CHICAGO -- Bond insurer Syncora Guarantee, Inc. will appeal a recent decision in Detroit’s bankruptcy, marking the first appeal in the case.

Syncora filed a one-page court document Tuesday announcing it would appeal U.S. Bankruptcy Judge Steven Rhodes’ Aug. 28 decision to block the insurer’s ability to freeze casino revenue that acts as collateral on the city’s interest rate swaps, in part because the revenue is protected by the automatic stay.

Syncora will appeal to the U.S. District Court for the Eastern District of Michigan’s Southern Division.

It’s the first appeal in Detroit’s historic bankruptcy case but likely not the last, legal experts have said. Unhappy parties that appeal unfavorable rulings on thorny issues could derail Detroit’s efforts to keep the case on a fast track.

Some may wind up in the U.S. Supreme Court depending on how much “ardor” the parties have to continue fighting, said James Spiotto, bankruptcy attorney with Chapman and Cutler LLP in Chicago.

“All these fights cost money,” said Spiotto. “Chapter 9 is like open-heart surgery -- the longer you stay under the knife, no matter how good the surgeon, the greater are the consequences.”

Syncora’s appeal is part of an ongoing court battle between the city and the insurer over the proposed swap settlement; one that began even before Detroit’s July 18 filing for Chapter 9.

After the bankruptcy filing, several bond insurers and holders of the pension certificate holders joined Syncora in fighting Detroit’s settlement with UBS AG and Merrill Lynch, the counterparties on the city’s interest-rate swaps.

Detroit emergency manager Kevyn Orr would pay the banks roughly 75 cents on the dollar -- and more after a certain point -- on a $300 million termination penalty in return for gaining access to the casino revenues that are used as swap collateral.

The bond insurers argue the agreement is unreasonably favorable to the banks and would leave creditors without access to the gambling revenue, the city’s third-largest revenue source. Syncora says terminating the swaps would expose it to interest-rate risk on the insured certificates, on which the city defaulted in June.

Rhodes is expected to hear arguments on the settlement on Sept. 23 and 24.

On Aug. 28, Rhodes ruled that Syncora cannot order the swap custodian to freeze the casino revenue because Syncora is not a participant in the swap agreement, which is solely between the city and the counterparties.

Rhodes also ruled that the casino revenue is subject to the automatic stay because it is owned by the city, and that the monthly flow of the funds into the custodian’s accounts is merely an administrative action and not due to a lien by Syncora.

Syncora is also suing UBS and Merrill Lynch in New York to fight the settlement. In both cases, the insurer is seeking to establish its rights with regard to the original pension borrowing, the original swap transaction, a 2009 agreement that pledged the casino revenues as collateral, and the recent swap settlement.

Rhodes has ordered the parties to enter into mediation to try to reach an agreement. Ahead of the late-September hearings, both sides are deposing witnesses.

Syncora has deposed Orr and the city’s investment banker, Ken Buckfire, as part of the dispute. Monday it deposed an executive at Ernst & Young, which crafted revenue projections for the city before its bankruptcy filing.

The city has said it may call as witnesses Gary Greendale, a managing director at Ambac; Todd Snyder, vice chairman of Rothschild Inc. and co-chair of its North American Debt Advisory and Restructuring Group, who advised Syncora during the insurer’s pre-petition efforts to reach a settlement with the city; as well as Alexandra Schwarzman, an associate with Kirkland & Ellis LLP who was also involved with the early negotiations regarding a dispute over a non-disclosure agreement.

The settlement is important to Detroit because it would give the city access to the roughly $180 million in annual casino revenues, which it wants to use as collateral to secure debtor-in-possession financing. There are other reasons why the settlement may be important to the city as well, Municipal Market Advisors noted in a recent paper.

“The agreement seems to have at least one additional, significant benefit to the city beyond unfettered access to the casino revenues: the ability of the city to move forward under the settlement without third-party liability concerns,” MMA said, citing Orr’s recent deposition. “Perhaps, the added benefits of closure -- and the potential relief from exerting potentially a significant amount of time and money associated with litigation on potential issues related to the swaps -- made the swap settlement more valuable to the city than we originally estimated.”

In related news, a newly created nine-member committee representing roughly 20,000 retirees Tuesday filed an objection to the city’s eligibility to enter into Chapter 9. The committee argued that the city lacks the authority to enter into Chapter 9 and that its filing was in bad faith, among other factors.

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