CHICAGO — Bond insurer Syncora Guarantee Inc. would settle its year-long battle with bankrupt Detroit for 75 cents on the dollar.
The 75% target was revealed by a Syncora attorney under questioning from U.S. Bankruptcy Judge Steven Rhodes Wednesday at the end of an opening statement at Detroit's bankruptcy confirmation trial.
Kirkland & Ellis attorney Marc Kieselstein was nearing the end of his two-hour statement, which attacked the city's bankruptcy exit plan as featuring "epic levels" of discrimination against certain creditors, and had just finished quoting St. Thomas Aquinas on faith and raising the concept of predestination, when Rhodes interrupted him.
The judge said he wanted to know what the insurer wants from Detroit.
Kieselstein shied away from naming an exact figure, saying it could violate confidential mediation orders. The insurer is looking for "something that's within shouting distance of" pensioners' recoveries, the attorney said.
"I want a percentage and I want it now," Rhodes replied. "The only negotiation here is you are resisting answering my question and I'm trying to cajole you to do it."
Kieselstein then said his client would take 75 cents on the dollar. The confirmation plan offers the insurers less than 10 cents on the dollar. Under the plan, pensioners are in line to recover roughly 95% or more of their pensions. Unlimited-tax general obligation bondholders would receive 74%; limited-tax GO holders 34%; and water and sewer bondholders 100% of principal.
"Where's the city going to get the money to pay you 75 cents?" asked Rhodes.
"There are a million ways," Kieselstein replied, saying the city could sell some of its art collection, increase taxes, or share investment earnings.
In a statement released after the exchange, Kirkland & Ellis attorney James Sprayregen reiterated Kieselstein's position.
"A 75% recovery for all creditors, Syncora and pensioners, can best be accomplished if we maximize the value of the art collection as well as other assets," Sprayregen said. "The city has many options for raising revenue that have not been explored fully enough. This will be proven during the course of court proceedings."
The exchange came on the second day of the trial being held to decide if the court will confirm the city's plan to exit bankruptcy by shedding up to $7 billion of debt and reinvesting $1.5 billion over 10 years.
Syncora and Financial Guaranty Insurance Co. are the two major creditors who continue to oppose the city's plan of confirmation. The insurers cover $1.5 billion of certificates of participation that Detroit wants to either void as illegal or to settle by paying less than 10%.
The insurers have focused their legal challenges on the deal at the center of the city's bankruptcy plan, a "grand bargain" with a stated value of $816 million that would fund pension recoveries in exchange for transferring the fine art of the city owned Detroit Institute of Arts museum to an independent authority protected from the bankruptcy.
In his wide-ranging opening statements, Kieselstein argued that the city's plan, and the grand bargain in particular, violates bankruptcy law on several fronts, most notably by unfairly discriminating against the insurers in favor of retirees.
The city is not allowed to "inflict unnecessary and outsized losses on disfavored classes," Kieselstein argued. The plan, he said, cannot be "confirmed without doing serious mayhem to the rule of law."
The plan also fails to meet the creditors' best interests test the city is required to prove, the attorney said.
Detroit failed to "do its homework" by analyzing what creditor recoveries would be in alternative scenarios, including a dismissal, which is a key part of meeting the best interests test. Kieselstein compared the city to a "hormonal teenager" who doesn't want to do his homework.
"Nobody likes doing homework, nobody likes raising taxes, and nobody likes doing homework about raising taxes," Kieselstein said. He played videos of Detroit emergency manager Kevyn Orr and various consultants admitting they had not analyzed alternative recovery scenarios. Kieselstein told Rhodes the city "dropped a big mess" in the judge's lap.
FGIC also laid out its trial strategy in its opening statements. FGIC attorney Alfredo Perez, with Weil, Gotshal & Manges LLP, argued that the reported $816 million value of the grand bargain is in fact more like $455 million when discount rates are taken into account.
Like Syncora complaining about the city's lack of a dismissal scenario analysis, Perez said the city failed to fully analyze its art's value.
As part of its challenge to the plan, FGIC has hired consultants to analyze the art's value and even solicited bids from a handful of art and loan houses.
Syncora and FGIC both noted that the city has so far spent about $100 million on legal fees to Jones Day, comparing it to the $90 million allocated to the insurers' recoveries on the $1.5 billion of COPs.
An attorney for the Detroit Institute of Arts, which has found itself at the center of the closely watched case, also made his opening statement Wednesday.
DIA attorney Arthur O'Reilly, from Honigman Miller Schwartz and Cohn, argued that the museum is crucial to the city's future and that donors' restrictions make the sale of many pieces difficult or impossible. If Rhodes rejects the plan or the case is dismissed, the DIA will fight creditors "piece by piece," O'Reilly warned.
"What would charity mean and what would culture mean if the creditors had their way?" O'Reilly asked.
An attorney for Oakland County delivered Wednesday's final opening remarks. The county is opposed to the plan of confirmation's treatment of the Detroit Water and Sewer Department, which calls for the diversion of roughly $47 million of revenue to pay for the city's pensions.
"We understand that this not a trial about DWSD or how to fix DWSD, but the city's plan imposes burdens that will have a significant impact on DWSD and DWSD is already in trouble and they have been for decades," Oakland County's attorney, Jaye Quadrozzi, told Rhodes. "So to examine the effect that the city's plan has and will have is important as to whether that plan can be confirmed."
The system is "dilapidated," Quadrozzi argued, and the bankruptcy plan should not be approved if it means diverting revenue badly needed for capital improvements.
Quadrozzi also objected to Detroit's 6.75% return rate Detroit is using to calculate its pension liabilities, arguing that it has allowed the city to overstate the size of those pension liabilities. Quadrozzi will continue her opening statements Thursday morning.
