July 29, 2014 at 11:57 pm

Judge sets Thursday deadline for bankruptcy eligibility challenges

A federal appeals court judge late Tuesday challenged creditors to decide within 48 hours if they’ll continue to contest Detroit’s eligibility for bankruptcy and its plan to cut pensions.

The judge’s letter came after four creditor groups on Tuesday postponed Wednesday’s planned appeal over aspects of the city’s July 2013 Chapter 9 filing. Judge Julia Smith Gibbons, heading a three-judge panel that was to hear the arguments, wrote that she was pleased that settlement negotiations were progressing, but that time was running out.

“The panel does not consider further delay in rendering a decision an option at this time,” Gibbons wrote. She explained that the judges need time to rule before a federal bankruptcy judge decides on the fairness of Detroit’s exit plan. She gave creditors until the close of business Thursday to decide whether they would drop their challenges to U.S. Bankruptcy Judge Steven Rhodes’ prior rulings in the city’s favor.

While the postponement was one sign Tuesday of apparent progress toward a negotiated settlement, one legal challenge in the nation’s largest municipal bankruptcy will proceed Wednesday.

Detroit’s fiercest creditor will appear before the 6th Circuit Court of Appeals in Cincinnati to argue that the city should not have access to a coveted $15 million pot of monthly casino taxes.

Attorneys for Syncora Guarantee Inc. will make their case over an issue the bond insurer has been fighting since even before the city took legal shelter in bankruptcy court.

At issue is whether Detroit should have unfettered access to its casino taxes — the bankrupt city’s most reliable revenue source — after the city defaulted on debt backed by gambling tax receipts.

Syncora is one of two companies that insured the underlining debt former Mayor Kwame 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 will hear Syncora’s appeal just three weeks before Detroit’s bankruptcy exit plan is set to go on trial. The hearing is scheduled for 1:30 p.m. today

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

Last month, U.S. District Judge Bernard 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 only ruled 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.

“These actions suggest that at least this panel is watching the case more carefully, not willing to defer until after the whole case ends,” said Melissa Jacoby, a University of North Carolina bankruptcy law professor following Detroit’s case closely.

After arguments on Syncora’s appeal, attention will turn back to the four Detroit creditor groups that were trying to overturn the city’s eligibility for bankruptcy and its ability to slash pensions.

The Detroit Fire Fighters Association, Detroit Police Officers Association, Retired Detroit Police Members Association and the city’s two pension funds asked for the delay due to deals they’ve worked out to support the city’s debt-cutting plan at a planned trial next month.

Attorneys for Detroit and the four groups spent the weekend and Monday scrambling to get the hearing canceled after the appeals judges handed down a 2-1 decision granting them a hearing and canceling oral arguments for five other unions and retiree groups.

The 340-member retired police officers’ group struck a tentative deal with the city late Monday night to settle its issues with Detroit to avoid today’s planned hearing, attorney Lynn Brimer said.

“We haven’t inked it just yet,” Brimer said. “In good faith, we agreed to postpone.”

Cincinnati attorney Pierre Bergeron, a veteran observer of the 6th Circuit Court of Appeals in Cincinnati, said it’s unusual to have a panel split on whether to hold a hearing.

“I can’t say I ever recall hearing of a judge dissenting from that. … (But) obviously this isn’t your run-of-the-mill litigation with these bankruptcy issues,” said Bergeron, who leads the appeals practice for the national law firm Squire Sanders and writes a blog about cases in the 6th Circuit.