Meet Detroit’s leading bankruptcy opponent (and it’s not pensioners)

April 28--An obscure but combative insurance company deeply entangled in Detroit's financial problems has become one of the city's fiercest foes in Bankruptcy Court, presenting a stiff legal obstacle to the city's restructuring plans.

The bond insurer -- a Bermuda-based holding company generally referred to as Syncora -- has good reason to fight: Its own existence was believed to be at stake at one point during the bankruptcy.

Syncora could lose nearly a quarter-billion dollars on Detroit's bankruptcy, according to financial filings reviewed by the Free Press -- in large part because it guaranteed payments on a $1.4 billion debt deal engineered in 2005 by then-Detroit Mayor Kwame Kilpatrick that the city is now trying to completely wipe out.

Syncora has filed objections to virtually every major Detroit restructuring proposal so far -- with the notable exception of the city's eligibility for bankruptcy.

A few weeks ago, it delivered a subpoena seeking a crush of documents from the Detroit Institute of Arts -- part of its ongoing strategy to force the city to consider selling off the museum's prized artwork to pay down debts.

Syncora advisers say the company is being unfairly treated by Detroit and contends the city is moving hastily at the expense of creditors and residents.

"What we're doing is advocating for the highest and best reorganization and rehabilitation of the City of Detroit," said Todd Snyder, a Rothschild financial adviser for Syncora, in an interview.

'Let's keep the war analogies to a minimum'

The city, on the other hand, doesn't view Syncora's approach as altruism.

In one court filing, the city accused Syncora of orchestrating a "scorched earth litigation strategy," a reference that derives its origin from Stalin's decision to burn the Russian countryside during World War II under the premise that destroying everything was the key to victory against Hitler.

Detroit bankruptcy attorney Robert Hertzberg of Pepper Hamilton said Syncora is deploying a "carpet-bombing approach," another military reference denoting a high level of destruction.

At other times, the city has accused Syncora of launching a legal "ambush," taking a "schizophrenic view," and maintaining an "exceedingly adversarial" approach.

Syncora attorney Stephen Hackney of Kirkland & Ellis said he has a duty to defend his client, saying it's "unhealthy" for the city to suggest "we are committing war crimes."

"I have to take exception to the notion that Syncora is a carpet-bomber, that we are a terrorist," Hackney said at a court hearing earlier this month. "There are many times when you are asserting your legal rights that it may not be popular to do so, but the way the legal system works is you have to assert those rights."

Rhodes, who has generally rejected Syncora's arguments during the bankruptcy, sided with Hackney.

"Let's keep the war analogies to a minimum if not eliminate them from our discussion altogether," Rhodes said. "Phrases like 'scorched-earth,' 'nuclear' and 'carpet-bombing' really are not necessary and appropriate in the courtroom context."

High stakes

As several major creditors -- including bondholders and pensioners -- resolve their disputes with Detroit, Syncora may soon become one of the last remaining major creditors trying to block Detroit emergency manager Kevyn Orr's bid to extract the city from bankruptcy by October.

The company's Syncora Capital Assurance unit guaranteed payments on about $206 million of Kilpatrick's pension debt deal and had already been forced to pay $66 million to cover investors' losses by the end of 2013, according to public financial records.

Syncora Holdings, the parent company, whose stock is hovering in the $2 range, has warned that Detroit's bankruptcy roadmap could exceed the reserves it has set aside to pay investors' losses.

"Syncora has a lot at stake in this case, so one can understand why they're devoting the resources to put up a strong fight," said Melissa Jacoby, a University of North Carolina law professor who has listened to audio files of all the major court hearings.

By one count, the city's restructuring proposal would pay Syncora6 cents on the dollar for its Detroit debt, compared to pensioners and bondholders that will endure much smaller cuts. Police and fire pensioners, in fact, would get no monthly pension cuts under a deal the city's pension boards struck with Orr.

"We actually believe we've been treated hyper-aggressively by the city," said James Sprayregen, a Kirkland & Ellis attorney overseeing Syncora'sDetroit bankruptcy case, in an interview. "We've been treated football fields or universes differently than the other unsecured creditors. That's incredibly unfair in our view."

The insurer has a close ally in bond insurer Financial Guaranty Insurance Co. (FGIC) -- and jointly they have pushed the city to consider selling off DIA property to pay debts.

But it's Syncora whose aggressive legal strategy has drawn the harshest rebukes from Detroit bankruptcy attorneys and even drew laughter from Rhodes, who predicted the insurer's objection to a recent debt settlement before it even happened.

In an interview, Orr declined to speculate about Syncora's legal strategy.

"They certainly have filed a lot of objections," Orr said. "As Judge Rhodes said, they're going to object to everything perhaps. You know what? That's their right."

Jacoby said Syncora's attorneys have a responsibility to their client to fight aggressively, but with a caveat.

"The idea of taking such a strong stand can sometimes backfire," she said. "So there is that risk."

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Sprayregen said Syncora simply deserves fair treatment and that the insurer is not ruling out a consensual resolution to the case that would allow the city to plunge money into public services.

"Obviously we would not deny that Detroit has severe and difficult issues, some of which need to be addressed through significant reinvestment," he said. "That doesn't take away from the fact that you need to treat creditors fairly. There is no balance whatsoever."

The rivalry between Orr's high-profile team of Jones Day lawyers and Syncora'sKirkland & Ellis attorneys has given birth to some of the bankruptcy's lighter moments.

When Syncora's Hackney recently returned to court after missing a few weeks of proceedings, he ambled up to Jones Day'sDavid Heiman to shake hands.

"I'm back," Hackney said, smiling.

"Sent chills up my spine," Heiman replied with a smirk.

They shared a laugh -- ever so briefly -- and then resumed their court battle.

Sour history

Detroit's livelihood and Syncora's financial health are pegged to the largest municipal bankruptcy in history -- with Judge Rhodes retaining significant influence over the outcome. Rhodes may ultimately decide whether the city's proposed treatment of Syncora is fair.

At the heart of their dispute is the Kilpatrick debt deal -- a scuffle that dates back to the days before Detroit filed for Chapter 9 bankruptcy on July 18.

The insurer, in fact, helped tip Detroit into bankruptcy after attempting to seize Detroit's casino tax revenue, which is collateral on the interest-rate swaps Kilpatrick's administration purchased to secure a steady interest rate of 6% on the $1.4 billion pension certificates of participation debt deal.

So far in the bankruptcy, Syncora has fought all three proposed swaps settlements between Detroit and UBS and Bank of America Merrill Lynch over the swaps.

But Rhodes has already signaled that he believes the $1.4 billion pension debt deal Syncora insured -- and the related interest-rate swaps it also insured -- were probably illegal. He approved an $85 million settlement between Detroit and UBS and Bank of America</org> over the swaps.

Now, Detroit wants to completely eliminate the underlying $1.4 billion pension debt, calling the entire transaction a "sham."

A success for Detroit would slam Syncora's balance sheet.

The insurer could lose as much as $206.2 million on the pension debt deal and another $34.4 million on Detroit's general obligation bonds, according to a Dec. 31 financial filing.

To mitigate creditor losses, Syncora, FGIC and several European banks want the city to consider selling art instead of accepting a "grand bargain" in which the state of Michigan, nonprofit foundations and the DIA would contribute $816 million over 20 years to reduce pension cuts and allow the DIA to spin off.

The rivalry

Syncora's bid to block Detroit's bankruptcy restructuring strategy has come in many forms. It tried to block funding for Detroit's street lighting overhaul, sought to prevent Detroit from obtaining a loan to start reinvesting in services and has repeatedly tried to delay the bankruptcy.

The city's Hertzberg exuded frustration during an April 10 hearing over the city's proposed swaps settlement after Syncora claimed the city had not been forthcoming in providing documents ahead of the hearing.

Hertzberg said Syncora "has taken a pretty schizophrenic view in this case" and accused Syncora of "an ambush."

"I'm impressed I managed to ambush somebody by requesting something they refused to give me," Hackney retorted.

When Orr took the witness stand, the spat between the city and Syncora took the form of insincere pleasantries.

Syncora's Hackney greeted Orr and reminded him that he had enjoyed the "pleasure" of interrogating Orr in previous depositions.

"I wouldn't call it a pleasure, but it's nice to see you again," Orr responded.

"No offense," Hackney said.

Contact Nathan Bomey: 313-223-4743 or [email protected]. Follow him on Twitter @NathanBomey.

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