Bond Insurer Says Detroit Pension Debt Lawsuit is Fraudulent

Financial Guaranty Insurance Company is challenging the city of Detroit, Michigan’s efforts to invalidated $1.45 billion in borrowings that were supposed to resolve unfunded pension liabilities. Instead, they have been named as one of the reasons that the city went into Chapter 9 bankruptcy. The bond insurer is asking a bankruptcy judge to turn down the adversary complaint brought by Detroit to nullify debt that is pension-related.

The city maintains that the debt was issued by its former administration’s mayor and violated state law. It contends that the debts, which were viewed as contract payments, were really concealed borrowings that improperly went beyond the municipal debt limits of the Home Rule City Act.

FGIC says that this stance is a switch for the city, which for years insisted that the obligations were valid. The bond insurer wants damages from Detroit and says the city deceived it so that FGIC agreed to guarantee the transactions.

If the city has its way, it would be able to repudiate the debts and give the payments to other creditors. FGIC would not be able to assert claims based on payouts on the defaulted certificates of participation (COPs).

The bond insurer says that the city is looking to put the burden of paying for the city’s pensionary duties on the entities that already paid for the transactions for pension funding. FGIC maintains that Detroit’s case has no merit.

The COPs were sold by the city to the public. Proceeds were given to retirement systems through shell companies: The Detroit Police and Fire Retirement Systems Service Corp. and Detroit General Retirement System Service Corp.

With its counterclaim, FGIC says that it either wants a declaration that the COPSs are valid or damages for misrepresentations it says Detroit made when pitching for insurance for the debt.

The city purportedly said that two law firms had said that the transactions were solid. Now, however, Detroit is claiming that a lot of the statements and representations it made related to the pension funding transactions were false. FGIC maintains that had it known this it wouldn’t have issued the polices. The insurer doesn’t believe the city should benefit from the policies, which received pristine ratings from credit rating agencies, while leaving FGIC with liability for the debt.

The SSEK Partners Group represents securities fraud victims in getting their money back. Contact our securities lawyers today.

FGIC Wants Damages In Detroit’s Bid To Undo $1.5B Debt, Law360, August 14, 2014

Bond insurer claims fraud in Detroit pension debt lawsuit, Reuters, August 14, 2014

Home Rule City Act (PDF)

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