September 3, 2014 at 11:37 pm

Creditor takes Detroit to task for debt plan

Detroit bankruptcy trial
Detroit bankruptcy trial: Attorney for Syncora Stephen Hackney discusses Wednesday's proceedings in federal court.

Detroit— The city’s plan to dump $7 billion in debt and favor pensioners over financial creditors is a “failure on all fronts” and should be rejected, a holdout creditor’s lawyer said Wednesday.

A lawyer for bond insurer Syncora Guarantee Inc. spent several hours during the second day of Detroit’s bankruptcy trial trying to undermine the city’s debt-cutting plan, saying it was devastatingly unfair, not feasible and filled with “record-breaking, bone-crunching” discrimination. And for the first time, Syncora named its price to settle the biggest municipal bankruptcy in U.S. history.

In a wide-ranging and colorful opening statement that invoked St. Thomas Aquinas and Hebrew National hot dogs — and likened Detroit to a “moody, hormonal” teen — Syncora attorney Marc Kieselstein launched a bid to kick Detroit out of bankruptcy court by attacking a controversial plan to shield the city’s art collection and soften pension cuts.

Kieselstein faulted the city’s legal team for failing to explore options to monetize Detroit’s world-class art collection and raise more money for creditors.

“This was a failure on all fronts,” Kieselstein said.

The lawyer’s argument served as a counterpoint to the trial’s first day. On Tuesday, city lawyer Bruce Bennett said Detroit would not survive having its bankruptcy plan dismissed.

Syncora has been the city’s fiercest bankruptcy opponent, challenging everything from Detroit’s access to casino tax revenue to its ability to fix the city’s broken streetlights, pushing for the sale of city-owned art and trying to access retirees’ personal financial information.

Syncora and fellow bond insurer Financial Guaranty Insurance Co. — which is on the hook for more than $1 billion — claim the city’s debt-cutting plan pays them as little as 6 cents on the dollar for the $1.4 billion in troubled pension debt they insured to help former Mayor Kwame Kilpatrick prop up the city’s pension funds in 2005.

The lawyer’s opening statement was interrupted by U.S. Bankruptcy Judge Steven Rhodes, who engaged in a tense standoff with Kieselstein.

The judge said Kieselstein made some powerful arguments. But if Syncora is unwilling to accept 6 cents on the dollar, how much does his client want, the judge asked.

“Within shouting distance of what active (workers) and retirees are getting,” the lawyer said.

“I want it now,” the judge said.

Kieselstein said he didn’t have permission from Syncora to reveal the amount. Besides, revealing a figure would violate closed-door negotiations led by the judge’s mediators, he said.

“I’m going to violate the mediation order,” the lawyer said.

“Give me a number,” the judge said.

“Seventy-five cents,” Kieselstein responded.

“Where would the city get 75 cents to pay the claim?” the judge said.

“There’s the art,” Kieselstein said. “You could sell one or two pieces; finance a few pieces and you could get us to that number very easily.”

The Detroit Institute of Arts’ 60,000-piece collection would be preserved in the so-called “grand bargain,” which is the cornerstone of the city’s bankruptcy plan. The grand bargain would shield art from creditors and contribute $816 million from foundations, the state and the DIA to soften pension cuts.

Laura Bartell, a bankruptcy law professor at Wayne State University, said Syncora’s “best argument” is that the plan unfairly discriminates against them by cutting their claim by at least 89 percent while reducing the total pension claims by 54 percent.

“If the judge truly thought there were was something legally wrong with the grand bargain, I believe he would have given a hint about it by now,” Bartell told The News. “Judge Rhodes is not shy about giving little hints about what his concerns are.

“If the judge is convinced that the $816 million is really vastly less than what the DIA is worth, the judge could conclude the plan is not fair and equitable to any of the creditors,” Bartell added.

During his opening statement, Syncora’s lawyer showed videotaped excerpts of Detroit Emergency Manager Kevyn Orr and the city’s investment banker, Kenneth Buckfire, testifying under oath.

The video was used in a bid to prove Detroit took shortcuts in creating a debt-cutting plan that discriminates against Syncora.

The bond insurer said Buckfire failed to analyze how much money creditors would receive if Rhodes dismissed Detroit’s bankruptcy case.

Yet during Orr’s videotaped deposition, the emergency manager said he reviewed dismissal analysis from Buckfire.

Kieselstein stopped the recording.

“One problem: As we now know, Mr. Buckfire never did dismissal analysis,” Kieselstein said.

The city took shortcuts in hopes of the judge approving Detroit’s bankruptcy plan, Kieselstein said.

And the city failed to provide evidence supporting Buckfire’s expert opinion that there would be a mass exodus of residents if the city raised taxes.

“Evidence will show that the debtor cut the grand bargain, committed to funding ($1.4 billion in improvements to city services) and then turned its pockets inside out and said ‘sorry, we’re tapped out,’ ” Kieselstein said.

Earlier Wednesday, a lawyer for the Detroit Institute of Arts argued the city’s world-class art collection is worth protecting and the court should respect people’s right to art and culture.

Arthur O’Reilly launched his support of the city’s debt-cutting plan by focusing on pieces of art donated by patrons, including Edsel Ford.

The grand bargain and the case “is about respecting charitable donations and the people’s right to art and culture,” O’Reilly told the judge.

About 95 percent of the DIA’s collection of 60,000 pieces was donated or acquired with donated money, he added.

During his opening statement, O’Reilly referenced “Dancers in Repose,” a 116-year-old drawing by the French artist Edgar Degas.

The drawing was a gift that could have gone to the donor’s daughters.

Holdout creditors, however, say “send that to Christie’s,” the New York auction house, O’Reilly said. “Sell it at the highest price.”

Bennett, the city’s lawyer, began the second day of the trial by arguing that a dismissal of the debt-cutting plan will lead to higher taxes and a rush to the courthouse by creditors trying to recoup money.

“This is the city’s last, best chance,” Bennett said, “and it’s going to work.”

Chad Livengood contributed.

Rhodes (John Meiu / AP)
O'Reilly
Bennett (Daniel Mears / The Detroit News)