August 13, 2014 at 6:55 pm

Judge delays Detroit bankruptcy trial until Aug. 29

U.S. Bankruptcy Judge Steven Rhodes (Courtesy of Detroit Legal News Publishing LLC)

Detroit— Citing “extraordinary cause,” U.S. Bankruptcy Judge Steven Rhodes has delayed the city’s bankruptcy trial until the end of August.

Rhodes, in a four-page scheduling order issued late Wednesday afternoon, postponed the Aug. 21 trial date, noting the city’s plan to file a sixth amendment to its debt-cutting bankruptcy plan.

He then set a final pretrial and the start of the confirmation hearing for Aug. 29. The trial will determine the feasibility of Detroit’s plan to shed about $7 billion in debt.

“The city has stated its intention to file a sixth amended plan of adjustment,” Rhodes wrote. “The court concludes that this constitutes extraordinary cause to adjourn the dates and deadlines that it previously established.”

This is the third delay of a trial Rhodes originally planned to begin in mid-July. The decision comes after Rhodes refused to push it back during a separate hearing last week. The trial delay could give holdout creditors time to cut last-minute deals with the city and avoid a protracted legal battle.

Bloomfield Hills bankruptcy lawyer Douglas Bernstein said he agrees that a delay is appropriate — but not a long one.

“(Rhodes is) very aware that the city can’t afford the protracted proceeding, but at the same time, everybody, including the objecting creditors, are entitled to due process,” said Bernstein, an attorney at Plunkett Cooney. “It’s a complicated case. There’s a lot of moving parts to it.”

In a new development, the judge ordered the city to offer evidence at trial of how a new state-created financial review commission will operate. The commission, which will be dominated by gubernatorial appointees, was a string the Legislature attached to $195 million in aid for Detroit pensioners to help the city settle with retirees.

The Wednesday order calls for opening statements from the city and its objecting creditors on Sept. 2. The new schedule allows for 29 days of trial over seven weeks. Besides the final pretrial and opening statement sessions, the dates will be Sept. 3-5, 8-12, 15-19, 22-24 and Sept. 29-Oct. 3; and Oct. 6-7 and 14-17, according to the court filing.

The trial, Rhodes wrote, will run from 8:30 a.m.-5 p.m. each of the days with the exception of Sept. 24 and Oct. 3, when it will be held from 8:30 a.m.-12:30 p.m.

Rhodes’ order provides the city and objecting parties with 85 hours each to present their case.

On Tuesday, Rhodes heard renewed requests from several creditors, including one of the city’s last holdout creditors, Syncora Guarantee Inc., to push back the Aug. 21 trial date.

Also on Tuesday, Syncora filed an objection to the city’s bankruptcy exit plan, accusing court-appointed mediators of engineering a “fraudulent” plan to rescue city pensioners and preserve city-owned art at the expense of other creditors.

The bond insurer says it wants Rhodes to reject the “grand bargain” on claims that the mediation process was tainted.

Syncora is one of the insurers of debt Detroit issued to prop up pension funds representing civil retirees and police and fire retirees in 2005.

In 2005, Detroit borrowed $1.44 billion from investors through a financial note called “certificates of participation.” The deal was designed to pour money into the two pension funds. The pension debt was made more complex by an interest rate swaps deal layered on top of $800 million of the debt. The city traded a variable interest rate for a fixed rate.

The swaps initially gave Detroit lower borrowing costs. But when interest rates plummeted in 2008-09, the annual payment ballooned from an estimated $5 million to $50 million.

The city claims the deal was illegal.

Syncora has said it faces the prospect of “massive” losses, which could exceed $270 million, according to court records.

cferretti@detroitnews.com
Staff Writer Chad Livengood contributed.