Detroit hold-out creditor lashes out at courts

June 11 Wed Jun 11, 2014 3:00pm EDT

June 11 (Reuters) - As Detroit's historic bankruptcy churns toward a courtroom showdown later this summer, one hold-out creditor has shifted its line of attack from the city to the courts and judges who are charged with resolving the case.

Syncora Guarantee Inc, one of the last major creditors still actively opposing the city's bankruptcy plan, lashed out in court filings this week against judicial action and inaction, including recent public comments by a federal judge acting as a mediator in the case.

The bond insurance company, which is on the hook for potentially more than $400 million in losses, filed an objection on Tuesday over being singled out by U.S. Bankruptcy Court Judge Steven Rhodes on Monday for making "unreasonable" demands for city documents that contributed to his decision to delay the start of the key hearing on Detroit's debt adjustment plan to Aug. 14, from July 24.

On Wednesday, Rhodes rejected Syncora's objection, noting the filing was outside of bankruptcy court procedures.

In its objection, Syncora complained that court action, including "multiple press conferences by the impartial mediation team," was leaving the impression that the court has taken Detroit's side in an anti-Wall Street public relations campaign targeting Syncora and other creditors "who are asserting their legal rights."

"But when the court adds its voice to that chorus, it sanctions the harsh tactics the city has employed against Syncora and pushes further away the hope of a consensual plan," Syncora said.

U.S. District Judge Gerald Rosen, the lead mediator in Detroit's case, has spoken at two press conferences -- on June 3 with Michigan Governor Rick Snyder and legislative leaders after the passage of a $195 million state contribution for Detroit retirees and at the Detroit Institute of Arts' announcement on Monday of a $26 million commitment from automakers for the museum's $100 million share of the so-called grand bargain for retirees.

Rosen prefaced his remarks by acknowledging the rarity of a judge speaking at a press conference and then went on to praise the parties, including philanthropic foundations that pledged about $366 million, for coming up with money to ease pension cuts on Detroit's retirees and protecting the museum's art work from being sold to pay the city's creditors. At the DIA event, he also cited leaders of Detroit retiree associations who are supporting the city's plan to adjust $18 billion of debt and exit the biggest municipal bankruptcy in U.S. history.

Rosen did not mention any hold-out creditors, but said mediation was ongoing in the case.

Judges have gotten themselves in trouble for speaking publicly about their cases. U.S. Judge Nancy Gertner in Boston was removed from a case involving busing of school children after discussing it with the press. A federal appeals court warned the judge overseeing Anna Nicole Smith's bankruptcy that he risked the appearance of impropriety for initiating an in-court press conference during the case.

"It was very, very unusual," said Eric Brunstad, an attorney with Dechert LLP, of the judge in Smith's bankruptcy. "It's really important from a public confidence and fairness perspective that a judge be perceived as impartial."

But Brunstad said mediators operate in a different context, and even when the mediator happens to be a judge, they aren't deciding the case.

"If it's true mediation, it's voluntary and you don't have to agree," said Brunstad.

Syncora also took aim at the U.S. District Court in Detroit, contending it was stalling action on the insurer's Sept. 10 appeal of Rhodes' ruling that allowed Detroit access to casino revenue even though the city defaulted on $1.4 billion of pension debt in June 2013.

Syncora guaranteed payments on some of the debt and related interest-rate swap agreements. The company asked a federal appeals court on Tuesday to force the district court to rule on the appeal before the bankruptcy case is resolved and money, including casino revenue, is dispersed.

(Reporting by Karen Pierog; Additional reporting by Tom Hals and Nick Brown. Editing by Dan Burns and Leslie Adler)

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