July 1 A federal judge has blocked an initial
attempt to stop Detroit from trying to invalidate $1.4 billion
of debt sold to boost funding for the city's two retirement
U.S. Bankruptcy Judge Steven Rhodes on Monday denied a
motion by two service corporations created for the 2005 and 2006
debt sales that asked the court to dismiss the city's lawsuit.
In his ruling, Rhodes noted the pension debt was "a
significant factor in later forcing the city into bankruptcy"
and that the corporations were the proper defendants in the
The Detroit General Retirement System Service Corporation
and the Detroit Police and Fire Retirement System Service
Corporation had argued that because the city has labeled them as
sham entities created to get around a Michigan debt limit law
the city could not sue them.
"While the city does allege that the service corporations
were created to the unlawful purpose of enabling the city to
avoid debt limitations imposed by state law, nowhere in the
pleadings does the city allege that the service corporations are
not distinct and separate legal entities," Rhodes' ruling said.
Detroit filed the lawsuit on Jan. 31, claiming that because
the pension certificates of participation (COPs) were illegally
sold the court should void the city's obligation to pay them
In fact, Detroit defaulted on the debt in June 2013, just
weeks before it filed the biggest municipal bankruptcy in U.S.
history. Earlier this year, the city won court approval to
settle costly interest-rate swaps related to the COPs.
Rhodes also ruled Financial Guaranty Insurance Co, which
guaranteed payments on some of the COPs and European banks that
purchased some of the debt, can intervene in the lawsuit seeking
to void the debt.
His ruling came on the same day the city and a group of
hold-out creditors, including Syncora Guarantee Inc, were to
attend a court-ordered mediation session over the COPs.
(Reporting by Karen Pierog; Editing by Bernard Orr)