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Detroit Lawyer Says General Obligation Bonds Not Secured

Detroit’s general obligation tax pledge doesn’t give bondholders priority over other creditors in its record $18 billion municipal bankruptcy, a lawyer for the city told a judge.

Bruce Bennett, one of the attorneys leading Detroit’s bankruptcy case, urged U.S. Bankruptcy Judge Steven Rhodes today to reject a demand by bond insurers that the city segregate taxes collected to repay certain bonds.

The bond insurers have sued Detroit, claiming a proposal by the city’s emergency manager to cut payments to general obligation bondholders is illegal. The insurers say that pledges the city made when the bonds were issued give bondholders certain rights over the taxes.

The dispute may require the judge to weigh in on a long-running debate among legal scholars about whether certain municipal bonds get priority over more traditional unsecured creditors, such as public employees or suppliers.

“There is not a lien, there is no property interest and these creditors are just like all others,” Bennett told Rhodes.

Rhodes is scheduled to hear today from lawyers for the bond insurers, including National Public Finance Guarantee Corp. and Assured Guaranty Municipal Corp. (AGO)

No Different

Bennett argued the city’s pledges to bondholders are no different from those made to all unsecured creditors. Such general promises mean the municipal bonds in dispute are unsecured, he said. Detroit didn’t set aside any property that could be used as collateral for the bonds, or create a special lien on the taxes, according to Bennett.

The city may also try again to resolve a dispute over interest-rate swaps that cost taxpayers about $4 million a month. Detroit may present a new proposal for canceling the swaps in the next three or four days, Robert S. Hertzberg, a lawyer for the city, said in court today. Depending on how bond insurers receive the proposal, Detroit may be able to avoid a court fight over the cancellation.

The bankruptcy case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).

To contact the reporter on this story: Steven Church in U.S. Bankruptcy Court in Detroit at

schurch3@bloomberg.net

To contact the editor responsible for this story: Andrew Dunn at adunn8@bloomberg.net

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