A showdown between bond insurers and city attorneys in Detroit’s bankruptcy highlights the level of protection that secured bondholders have in Chapter 9 bankruptcy. Detroit attorneys argued that federal bankruptcy law trumps Michigan state law and that “secured” bonds could be impaired. From Chad Livengood of the Detroit News:
[Bond insurers] Ambac Assurance Corp., Assured Guaranty Municipal Corp. and National Public Finance Guarantee Corp. want [federal bankruptcy judge Stephen] Rhodes to order the city to segregate special property taxes Detroit voters approved for economic development, cultural and recreation projects and public safety facilities and resume paying bondholders the full amount owed.
‘These monies were raised solely for repaying the bonds and no other purpose,’ Guy Neal, attorney for National Public Finance Guarantee, said in court Wednesday.
But city attorney Bruce Bennett argued the federal bankruptcy code allows Detroit to sidestep state laws requiring the city to pay bondholders with designated funds while the city reorganizes its finances in Chapter 9.
The argument about the supremacy of federal bankruptcy law over state law comes forward again. More from Detroit News: