Detroit is pursuing this unfair discrimination even as it has refused to consider selling the city’s multibillion-dollar art collection and other options that could create a “win-win” plan for all of its creditors, Syncora attorney Marc Kieselstein of Kirkland & Ellis LLP told the judge overseeing the Chapter 9 bankruptcy.
He added that the “day of reckoning” had come for a plan that is so flawed and devoid of evidentiary support “that it cannot be confirmed without doing serious mayhem to the rule of law.”
Kieselstein’s opening statement came on the second day of the make-or-break trial, where Detroit is asking U.S. Bankruptcy Judge Steven Rhodes to approve a plan to shed $7 billion of the city’s $18 billion debt load and inject $1.7 billion toward improving the city’s spotty services and crumbling infrastructure. However, the plan’s opponents, led by Syncora and Financial Guaranty Insurance Co., have cried foul that many bondholders will see as little as 10 cents on the dollar for their claims, while the city’s pensioners are getting recoveries upwards of 90 percent.
In order for this discrimination to pass muster under the Bankruptcy Code, Detroit must show a reasonable business justification for it. But, according to Kieselstein, the city has been on a “never-ending scavenger hunt” to justify its favoritism toward retirees, putting forth unacceptable rationales like the personal hardship of pensioners and the fact that it has sued to void $1.45 billion of the bond debt as illegal.
At the conclusion of Syncora’s argument, Judge Rhodes pressed Kieselstein on exactly what recovery would convince the insurer to drop its opposition to the plan, prompting a waffling response from the attorney.
“I want a percentage and I want it now,” the judge demanded.
Kieselstein finally responded that 75 cents on the dollar would be an acceptable payout, but Judge Rhodes continued to question how the bond insurer planned to meet that lofty goal.
In a statement after the hearing, James Sprayregen, another Kirkland attorney representing Syncora, said the city could meet a 75 percent recovery for all its creditors by maximizing the value of the art collection and other city assets.
“The city has many options for raising revenue that have not been explored fully enough,” he said.
Syncora also contends that it would be worse off under the plan than if the case were simply dismissed, meaning the plan fails the Bankruptcy Code’s “best interests of creditors” test. During his own opening statement on Tuesday, city attorney Bruce Bennett of Jones Day claimed this rule has to be applied across the creditor body as whole in Chapter 9, saying any lone creditor can “dream up a scenario” where they would be better off outside of bankruptcy.
But Kieselstein attacked this claim on Wednesday, quoting from a brief filed by attorneys from Detroit’s own law firm, Jones Day, in the Stockton, California, bankruptcy, which suggested the rule is applied to each dissenting creditor.
The city also completely neglected to conduct a “dismissal analysis” to prove creditors fare better under the plan, according to Kieselstein. He showed a video clip of a deposition where Detroit Emergency Manager Kevyn Orr asserts that he reviewed a dismissal analysis from the city’s investment banker, Kenneth Buckfire, followed by another clip where Buckfire says that he performed no such analysis.
Their answers are “emblematic of the problem with this plan — very little work and a lot of talk,” Kieselstein said.
Alfredo Perez of Weil Gotshal & Manges LLP, who represents FGIC, spent his opening statement attacking the “cornerstone” of Detroit’s plan, the so-called grand bargain that calls for raising $816 million in state aid and private pledges to bolster the city’s pensions and prevent the 60,000-piece collection at the Detroit Institute of the Arts from being sold off.
Perez said the real value of the settlement to the city was just $455 million, a far cry from the $8 billion that the collection could be worth on the auction block. And the city has again provided little evidence to support its claim that any attempt to sell the collection would result in a messy court fight, instead blindly accepting the Michigan attorney general’s opinion that the city doesn’t have the right to sell it, he said.
“If the cornerstone fails, the plan fails,” Perez said.
Detroit’s Chapter 9 confirmation trial is scheduled to continue Thursday and throughout the month.
Detroit is represented by Jones Day, Pepper Hamilton LLP and Miller Canfield Paddock & Stone PLC.
Syncora is represented by Kirkland & Ellis LLP and McDonald Hopkins PLC. FGIC is represented by Williams Williams Rattner & Plunkett PC and Weil Gotshal & Manges LLP.
The bankruptcy is In re: City of Detroit, case number 2:13-bk-53846, in the U.S. Bankruptcy Court for the Eastern District of Michigan.
--Additional reporting by Andrew Scurria. Editing by Mark Lebetkin.
