Detroit may sue banks if Bank of America and UBS don’t agree to a better settlement over a disastrous 2005 debt deal that helped plunge the city into Chapter 9 bankruptcy.
Jones Day lawyer Thomas Cullen told Judge Steven Rhodes Friday that the city has already notified the banks that it may sue if the banks don’t agree to settlement terms that are more favorable to the city.
“We are doing whatever is necessary to protect the city, its residents and its interests,” Cullen said.
Rhodes convened a hearing Friday to get a progress report on the city’s attempts to negotiate a new settlement on a complex pension debt interest-rate transaction called “swaps,” which cost the city about $50 million per year, or 5% of its revenue.
The city had previously proposed to pay 75 cents on the dollar to 82 cents on the dollar to UBS and Bank of America to get rid of the swaps, which would amount to about $230 million today. The money would come from a fresh round of $350 million in financing from London-based Barclays.
But Rhodes on Wednesday instructed the city to renegotiate the swaps settlement, saying it was too generous to the banks.
Cullen said Friday that the city will try to reach a new deal with the banks during Judge Gerald Rosen’s Detroit bankruptcy mediation sessions Monday and Tuesday.
If the talks collapse, the city may opt to challenge the legality of the original swaps transaction and its own 2009 decision to pledge its casino tax revenue as collateral on the swaps. Several creditors have challenged the legality of the swaps, saying the entire deal was bogus and the city shouldn’t have to pay a dime.
If the talks are successful, Detroit emergency manager Kevyn Orr would conduct a deposition with creditors on Dec. 31 — and an ongoing trial on whether Rhodes should approve the settlement would resume Jan. 3.
The city proposed conducting Orr’s deposition in Washington, D.C near his suburban home, prompting a protest from the city’s pension funds.
“They have suggested this in the past and we have suggested he should be here,” Detroit pension funds attorney Robert Gordon said. “I don’t think we should all have to go to D.C.”