CHICAGO — The judge overseeing Detroit's bankruptcy chastised Syncora Guarantee Inc. for calling federal mediators biased, and threatened to impose sanctions on the bond insurer.

"The court concludes that it is readily apparent that Syncora's allegations of failure to disclose conflicts, collusion, favoritism and bias on the part of the mediators are false," Bankruptcy Judge Steven Rhodes wrote, partially granting the city's request to strike some language from the insurer's objection to the confirmation plan.

Rhodes' order came late Thursday in response to the city's Aug. 19 request to strike some sections of the objection in which the insurer attacked mediators.

"We respectfully disagree with Judge Rhodes. We still have concerns about the fairness of the mediation process. These issues will be addressed more specifically in further court proceedings," Syncora attorney James Sprayregen, of Kirkland & Ellis, said in a statement.

The city's motion also asked the court to consider ordering the insurer to apologize to U.S. District Court chief Judge Gerald Rosen, who has led the bankruptcy mediation process, and another mediating attorney, Eugene Driker, and consider sanctions against the firm.

Syncora in its objection called the mediation process that led to the so-called "grand bargain" at the center of the city's bankruptcy exit plan unethical, biased, and tainted by politics and accused Rosen and Driker of open favoritism toward pensioners.

It accused Driker of failing to disclose his wife's ties to the city's art museum. The grand bargain calls for contributions from the state, not-for-profit foundations, and the Detroit Institute of Arts to improve the recovery rates of pensioners while protecting the city-owned museum's art collection.

Rhodes agreed with the city. "The court finds that the allegations concerning the mediators …are scandalous and defamatory. Syncora's highly personal attack on Chief Judge Rosen in the objection was legally and factually unwarranted, unprofessional and unjust. Justice requires the court to strike the attack from its record," Rhodes wrote.

"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 further wrote of the mediators.

Rhodes denied the city's request to order Syncora to apologize to the mediators, saying a coerced apology would not be genuine, but he did agree to the city's request to consider sanctions against the insurer.

Syncora and its attorneys were ordered by Sept. 12 to show cause why the specific conduct on their part described in the order does not violate bankruptcy rules and why sanctions should not be imposed. Responses from other parties are due Sept. 19. Rhodes said he would then decide whether to hold a hearing.

Rhodes rejected the city's request to strike Syncora's accusation in the objection that the grand bargain amounts "to a judicially sanctioned fraudulent transfer" finding that the argument is based on evidence resulting from discovery and is timely and not scandalous.

Rhodes said he would strike the objection in its entirety and give Syncora until Sept. 2 to file an amended one that deletes the references opposed by the court. The court trial on the city's confirmation plan begins Sept. 2.

Syncora has been the city's most ardent adversary, resisting efforts to reach a settlement over the city's proposed treatment of $1.5 billion of certificates of participation, some of which are insured by Syncora. The city has offered pennies on the dollar for the debt and filed litigation challenging the COPS' legality. A new round of mediation began Wednesday.

Rhodes praised attorneys in the bankruptcy case for conduct with "the highest degree of professionalism and civility" but said that record came to an end with Syncora's Aug. 12 filing.

Rhodes' order notes the mediators' success at negotiating settlements between the city and nearly all of its institutional financial creditors, including its interest rate swap counterparties, insurers on its unlimited tax general obligation bonds, holders and insurers of its limited tax GOs, and most recently the insurers and holders of its water and sewer revenue bonds.

"None of these financial creditors joined in the objection and none of them have otherwise made any claim or suggestion of bias or any other impropriety against the mediators," the order says.

Rhodes also noted his initial objection to the size of the swap counterparty settlement as being too favorable to the institutions.

"These circumstances establish anything but bias against the city's financial creditors on the part of the mediators," he wrote, adding that ultimately it's the bankruptcy court and the appellate courts that cast a final decision on any settlement.

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