CHICAGO — Bond insurer Syncora Guarantee Inc. has challenged Detroit's settlement with its unlimited-tax general obligation bondholders, saying the deal violates voters' rights under state law.

The insurer made the argument at a Tuesday morning hearing. US Bankruptcy Judge Steven Rhodes said after the brief hearing that he would take the matter under advisement.

Detroit's settlement with its unlimited tax GO holders calls for them to receive a 74% recovery, with their outstanding bonds repaid with new bonds. The remaining 26% of the debt, so-called stub GOs, would remain outstanding, with the money collected under the levy that originally went to bond holders going to the city's two retirement systems.

The problem is that voters never approved sending 26% of the tax levy to the retiree systems, Syncora attorney Ryan Bennett, with Kirkland and Ellis LLP, told Rhodes.

"The tax-paying citizens of Detroit now required to pay a tax for something they never approved in voting process," Bennett said. "You've got the attempt to sidestep the electoral process and funnel money from the taxpayers to a recipient they never intended it to go to."

Syncora raised the objection as part of its overall challenge to the city's confirmation plan, and also as an insurer on roughly $40 million of the ULTGO bonds and the owner of a property tax paying entity in the city, Bennett said.

"If the plan is confirmed, the city will be required to unlawfully tax its taxpayers," Bennett said, adding it violates not only state law but federal bankruptcy code.

Detroit's Jones Day attorney, Heather Lennox, argued that Syncora does not have standing to bring the objection, because it signed off on the 74% settlement and is now raising arguments that belong to another party, namely the taxpayers.

At the same time, the settlement does not violate state law because the voters only approved the issuance of debt for certain projects - which were completed -- and not the specific creation of the levy, Lennox said.

The levy can also be collected as long as the debt remains outstanding, and the so-called stub bonds will remain outstanding under the terms of the settlement, she argued.

"The taxpayers are not harmed; they're not paying a penny more than they voted to pay," Lennox said.

Bond insurers Assured Guaranty, Ambac Assurance Co., National Public Finance Guarantee Co., and the state of Michigan voiced their support of the settlement.

Rhodes asked a few questions of each side and said he would take it under advisement.

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