(Adds background on bond insurers, comments from attorneys and judge)
DETROIT, Sept 2 A federal judge on Tuesday denied motions by two bond insurance companies that sought to block Detroit from presenting certain evidence at a key hearing on the city's plan to exit bankruptcy.
U.S. Bankruptcy Judge Steven Rhodes said that while he rejected the pretrial motions by Syncora Guarantee Inc and Financial Guaranty Insurance Co, the companies were not precluded from bringing up their objections during the confirmation hearing on Detroit's debt adjustment plan.
While Detroit has settled with most of its major creditors, including the city's two pension funds, Syncora and FGIC have emerged as its biggest hold-out creditors. Both guaranteed payments on $1.4 billion of pension debt the city is seeking to void and both are facing recoveries of just pennies on the dollar.
Attorneys for the insurers argued that their clients would be harmed during the hearing if Detroit were allowed to bring up matters that the insurers were blocked from investigating.
Those included mediation sessions that were subject to a court gag order and that resulted in the so-called grand bargain in which foundations, the Detroit Institute of Arts and the state of Michigan would contribute money to ease pension cuts for city retirees and protect the museum's collection from being sold to pay creditors.
Edward Soto, an attorney at Weil, Gotshal & Manges, representing FGIC, said his client would be hurt if the city were allowed to pick and choose what it wants to reveal from mediation.
"The city cannot be able to use this court's (mediation) order as a sword and a shield," he said, adding that any evidence that objecting creditors were not "fully able to explore in discovery" should be excluded from the trial.
The city contended that the insurers were seeking a remedy that would preclude it from introducing evidence regarding the results of mediation.
"The back and forth doesn't matter, the results matter," said Detroit's attorney Gregory Shumaker from Jones Day.
Rhodes said he planned to enforce his mediation confidentiality order during the hearing, adding he would take up issues related to mediation on a "question by question basis."
Other matters involved Detroit's contention that the pension debt was illegally issued and the possible financial hardships that retirees could face without recoveries they are set to receive under the city's plan.
Rhodes said that the impact of the plan on any individual creditor is not relevant to the plan's confirmation, once again adding he would take up specific questions on this during the confirmation hearing, which is scheduled to begin later on Tuesday. (Reporting By Karen Pierog; Editing by Tom Brown)