By: Debra March
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Recently, in Syncora Guarantee Inc. v. City of Detroit, a federal district court held that the exception to the automatic stay contained in section 922(d) of the Bankruptcy Code did not apply to casino tax revenues pledged to secure the debtor’s swap obligations because the court opined that the swap agreements were not the type of special revenue bonds that the statute was intended to protect, and the debtor’s swap obligation was not a form of indebtedness owed to the swap counterparties or the swap insurer. In 2005, the City of Detroit (the “City”), in order to strengthen its finances and secure pensions, issued debt by forming two not-for-profit service corporations to issue Certificates of Participation (“COPs”) since state law prohibited the City from directly issuing more debt. These service corporations sold the certificates and gave the capital to the City to fund its pensions. The City needed to protect itself against the risk of floating interest rates of COPs because if the rates increased, the amount of interest the City would owe would also increase. In order to protect the City against this risk, the service corporations executed interest-rate swaps with two banks. Since the City had major debt problems, however, investors would not buy the COPs and the banks would not execute the interest-rate swaps without an insurer guaranteeing the City’s obligations. Syncora, a monoline insurer, promised to make payments under the certificates and the swaps if the City failed to do so. After the City defaulted, Syncora allowed the City to enter into a collateral agreement with swap counterparties. Pursuant to this agreement, the City gave swap counterparties an optional termination right and created a “lockbox” system the caused casino tax revenues to be paid into a designated bank account, which could be frozen if the City failed to make it swap payments. The swap counterparties could access this casino tax revenue by obtaining the City’s permission. In June 2013, Syncora notified the bank that the City had defaulted, and the bank froze the casino tax revenues in the account. The City sued in state court to recover the funds. After the state court ordered the bank to release the funds, Syncora removed the case to the federal district court. The district court then transferred the case to bankruptcy court after the City subsequently filed for bankruptcy in July 2013. In August 2013, the bankruptcy court decided that the casino tax revenue was property of the estate and protected by the automatic stay. In April 2014, the district court sua sponte stayed Syncora’s appeal of the bankruptcy court’s decision regarding the lock box funds until the Sixth Circuit ruled on whether the City was eligible to file. Subsequently, the Sixth Circuit granted Syncora’s request for a writ of mandamus and directed the district court to rule on Syncora’s appeal. Ultimately, the district court affirmed the bankruptcy court’s ruling.