U.S. Bankruptcy Judge
Rhodes announced his plans at the end of a daylong hearing over legal action bond insurers have taken against
The judge urged the city and bond insurance companies to try to negotiate a resolution to the dispute as the city is expected to prescribe deep cuts to bondholders in its plan of adjustment it expects to file this week.
"The decision here is most likely all or nothing," Rhodes said from the bench. "One side is going to win and the other side is going to lose. ... For you to maintain control of this, you've got two or three weeks to settle it."
"These monies were raised solely for repaying the bonds and no other purpose,"
But city attorney
Bennett said the bondholders and their insurers have no more right to be paid for their debts than pensioners and other unsecured creditors.
"There is no lien, there is no property interest, these creditors are like all others," Bennett told U.S. Bankruptcy Judge
Bennett argued that state laws about general obligation bonds being backed by unlimited taxes only provide "secured feelings to creditors that are concerned about things that could change inside a municipality.
In October, the city skipped
The insurance companies argue bondholders have a property right to the tax dollars that supersedes any contractual obligation that can be terminated in bankruptcy.
A team of six attorneys representing the three insurers argued in court Wednesday afternoon bondholders have a statutory lien on tax revenues designated by voters for limited uses.
"These are not covenants and promises. These are state statutory requirements and they weren't just put in place in on a whim," said
Rhodes' decision on the issue could affect
The hearing was held as the city's legal team prepares to file a debt-cutting plan of adjustment this week that is expected to prescribe deep cuts for bondholders.
During the morning hearing, Rhodes asked Bennett what happens to the special taxes voters have approved to pay for the bonds if he were to determine the bondholders are unsecured creditors.
"That's between the taxpayers and the city," Bennett replied.
Presuming the city exists bankruptcy, Bennett said taxpayers could sue the city in state court to get the extra property taxes removed from their bills. The issue "will be the subject of a risk factor" detailed in a disclosure statement to creditors that will be attached to the plan of adjustment, Bennett said.
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