Judge drops hints as Detroit bankruptcy case nears finish line

By Karen Pierog DETROIT (Reuters) - The U.S. judge overseeing Detroit's historic bankruptcy dropped hints on Tuesday on what he wants to hear in the city's closing statements and what he may be scrutinizing in creditor settlements. The city's emergency manager also testified in federal court on Tuesday that a recent settlement with the last major holdout creditor was important to keeping elements of Detroit's debt adjustment plan together. "We are getting finality and stability going forward," state-appointed Emergency Manager Kevyn Orr told U.S. Bankruptcy Court Judge Steven Rhodes, referring to last Thursday's deal with bond insurer Financial Guaranty Insurance Co. [FGIC.UL] Rhodes said he wants the city to explain its settlements with creditors, its exit financing, the "reasonableness" of consultants' fees and the business justification for discrimination among classes of unsecured creditors in closing arguments scheduled for Oct. 27. Rhodes is conducting a hearing that started on Sept. 2 to determine if the plan for adjusting $18 billion of debt and exiting the largest-ever municipal bankruptcy is fair to creditors and feasible for the city to carry out. FGIC, which has a $1.1 billion exposure from insuring Detroit pension debt, would receive a 13 percent recovery in the plan under the settlement reached last week. Orr testified that without that settlement, the court might have rejected the restructuring plan and thereby scuttled all the settlements the city has forged. He added that Detroit's two retirement systems would have been under threat of lawsuits related to the pension debt. "It might well have exposed the retirement systems to a FGIC claim for a billion dollars," he said. Rhodes quizzed Orr about the value of part of the settlement in which FGIC would acquire and develop the Joe Louis Arena site and its parking lot into a hotel and retail space. Orr said the property has no current market value because the arena is set to be demolished, but various credits, tax increment financing and demolition money for the project add up to $22 million. The Detroit City Council will discuss the FGIC settlement in a closed session on Wednesday. Orr also testified that a Barclays Capital loan for exiting bankruptcy has been cut back to $275 million after Detroit reached a litigation settlement with a contractor, received a $5 million payment from Hilco Industrial Llc for a contract to hold auctions of city excess property and revised parking revenue projections. Earlier this month, Detroit Mayor Mike Duggan raised concerns when the loan amount increased to $325 million. Also on Tuesday, accounting consultant Guarav Malhotra told Rhodes the city stands to gain at least $20 million from selling copper wiring from public lighting that is being replaced. Malhotra, who works for Ernst & Young and testified on changes in the plan's projections due to the FGIC settlement, said Detroit "should be able to meet its operating expenses and meet its obligations." Rhodes also asked Orr, whose already-diminished role ends when the city emerges from bankruptcy, if he would have any personal involvement with a financial review commission intended to keep a check on city finances. "I don't know," Orr said. Rhodes expects to announce his decision the week of Nov. 3. Meanwhile, holders of about $1 billion of Detroit pension debt are considering signing off on the FGIC settlement, and could by Friday drop their objections to the city's restructuring plan, their lawyer Thomas Moers Mayer told Rhodes on Tuesday. The settlement had left dangling seven investment firms that hold most of the $1.1 billion Detroit certificates of participation (COPs) that FGIC had insured. Those firms had planned to opt in to the settlement but then hit a stumbling block in their negotiations last Wednesday. On Tuesday, Detroit filed only a draft of the final version of its bankruptcy plan, saying it needed time to integrate FGIC's settlement with a deal reached with another bond insurer, Syncora Guarantee Inc. Rhodes said the court-appointed expert witness on feasibility, Martha Kopacz, would testify Wednesday on the draft, but could return to the stand if the economics in the final plan are changed. Heather Lennox, a Jones Day attorney representing Detroit, said that mediation later on Tuesday would run nonstop until there is a final plan. (Additional reporting by Serena Maria Daniels in Detroit and Lisa Lambert in Washington; editing by Matthew Lewis)