UPDATE 2-Battlelines drawn over creditor recoveries in Detroit bankruptcy hearing

Wed Sep 3, 2014 4:26pm EDT

(Recasts throughout with Syncora attorney's statements)

By Karen Pierog

DETROIT, Sept 3 (Reuters) - Detroit's chief detractor in its historic bankruptcy case said it is seeking a 75 percent recovery on its $400 million exposure after a federal judge pushed its attorney on Wednesday to reveal a figure.

Marc Kieselstein, an attorney with Kirkland & Ellis representing hold-out Detroit creditor Syncora Guarantee Inc, threw out the percentage after being asked for it repeatedly by U.S. Bankruptcy Judge Steven Rhodes.

The judge, who said Kieselstein made some powerful arguments in his 2.5 hour opening statement that blasted Detroit's plan to adjust $18 billion of debt, also insisted on knowing where Syncora believed the city would get that money.

The attorney mainly pointed to the potential sale or monetizing of pieces at the Detroit Institute of Arts - an idea the city took off the table under the so-called grand bargain.

That bargain, a key element in the debt adjustment plan, would tap $366 million pledged by foundations and $100 million from the Detroit Institute of Arts (DIA) over 20 years, as well as a $195 million lump-sum payment from the state of Michigan. The money would be used to ease pension cuts for city retirees and prevent the museum's collection from being sold to pay creditors.

Kieselstein said the grand bargain allows the city to favor one group of creditors over others, including the insurers, resulting in "very significant" discrimination among similarly situated creditors. Syncora and Financial Guaranty Insurance Co, which guaranteed payments on $1.4 billion of pension debt, are facing recoveries of just 10 cents on the dollar or nothing if the city succeeds in voiding the debt all together.

Bruce Bennett, a Jones Day attorney representing Detroit, cited complex mathematical comparisons earlier on Wednesday that he said show no more than mild differences in creditor recoveries under the plan.

"We think this is the city's last best chance and we think it will work," Bennett told the judge, who on Tuesday began a confirmation hearing on Detroit's plan that is scheduled to last for weeks.

Tossing the case out of bankruptcy court would result in creditors slugging it out in Michigan courts to squeeze money from the broke city, according to Bennett.

Kieselstein said the plan consistently skirts federal bankruptcy law and he presented snippets of taped sworn depositions of major Detroit officials to underscore Syncora's contention the city failed to conduct analyses on how creditors would fare should the bankruptcy be dismissed.

"Evidence will show extreme inattention to the obligation of minimizing creditor losses," he said, adding the city's case was predetermined to save some creditors, while damning others, including Syncora.

Detroit, which filed the biggest-ever Chapter 9 municipal bankruptcy in July 2013, has reached settlements with most of its major creditors, including the city's retired workers and two pension funds. Unlimited-tax general obligation bonds would see a recovery of 74 cents on the dollar - the largest recovery for bond-related creditors in the plan.

Kieselstein said Detroit was trying to justify uneven treatment of creditors by citing the financial needs of its retired workers even though Rhodes has said those needs are not relevant to the confirmation process.

Syncora and FGIC have pushed to sell or monetize the art, which was valued at $8 billion in one appraisal, to improve recoveries for all creditors.

Arthur O'Reilly, the DIA's attorney at law firm Honigman Miller Schwartz and Cohn, said the city does not have legal ownership of most of the DIA collection because a "great preponderance" of the art was given to the DIA Corp, a non-profit corporation responsible for museum operations. Case law and Michigan's Attorney General both support the DIA's contention that the art work cannot be sold to satisfy the city's debts, he added. (Reporting by Karen Pierog, additional reporting by Lisa Lambert in Washington; editing by David Gregorio, Bernard Orr)