CHICAGO — Hang them with their own words.
That's the tactic bond insurer Syncora Guarantee Inc. is trying in a new court filing that blasts Detroit's plan of confirmation.
The insurer targets the case's federal mediators as "agenda-driven and conflicted," arguing that they showed unethical and politically motivated bias toward pensioners and toward saving the city's prized art collection. The bias tainted the bankruptcy process and led to a confirmation plan that violates most major principles of federal bankruptcy law, the insurer argues.
The argument relies heavily on public quotes from the chief mediator, US District Judge Gerald Rosen, as well as other mediators and participants in the so-called grand bargain, to make its case.
The insurer even notes that the wife of one of the mediators was a long-time board member of the Detroit Institute of Arts.
"The mediation process was rife with problems," Syncora attorney James Sprayregen, with Kirkland & Ellis LLP, said in an interview. "Everything in [Syncora's court] brief is public information and things that the mediators have said publicly, but we don't think it's been all put in one spot before," said Sprayregen. "So much of this process has been inappropriately cloaked in privilege, but what we know in the public record is damning enough that it fails the good-faith test."
The court brief reflects the main arguments Syncora will use in an Aug. 21 trial on the city's confirmation plan.
Syncora is one of the last financial creditors to not have reached a settlement with bankrupt Detroit. Financial Guarantee Insurance Corp. and the holders of $1.4 billion of pension certificates, which Detroit has sued to invalidate, are also fighting the city.
In addition to its grand bargain challenge, Syncora argues that the bankruptcy court should reject the confirmation plan because Detroit has failed to satisfy due process requirements; its treatment of the COPs violates the bankruptcy code; the plan illegally exculpates the city's interest-rate swaps counterparties from future claims; and that Syncora's pending appeals - there are five -- could affect the final plan.
But it's the grand bargain, and the mediators who crafted it, that is at the heart of the insurer's challenge.
The grand bargain features a mix of donations from several private foundations and the state, estimated at $830 million, which will go toward pensioners in exchange for transferring the city-owned art collection at the Detroit Institute of Arts into an independent trust that protects it from future fallout from the city.
Syncora's filing features 14 quotes from various parties, including Rosen and the private foundations, to make its argument of improper bias.
"The strongest indictment of the grand bargain and the clearest evidence that the plan was not proposed in good faith comes from Judge Rosen himself at the conclusion of his lobbying efforts in Lansing: "[N]one of this would be possible without all of us keeping a clear vision firmly in mind about who this is really about. It's about Detroit's retirees . . . that's what this is really all about," Syncora argues in the filing.
Mediator and Detroit attorney Eugene Driker's wife is a "longtime member (now emeritus) of the board of directors of the Detroit Institute of Arts," the insurer notes, in bold-faced and italicized type.
The insurer later adds: "[E]ven a casual observer of Detroit history can see the grand bargain for what it truly is: the further impoverishment of Detroit's rich history and treasures by residents of affluent suburban towns and cities," noting that the transfer into the trust is irrevocable. "Thus, should the plan fail to revitalize the city sufficiently -and it will fail as presently proposed-Detroit will have forever lost significant assets that could be used in the future to satisfy the city's obligations. In sum, the grand bargain is not so grand and, if it is a bargain, it is not one for the city or its citizens-let alone its creditors."
The city also took advantage of mediation privilege as a shield from deposition testimony, and Bankruptcy Judge Steven Rhodes, who is overseeing the case, also muddied the waters by entering a secret mediation order that Syncora has not been allowed to see.
"The public record demonstrates that the grand bargain was engineered by purpose-driven, result-oriented mediators to commit a fraudulent transfer of multi-billion dollar assets and ensure wildly favorable treatment of a politically popular creditor group," Syncora argues. "The grand bargain is procedurally and substantively antithetical to the concept of good faith and, accordingly, the court cannot confirm the plan."