Aug. 19 (Bloomberg) -- Detroit’s deal to refinance $388 million in bonds is illegal because part of the tax dedicated to paying the debt will be given to city retirement systems, bond insurer Syncora Guarantee Inc. said.
As part of the bankrupt city’s plan to address $18 billion in obligations, holders of certain tax-backed bonds would get new debt worth about 74 percent of what they are owed. Detroit’s two retirement systems will take possession of the old bonds accounting for the other 26 percent and be able to collect from taxes dedicated to paying off the debt.
“The city’s engineered this very clever form-over-substance argument,” Ryan Bennett, an attorney for Syncora, told a judge today in Detroit federal court. “The taxpayers did not approve a tax levy for payment” to the retirement systems, he said.
The bond deal is one of several settlements or legal issues that U.S. Bankruptcy Judge Steven Rhodes must rule on as part of the city’s historic bankruptcy-exit proposal. Under that plan, Detroit would impose about $7.4 billion in cuts on bondholders, pensioners and other creditors.
Heather Lennox, an attorney for the city, and creditors that are part of the deal defended the settlement. Lennox said Syncora is misreading the state law governing tax-backed bonds and the bond insurer doesn’t have the right to challenge how the tax revenue will be used. Only the state of Michigan can bring that type of challenge, she said.
State officials support the settlement.
Detroit filed for bankruptcy in July 2013, saying that decades of decline and the disappearance of manufacturing jobs had left it unable to meet financial obligations while providing basic services to its 700,000 residents.
Detroit must convince Rhodes at a trial starting Aug. 29 that its debt-cutting plan is feasible and fair. The judge also set aside court time before trial to separately address some disputes over the plan.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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