.

At one point, Landau told the judges about a deal provision that allowed for the casino revenue to be trapped by creditors.

Kethledge called the provision “fairly Draconian” and suggested there should be a remedy other than trapping the money.

The hearing had one tense moment.

During Landau’s argument, Ball started shaking her head, prompting Kethledge to interject: “Don’t shake your head. It’s distracting.”

In filings, the bond insurer, which faces millions in losses and has pushed for the sale of Detroit’s art collection, has argued the casino revenue does not belong to the bankrupt city.

The firm has asked the three-judge appeals panel to reverse a lower court order that the money belongs to Detroit despite the city defaulting on debt backed by gambling tax receipts.

The legal fight predates Detroit’s bankruptcy in July 2013.

Syncora is one of two companies that insured the underlining debt Kilpatrick’s administration used to prop up the city’s pension funds. The financial giant has argued the casino tax revenues should be used to make payments on the $1.4 billion in pension debt so the company doesn’t have to pay insurance claims.

The three-judge appellate panel heard Syncora’s appeal just three weeks before Detroit’s bankruptcy exit plan is set to go on trial.

Detroit Emergency Manager Kevyn Orr has said the casino revenues are crucial to the city’s restructuring and making payroll each month.

Last month, Friedman agreed with Rhodes’ ruling that the casino revenues are property of the bankruptcy estate and subject to an automatic stay freezing lawsuits against the city.

But Friedman ruled only after being ordered by the Court of Appeals to decide the appeal, suggesting that appellate judges are keeping a close eye on Detroit’s fast-moving bankruptcy.

The automatic stay triggered by Detroit’s bankruptcy case blocks Syncora from controlling the casino revenues while the city is in bankruptcy court, the city’s legal team argued.

Syncora is trying to “bend law and logic to their breaking points,” Ball wrote in one filing.

The casino revenue does not belong to the bankrupt city, and never did, and is exempt from the automatic stay, which freezes lawsuits against Detroit while it is in bankruptcy court, Syncora countered.

“Either way, the bankruptcy court erred by sweeping those revenues into the bankruptcy estate to be allocated among the city’s other creditors,” Landau wrote.

On Wednesday, Ball told the judges that banks involved in the deal continue to be paid and have “always been paid timely,” even prior to the bankruptcy filing.

The automatic stay is designed to maintain that status quo, Kethledge said.

“Why isn’t that fatal to your argument?” Kethledge asked Syncora’s lawyer.

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