Dec. 18 --U.S. Bankruptcy Judge Steven Rhodes today urged the city of Detroit to renegotiate a proposed debt settlement with two global banks, suspending a trial over whether to approve the deal and related bankruptcy financing. The decision had the dual effect of dealing a setback to a settlement that Detroit's bankruptcy attorneys described as crucial to the city's recovery -- while simultaneously giving the city ammunition to convince Bank of America Merrill Lynch and UBS to offer a better deal. The city, its creditors and Rhodes engaged in a two-hour tussle in court over the city's refusal to disclose its reasoning for not attacking the legality of a 2005 disastrous debt interest-rate transaction called "swaps." The exchange culminated in the indefinite suspension of a three-day trial in which Rhodes was being asked to approve the swaps settlement and $350 million in fresh bankruptcy financing from London -based Barclays . The city has argued that it must pursue the swaps settlement and bankruptcy financing to free up cash flow and reinvest in city services. The swaps cost the city about $50 million a year, diverting about 5% of the city's revenue to an expense that has nothing to do with city services. Jones Day attorneys, who represent the city in bankruptcy court, agreed to spend Thursday renegotiating the deal with Bank of America and UBS -- and reconvene Friday for a hearing to discuss their progress. "I would encourage that as strongly as I can," Rhodes said. In the midst of the trial this afternoon, a dispute erupted over whether the city should be forced to disclose its assessment of the legality of the swaps, which were brokered under Mayor Kwame Kilpatrick's administration in 2005 to secure a steady interest rate on a $1.4 billion pension debt deal. The Free Press reported in September that the swaps deal, brokered under former mayor Kwame Kilpatrick's administration, might have been illegal. While attorneys scrambled to respond to Rhodes' comments, Detroit emergency manager Kevyn Orr sat silently at the witness stand, not allowed to speak up because he's not acting as an attorney in this case. He was seen discussing the city's options during a recess with Jones Day attorney Corinne Ball and others. Rhodes suggested that the city's case to win approval for the swaps settlement was "more difficult" if it opted not to disclose why it is not challenging the legality of the swaps. Jones Day attorney Thomas Cullen responded, "I think one of the reasons we haven't disclosed those memoranda is because we may still sue the banks." But Rhodes wasn't satisfied, suggesting he wants to comprehend why the city agreed to pay 75 cents on the dollar to 82 cents on the dollar -- it would be about $230 million today -- to get rid of the swaps. The judge argued that 75 cents on the dollar is typically a great deal for creditors in bankruptcy. "Every transaction -- including this one -- that the city has entered into in connection with these swaps ... has been with a gun to its head," Rhodes said. "That has to stop." He added: "And I think it's part of a bankruptcy judge's role to carefully scrutinize a debtor's request to approve a settlement when that settlement was made with a gun to the debtor's head." Jones Day attorney Greg Shumaker responded: "No one likes to make a decision with a gun to their head, but a big, big reason why we believe (the settlement) is needed is to stabilize the city. That is exactly what we're trying to do. We know it's not ideal." Rhodes retorted: "Stabilizing the city is exactly what motivated the original swaps ... and look where we are." The city is currently treating the swaps as secured debt, meaning it has to be paid off. But if the city successfully challenged the swaps in court, it could save hundreds of millions of dollars. In testimony today, Orr asserted attorney-client privilege in refusing to publicize an internal legal memoranda on why the city chose not to sue the banks. Orr said the city considered lawsuits against UBS and Bank of America but decided it would be "costly" and it would take too long with no guarantee of success. He said it would be better to pay them off at a discount. "I don't get it," Rhodes interjected. "Just because you have the privilege doesn't mean you have to claim it." Rhodes added: "How can I decide whether this was a fair settlement without understanding the city's assessment of the strength of its claims against the" banks? Miller Buckfire investment banker Ken Buckfire testified Tuesday that if the city challenged the legality of the swaps, the banks would trap the city's casino tax revenue, which was pledged as collateral on the deal in 2009. Buckfire said that if the banks won the challenge, the banks would be owed up to all of the city's casino revenue for three to four years. "At that time, the city would be dead," Buckfire said. "It was not a risk worth taken." Orr testified today that the city must rid itself of the swaps to regain direct access to its casino tax revenue, which amounts to about $170 million per year. "Casino revenue is the single most stable source of revenue available to the city and without it the city couldn't operate," Orr said. ___ (c)2013 the Detroit Free Press Visit the Detroit Free Press at www.freep.com Distributed by MCT Information Services
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