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Detroit's last major holdout creditor wants a combination of cash and city-owned real estate downtown, including an Eastern Market parking garage, to settle the biggest municipal bankruptcy case in U.S. history, The Detroit News learned Monday.

Negotiations on the sidelines of Detroit's bankruptcy trial could end in a deal that transforms bond insurer Financial Guaranty Insurance Co. from the last major holdout creditor into a partner in Detroit's revitalization. Among other assets, FGIC is interested in a $123 million bankruptcy reserve fund, city-owned real estate, including riverfront property east of the Renaissance Center, and a 300-space municipal parking garage on Riopelle Street, two sources familiar with negotiations told The News.

Settlement talks with FGIC have intensified since Thursday, when the City Council and Mayor Mike Duggan reclaimed power once held by Emergency Manager Kevyn Orr, said one source familiar with talks.

The assets offer the first hint at the framework of a deal that could help Detroit secure support from a financial creditor fighting the city's plan to shed about $7 billion in debt.

"Maybe they are closing ground, which would be a good thing," Bloomfield Hills bankruptcy lawyer Douglas Bernstein said.

An FGIC spokesman declined comment on negotiations with the city.

A person briefed on the talks confirmed that FGIC has been working to create a settlement proposal but stressed the bond insurer is also interested in other, unidentified assets.

Negotiations are ongoing nearly three weeks after fellow bond insurer Syncora Guarantee Inc. struck a deal involving a parking garage, riverfront land, cash and other considerations.

Unlike the Syncora deal, an FGIC settlement involving real estate must be approved by Duggan and the council, the source told The News. That's because on Thursday, the City Council reclaimed control over city departments, contracts and other day-to-day matters after 18 months under emergency management.

If the City Council approves any deals, the settlement won't be final until U.S. Bankruptcy Judge Steven Rhodes approves it, Bernstein said.

"The judge still has to ... make sure it's in the best interest of the city," he said.

Orr, Duggan and council will be unified if a deal is reached, Bernstein said.

"I would believe that in order to get settlements accomplished and the plan confirmed, the City Council, mayor and Kevyn Orr are going to be in lock-step," he said. "If they are going to settle, it's going to be on terms that they all agree on."

One aspect of a possible FGIC deal surfaced Monday during the city's bankruptcy trial.

FGIC can opt into a similar deal as bond insurer Syncora, which struck a settlement involving real estate and bonds earlier this month, a Detroit bankruptcy consultant testified Monday.

Ernst & Young consultant Gaurav Malhotra said FGIC could tap into a $123 million pool of money being set aside in Detroit's bankruptcy case.

"FGIC has the option ... but I don't know all the details," Malhotra told Detroit lawyer Geoffrey Stewart during the city's bankruptcy trial Monday.

If FGIC reaches a deal, the bond insurer could receive a portion of the $123 million reserve fund.

It's not clear how much of the reserve fund would be available for FGIC, one source said.

The big problem, the source said, "is there isn't a lot of money left."

But Detroit is still eager for a settlement at the right price, the source added. A settlement would shorten the ongoing bankruptcy trial and eliminate the biggest possible appeal.

FGIC, which insured $1.1 billion in pension-related debt, walked out of closed-door negotiations several weeks ago and has a claim three times the size of Syncora's.

Even if Detroit settles with FGIC, the judge must conclude the city's debt-cutting plan is fair and feasible.

The city wants to pay FGIC as little as 6 cents on the dollar in Detroit's debt-cutting plan.

Syncora, meanwhile, is expected to get a nearly 14 percent recovery on financing it supplied for the troubled pension debt, up from about 10 percent in an earlier version of the city's debt-cutting plan.

Syncora's deal involves a transfer of city land and the extension of the Detroit-Windsor Tunnel lease to a Syncora subsidiary and the Grand Circus Park garage lease.

Syncora will also get $6.25 million in settlement credits to be used on eligible properties including Joe Louis Arena, other parking assets and real property located within three miles of the tunnel.

Since FGIC is interested in city-owned land within that three-mile area, the bond insurer will need Syncora's approval, the source said.

Many of the city's most expensive and available parcels are east of the auditorium site, Renaissance Center and tunnel, according to city property records. Two sites last sold for $9 million and several others sold for as much as $4 million.

FGIC appears to be following a pattern set by the Syncora deal.

At 300 spaces, the Eastern Market parking garage eyed by FGIC is the city's smallest. The underground parking garage Detroit is giving to Syncora at Grand Circus Park has 800 spaces.

Syncora's lease deal is for 30 years. The garage near Ford Field and Comerica Park is Detroit's third-largest municipal garage and near an entertainment district that includes the Fox Theatre. Syncora has to make $13 million in capital improvements in the garage. Once it does, it will receive the parking revenue — except for 25 percent that would go to Detroit.

Syncora also gets a $6.25 million coupon that can be used to bid on available city property — namely the Joe Louis Arena site, once the Red Wings move out after construction of a planned arena north of the Fox and Comerica Park.

Meanwhile on Monday, Rhodes cleared the way for a lawsuit stemming from Detroit City Council's marathon closed-door talks over the future role of Orr.

Rhodes made the ruling before testimony in the city's Chapter 9 case resumed Monday in federal court in Detroit.

Andrew Paterson, an attorney for union activist and convicted felon Robert Davis and the group Citizens United Against Corrupt Government, last week sought permission from Rhodes to sue the city over its alleged violation of the Open Meetings Act.

The Detroit City Council last week convened closed talks for more than 16 hours over three days as it worked to hammer out a deal that transfers power back to Detroit's elected leaders and keeps Orr in place solely for navigating the remainder of the bankruptcy case.

In issuing his ruling, Rhodes noted that the city maintains that there was no evidence of any violations and that the closed meeting was noticed properly and cited the correct statute. Davis' lawsuit is moot and lacks merit, attorneys for Detroit say.

But the judge, in his ruling, said he believed some aspects of the claimed violation were not moot, and while the city likely has a defense and perhaps a strong one, Davis' claim was not frivolous. The ruling now clears the way for a suit to be filed in Wayne County Circuit Court.

rsnell@detroitnews.com

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