Detroit, hold-out creditors must go to bankruptcy mediation -judge

Tue Aug 26, 2014 1:19pm EDT

Aug 26 (Reuters) - Detroit and its major hold-out creditors were ordered on Tuesday into mediation, just a week before a key federal court hearing is to start in the city's historic bankruptcy case.

The move followed a Monday hearing before U.S. Bankruptcy Judge Steven Rhodes on Detroit's objection to bond insurer Syncora Guarantee Inc's allegations of improper conduct and conflicts of interest in the case by court-appointed mediators.

U.S. District Court Judge Gerald Rosen, the chief mediator in the case, set a Wednesday and possibly Thursday mediation session over $1.4 billion of certificates of participation (COPs) that Detroit sold in 2005 and 2006 to pay its pension liability.

The session will include bond insurers that guaranteed payment on the COPs - Syncora and Financial Guaranty Insurance Co.

The city, which defaulted on the debt in June 2013 and is seeking to void it altogether, is offering a recovery of only pennies on the dollar on the COPs in its plan to adjust $18 billion of debt. Meanwhile, the plan calls for much higher recoveries for city retirees resulting from the so-called grand bargain in which philanthropic foundations, the Detroit Institute of Arts and the state of Michigan would contribute money to ease pension cuts.

In an Aug. 12 court filing, Syncora lashed out at mediators, including Rosen, who brokered the grand bargain, which is also aimed at protecting the museum's artwork from being sold to pay Detroit creditors.

"The plain truth is that the mediators in this case acted improperly by orchestrating a settlement that alienates the city's most valuable assets for the sole benefit of one creditor group," Syncora's filing stated.

Detroit's attorneys countered by accusing Syncora of making "false and malicious allegations."

While the city has won settlements with most of its biggest creditors, Syncora, which has a $400 million exposure mainly from insuring the COPs and related interest-rate swaps, has emerged as Detroit's No. 1 opponent in the case.

The bond insurer has objected to almost every twist and turn in the complicated case. Syncora and FGIC filed motions last week to bar certain evidence and witnesses from the key confirmation hearing on Detroit's plan to adjust its debt and exit the biggest-ever municipal bankruptcy.

That hearing to determine if the plan is fair and feasible is scheduled to begin Sept. 2.

Syncora has also criticized the speed of the bankruptcy, filed in July 2013, and asked the court to send the city "back to the drawing board." (Reporting by Karen Pierog; Editing by Jan Paschal)