Bond insurer creates setback for Detroit bankruptcy plan

April 4, 2014
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Detroit is continuing to negotiate with its creditors in order to form a plan to emerge from Chapter 9 bankruptcy. In the latest wrinkle, bond insurer the Financial Guaranty Insurance Company, argued in a lawsuit that Detroit’s plan would illegally discriminate against the city’s third largest group of creditors, according to The New York Times. This group consists of the investors who gave the city $1.4 billion for workers’ pensions almost 10 years ago. These investors bought “certificates of participation,” which the city argues constituted an effort on behalf of Detroit’s former leadership to avoid the limit on how much debt it could take on, according to the news source. Detroit is calling the investment a “sham transaction,” and plans to give investors an extremely low recovery rate in its bankruptcy plan. When it issued its plan of adjustment, the city considered the debt to be null and void, but in order to bring about a faster settlement, it is willing to honor 40 percent of the certificate holders’ claims if they will vote in favor of the plan of adjustment. “The city’s opportunism and revisionist history have broad repercussions, not the least of which being the impact on the funded status of the city’s retirement systems,” Financial Guaranty said in its suit. Meanwhile, pension holders are pursuing a different strategy. Under Emergency Manager Kevin Orr’s plan of adjustment for Detroit, fire and police pensioners will take a 10 percent cut and normal pensioners will take a 30 percent cut against what they are owed, according to MLive. Many of these pensioners feel that the plan is unfair, and dozens of handwritten letters have begun appearing in the federal bankruptcy court database. “We worked very hard and too many years to deserve a slap in the face like this,” wrote retiree Angela Newell. The basic tenet of any successful bankruptcy plan is that the financial pain has to be shared by all of the parties. It remains to be seen if the participants in Detroit’s bankruptcy will buy into this understanding.