The Inapplicability of Section 922(d): Interest Rate Swap Agreements Do Not Qualify as Special Revenue Bonds

By: Debra March

St. John’s Law Student

American Bankruptcy Institute Law Review Staff


Recently, in Syncora Guarantee Inc. v. City of Detroit,[1] 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.[2]  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.[3]  These service corporations sold the certificates and gave the capital to the City to fund its pensions.[4]  The City needed to protect itself against the risk of floating interest rates of COPs[5] because if the rates increased, the amount of interest the City would owe would also increase.[6]  In order to protect the City against this risk, the service corporations executed interest-rate swaps with two banks.[7]  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.[8]  Syncora, a monoline insurer, promised to make payments under the certificates and the swaps if the City failed to do so.[9]  After the City defaulted, Syncora allowed the City to enter into a collateral agreement with swap counterparties.[10]  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.[11]  The swap counterparties could access this casino tax revenue by obtaining the City’s permission.[12]  In June 2013, Syncora notified the bank that the City had defaulted, and the bank froze the casino tax revenues in the account.[13]  The City sued in state court to recover the funds.[14]  After the state court ordered the bank to release the funds, Syncora removed the case to the federal district court.[15]  The district court then transferred the case to bankruptcy court after the City subsequently filed for bankruptcy in July 2013.[16]  In August 2013, the bankruptcy court decided that the casino tax revenue was property of the estate and protected by the automatic stay.[17]  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.[18]  Subsequently, the Sixth Circuit granted Syncora’s request for a writ of mandamus and directed the district court to rule on Syncora’s appeal.[19]  Ultimately, the district court affirmed the bankruptcy court’s ruling.[20]

“Section 922 of the Bankruptcy Code both expands and modifies the provisions of section 362, which are incorporated into chapter 9 by section 901(a).”[21]  For example, section 922(d) modifies the automatic stay by providing that “[n]otwithstanding section 362 of this title and subsection (a) of this section, a petition filed under this chapter does not operate as a stay of application of pledged special revenues in a manner consistent with section 927 of this title to payment of indebtedness secured by such revenues.”[22]  While there is very little case law interpreting section 922(d), it is generally understood that “one of the main purposes of section 922(d) is to ensure ‘the protection in chapter 9 cases of a pledge of special revenues under revenue bonds.’” [23]  In re Jefferson County, one of the few cases to interpret section 922(d), held that certain revenues were “pledged special revenues” even though the revenues at issue were not in the actual possession of the bondholders.[24]  In Jefferson County, the court used section 902(2)’s definition of special revenue to determine whether the revenues at issue qualified under 922(d). Under section 902(a), some examples of special revenues include “receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide transportation, utility, or other services,” special excise taxes that are levied on certain activities, and “incremental tax receipts from the benefited area.”[25]  In Syncora, the district court held that section 922(d) was inapplicable because the casino tax revenues that secured the City’s swap obligation payments were not pledged special revenues under revenue bonds, and the City’s swap obligation was not a form of indebtedness issued to either the swap counterparties or Syncora.  Importantly, the litigation between Syncora and the City has not been limited to the issue of whether the casino tax revenues were property of the estate that was subject to the protections of the automatic stay.[26]  Indeed, Professor David Skeel has commented that Syncora’s litigation tactics amounted to a “‘scorched-earth policy.’”[27] Shortly after Syncora appealed the decision, Syncora settled with the City.[28]

The Syncora decision underscored that while 922(d) broadly covers certain pledged revenues, it does not cover all pledged revenues. As a result, revenues that are pledged to secure a municipalities’ obligations under a derivative contract, such as a swap agreement, will likely not be covered by the exception to the automatic stay contained in section 922.  Practically, this means that counterparties will not be able to enforce their rights under the derivative contract or continue to collect the revenue from the pledged source.






[1] Syncora Guar. Inc. v. City of Detroit, No. 13-CV-14305, 2014 U.S. Dist. LEXIS 94107, (E.D. Mich. July 11, 2014).

[2] Syncora Guar. Inc, 2014 U.S. Dist. LEXIS 94107, at *4–5 (holding that the “lockbock” procedure was not an escrow arrangement). 

[3] Id.

[4] Id.

[5] In re Syncora Guar. Inc., 757 F.3d 511, 513 (6th Cir. 2014).

[6] Id.

[7] Syncora Guar. Inc., 2014 U.S. Dist. LEXIS 94107, at *4–5.

[8] Id. Since the swaps provided that the City would pay the swap counterparties if interest rates were low to cover the investors’ lost interest and that the swap counterparties would pay the City if interest rates were high in order to compensate the City for the additional payments owed to the certificate holders, the swap agreements effectively converted the floating-rate debt into fixed-rate debt. Id.

[9] Id.

[10] Id.

[11] Id. at 513-14.

[12] In re Syncora Guar., 757 F.3d at 514.

[13] Id.

[14] Id.

[15] Id.

[16] Id.

[17] In re Syncora Guar., 757 F.3d at 514.

[18] Id. at 515.

[19] Id. at 517.

[20] Id. at 514–15.

[21] Collier on Bankruptcy ¶ 922.01, (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009), available at LEXIS, 6-922 Collier on Bankruptcy P 922.01.

[22] Id. at § 922(d).

[23] Syncora Guar. Inc, No. 13-CV-14305, at *5 (citing Collier on Bankruptcy, ¶ 922.05 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2009), available at LEXIS 6-922 Collier on Bankruptcy P 922.05).

[24]  In re Jefferson County, 474 B.R. 228 (Bankr. N.D. Ala. 2012) aff'd, BR 11-05736-TBB, 2012 WL 3775758 (N.D. Ala. Aug. 28, 2012).

[25] Id.

[26] Monica Davey & Mary Williams, One Judge to Decide the Future of Detroit, N.Y. Times, Aug. 31, 2014, at A9.

[27] Id.

[28] Lisa Lambert, Detroit Reaches Bankruptcy Deal with Fiercest Creditor, Chicago Tribune, (Sept. 15, 2014),