03 July 2014

Syncora Wins One

Syncora Guarantee, Inc., for those who may not have read my post here, insured a substantial amount of Detroit's bond debt and itself stands to become insolvent if the city's current plan of adjustment is confirmed. Syncora also played another role in Detroit's labyrinthine finances; it guaranteed Detroit's "certificates of participation" (COPS) and related credit-swaps in connection with the city's borrowing on the security (collateral) of its $500,000 daily take of casino taxes.

The details of the COPS and swaps need not detain us. Suffice it to say that they represent the municipal equivalent of payday lending. They served to circumvent Michigan's limits on municipal borrowing and were used to fund the city's grossly underfunded pension debt.

To make an already too-long story short, when Detroit filed bankruptcy the U.S. Bankruptcy Court held that Detroit could keep the casino taxes instead of paying them over to Syncora. Syncora, not surprisingly, appealed to the U.S. District Court which immediately--and ever since--has done precisely ... nothing. By refusing to rule for or against Syncora, the District Court has put it behind an 8-ball. In other words, if Detroit's plan, which is premised on the city getting to keep the casino money, is confirmed, then Syncora's appeal will be moot.

This is the judicial equivalent of running out the clock, which is fine in football (and futbol) but violates all notions of due process when it comes to legal rights.

Back to the story. So what's Syncora to do? File a writ of mandamus with the Sixth Circuit Court of Appeals, that's what. A writ of mandamus is a request to a yet higher court in the federal system to order the lower court to get off the can, to fish or cut bait if you will. Only once in practice did I come close to seeking a writ of mandamus because one expects that, if granted, the lower court will simply rule against the position of the party getting the higher court's order. And, indeed, that might happen to Syncora but then it at least gets to appeal that decision to the Sixth Circuit rather than getting screwed by the District Court's inaction.

Today the Sixth Circuit ruled 3-0 in Syncora's favor and ordered the District Court to decide by July 14. While the higher court made clear it was not ruling on the merits of Syncora's appeal, only getting the lower court to act, I came away from reading the decision with the faint impression of concern for the substance of Syncora's case

I fully expect the District Court to rule against Syncora on its right to the casino taxes but there's at least a plausible chance that the Sixth Circuit will come to a different conclusion. Which means ... that as of today, Syncora's bargaining position with Detroit over the plan has improved. In other words, the stakes in the game of Chicken (download my article Municipal Bankruptcy: When Doing Less is Doing Best comparing Chapter 9 bankruptcy to the game of Chicken here) have increased and thus, so have the chances of a negotiated settlement.

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