CHICAGO — Detroit bondholders have asked the bankruptcy court to delay consideration of several issues tied to the city's treatment of its bond debt until the main confirmation trial this summer, instead of during a legal hearing in two weeks.
U.S. Bankruptcy Judge Steven Rhodes on June 2 asked the bankrupt city and its creditors to respond to 14 legal issues tied to the city's plan of confirmation. Rhodes wants to address these "purely legal" questions ahead of a full confirmation trial, currently scheduled to begin July 24. Rhodes has set a hearing for the 14 legal issues on June 24.
Several financial creditors, including water and sewer holders and the insurer of the city's limited-tax general obligation bonds, filed briefs late Wednesday saying many of Rhodes' questions could not be settled at the hearing because they involve more than just legal questions.
With regard to the Detroit Water and Sewerage Department's roughly $5.3 billion of revenue bonds, Rhodes asked attorneys to weigh in on whether the city should be allowed to modify the terms of the debt by lowering the interest rate and eliminating call provisions.
The Detroit water and sewer bondholders argued that the issues "present questions of mixed law and fact," and should be not be addressed at a "bifurcated hearing on issues that may be determinable only as a matter of law,"
"This is a matter of significant importance to special revenue debt that will have precedential impact," the attorneys argue. "Accordingly, the DWSD parties respectfully urge the court to refrain from deciding these issues until a complete evidentiary record has been developed at the confirmation hearing."
They also asked Rhodes to amend his DWSD legal issue question to reflect the fact that the pledged revenues are already sufficient to pay the debt in full. Rhodes' current issue asks only whether it's legal to modify some of the terms of the debt.
If Rhodes does hold a hearing on the issue before the main trial, the DWSD holders asked that he delay the hearing until July 15 and require the city to file its briefs on the issue by June 15.
The DWSD parties include US Bank NA, as trustee for the bonds, National Public Finance Guarantee Corp., Assured Guaranty Municipal Corp., Berkshire Hathaway Assurance Corp., Financial Guaranty Insurance Co., and the Ad Hoc Bondholder Committee. The ad hoc committee is made up of Fidelity Management & Research Co., Eaton Vance Management, Franklin Advisers, Inc., Nuveen Asset Management, and Blackrock Financial Management Inc.
A group of creditors including FGIC, Syncora Guarantee Inc., and the banks that hold the city's pension certificate of participation debt filed a
Rhodes' question is widely seen as a reference to the Detroit Institute of Arts, one of the key players in the case. Syncora, FGIC and other creditors argue that the city is undervaluing the worth of the museum's art collection.
"The bankruptcy code does not preclude the bankruptcy judge from determining if a municipality should be taking an action in order for a plan to satisfy the best interests, fair and equitable, and good faith standards, even if such bankruptcy judge cannot order the municipality to do so," the creditors argue.
They say Rhodes' question presents mixed questions of law and fact that cannot be resolved solely on legal grounds before the main confirmation trial.
They also asked for a month delay in the schedule.
Ambac Assurance Corp.
The insurer said the question cannot be addressed in a "swift" one-day hearing with a "scant" 15 minutes argument time, which is what the judge has currently allotted each party.
Ambac asked for one hour to make its argument.
"Whether state law affords to the LTGO holders structural seniority in bankruptcy is a matter of great importance not only to Ambac and the LTGO holders, but also to the capital markets generally," the insurer said, saying the treatment has the potential to impact state and municipal access across the nation.
The state of Michigan also weighed in on Rhodes' request for legal clarity on whether the city's assumed pension investment return rate of 6.75% and discount rate restrictions violate state law. The question will soon be moot due to legislation recently approved by the state Legislature that allows an exception for Detroit's pensions plans to existing law that dictates investment calculations. Gov. Rick Snyder is expected to sign the bill into law in a matter of days, and when he does, it will render the question moot, the attorney general's office argued.
Detroit's Jones Day attorneys also filed a brief, asking Rhodes to push the hearing until at least July 1, as no counsel will be available until after June 30.
