Aug 14 A bond insurance company fired back at
Detroit's attempt to invalidate $1.45 billion of pension debt,
claiming in a court filing late Wednesday that it was
"fraudulently" led to guarantee payments on the debt.
Financial Guaranty Insurance Co, which insures more than $1
billion of the city's pension certificates of participation
(COPs), filed a counterclaim against Detroit asking the U.S.
Bankruptcy Court to dismiss the city's lawsuit seeking to void
If the city prevails in its lawsuit, FGIC, one of Detroit's
biggest hold-out creditors, asked the court for restitution and
damages from the city or its pension funds that would be
determined at a trial.
Detroit, which is working its way through the biggest
municipal bankruptcy in U.S. history, filed the lawsuit in
January, claiming the sale of the COPs in 2005 and 2006 violated
borrowing limits imposed on the city under Michigan law. The
COPs were issued during the term of former Mayor Kwame
Kilpatrick, now in prison on federal corruption charges.
At a Thursday court hearing on the COPs, Robert Hertzberg,
an attorney representing Detroit, said the city will probably
seek to dismiss FGIC's counterclaims.
FGIC said it agreed to issue insurance policies that earned
the COPs triple-A ratings based on representations from the city
and its lawyers that the debt was a legal vehicle for Detroit to
raise money for its constitutionally mandated obligation to fund
its two employee retirement systems.
"The city now alleges in its complaint that the many
representations and statements it made in connection with
pension funding transactions were false," FGIC's filing stated.
"The city intended for its fraudulent statements to induce
FGIC's issuance of the policies."
FGIC also filed counterclaims against the city for
misrepresentation and unjust enrichment, noting that "it would
be inequitable for the city to retain the benefits it received"
in the event the debt was invalidated.
Shortly before filing for bankruptcy in July 2013, the city
defaulted on the COPs, leaving FGIC and another insurer, Syncora
Guarantee Inc, to make debt service payments to bondholders.
Syncora, which has a $400 million exposure, and FGIC have
emerged as Detroit's biggest hold-out creditors after the city
entered settlements with other major creditors, including its
pension funds and various labor unions. A hearing on Detroit's
plan to adjust $18 billion of debt and exit bankruptcy is
scheduled to begin Aug. 29.
In its latest version of the plan, Detroit indicated that
the bankruptcy case could end before its COPs lawsuit is
resolved. If the COPs are voided, a litigation trust created in
the plan would allocate money the city would have used to pay
off the debt to retiree healthcare and to certain general
obligation bondholders and creditors.
Detroit hedged interest rate risk on some of the COPs with
swaps that ultimately proved costly to the city when rates fell
and the city's credit ratings dropped.
Judge Steven Rhodes, who is overseeing the bankruptcy, in
April approved a swaps settlement under which Detroit would pay
two investment banks $85 million.
(Reporting by Karen Pierog; Editing by Dan Grebler)