August 28, 2014 at 1:00 am

Judge rejects Detroit creditor's attack on mediators, may issue sanctions

U.S. Bankruptcy Judge Steven Rhodes )

U.S. Bankruptcy Judge Steven Rhodes on Thursday tossed out a city bond insurer’s blistering “personal attack” on Detroit’s chief bankruptcy mediator and ordered the creditor’s attorneys to prove why they shouldn’t face professional sanctions.

Rhodes struck from Detroit’s bankruptcy record Syncora Guarantee Inc.’s blistering Aug. 12 objection in which the bond insurer accused Chief District Judge Gerald Rosen and mediator-attorney Eugene Driker of having “naked favoritism” toward retirees.

Syncora accused Rosen and Driker of being “agenda driven, conflicted mediators who colluded with certain interested parties to benefit select favored creditors to the gross detriment of disfavored creditors.”

In his response, Rhodes rejected Syncora’s claims outright and ordered the creditor’s objection be struck from the public record.

“Syncora’s highly personal attack on Chief Judge Rosen in the objection was legally and factually unwarranted, unprofessional and unjust,” Rhodes wrote in a 22-page order. “Justice requires the court to strike the attack from its record.”

The judge gave Syncora’s Chicago-based attorneys at the law firm Kirkland & Ellis LLP until Sept. 12 to respond in writing with evidence as to why they shouldn’t face sanctions.

Rosen is credited with conceiving the “grand bargain,” a $816 million fund of private and taxpayer contributions designed to spare retirees of deep pension cuts in exchange for protecting city-owned art at the Detroit Institute of Arts from being sold to satisfy creditors.

Driker, a Detroit attorney, mediated negotiations with retiree groups and the city’s pension funds to get their support for the deal. Syncora contended Driker had a bias toward the DIA because of his wife’s past service on the museum’s board.

At a lengthy hearing Monday over Syncora’s objection, a city attorney accused the bond insurer of engaging in “sandbagging of an Olympic sort” to derail the grand bargain.

Rhodes agreed with the city’s attorneys that Rosen and Driker only offered possible solutions for resolving the city’s unfunded pension liability. He said Syncora’s allegations were “false.”

“They were in no position to ‘collude’ with anyone, to ‘orchestrate’ or ‘engineer’ anything, to ‘execute a transaction,’ or to ‘pick winners and losers,’” Rhodes wrote in his order, highlighting Syncora’s claims.

Rhodes, who appointed Rosen chief mediator last year, defended the work of the mediation team, which has negotiated numerous deals with city labor unions, retiree groups, pension funds and financial lenders.

Rhodes declined Detroit’s request that the bond insurance company be forced to publicly apologize to Rosen and Driker. “The court concludes that a coerced and therefore insincere apology is not a true apology at all; it is not an acknowledgment of a mistake or an expression of regret,” Rhodes wrote.

The judge’s decision came Thursday as Syncora and another holdout bond insurer, Financial Guaranty Insurance Co., were reportedly in mediation talks with the city.

Syncora’s attorneys have argued the plan is unfair as the so-called “grand bargain” aids pensioners at the expense of Syncora and other unsecured creditors. The bond insurer faces hundreds of millions in potential loses under Detroit’s debt-cutting plan.

Syncora attorney James Sprayregen issued a statement late Thursday, saying they "respectfully disagree with Judge Rhodes."

"We still have concerns about the fairness of the mediation process," Sprayregen said. "These issues will be addressed more specifically in further court proceedings.”

http://twitter.com/ChadLivengood