Detroit might sue swap counterparties -city attorney
DETROIT Dec 18 (Reuters) - A lawyer for Detroit said in U.S. Bankruptcy Court on Wednesday that the city might still pursue litigation over its interest-rate swap agreements, even though the city has maintained that the swap counterparties are secured creditors.
Attorney Thomas Cullen of law firm Jones Day made the statement to defend the city's decision to claim attorney-client privilege over internal memos discussing the legality of the swaps. The city used the swaps contracts to hedge interest rate risk on some of the $1.4 billion of pension debt that Detroit sold in 2005 and 2006.
U.S. Bankruptcy Judge Steven Rhodes, who is overseeing Detroit's historic bankruptcy case, pushed the city attorneys for information about the swaps deal. He said the information would be revealed during the litigation process if the city were to sue the swap counterparties.
"How can I decide whether this was a fair settlement without understanding what the city's assessment of the strength of its claims against the swaps and the COPs were?" asked Rhodes. "It's all going to come out."
COPs, or certificates of participation, are related to the city's pension debt.
Earlier in the hearing, Rhodes said "probably the most significant question in this trial" was what arguments Detroit was using to negotiate a termination of the costly interest-rate swaps.
Bond insurers that covered the swaps and payments on the pension debt, holders of the debt, Detroit pension funds and others objecting to the deal have argued it gives an unfair advantage to the counterparties over other creditors.
But the city has defended the move as a way to protect casino tax revenue used as collateral for the swaps, money it views as the Detroit's most reliable source of revenue.
Detroit Emergency Manager Kevyn Orr took the witness stand on Wednesday, the second day of a hearing over whether the court should approve $350 million in post-petition financing. Detroit intends to use a portion of the loan to satisfy a deal with swap counterparties UBS AG and Bank of America Corp's Merrill Lynch Capital Services to end the swap contracts at a lower cost to the city.
"Casino revenue is the single most stable revenue available to the city," Orr said on Wednesday. "Without it, the city could not operate."
And on Monday, the city's lead restructuring adviser, Kenneth Buckfire of Miller Buckfire, said litigation "was not a risk worth taking" because the issue could take years to resolve.
"At that time the city would be dead," Buckfire said in court.
In an Aug. 30 deposition related to the swaps deals, Orr repeatedly dodged questions lobbed by lawyers on whether the city would ever sue the counterparties.
The deal to end the swaps has emerged as a major component in Detroit's July 18 bankruptcy filing.
Wednesday's hearing is occurring as Detroit Mayor-Elect Mike Duggan and Orr have reached an agreement to share power, the Detroit News reported.