Detroit’s Bankruptcy Judge Threatens Kirkland, Syncora With Sanction...

Detroit’s bankruptcy judge said he’s considering sanctions for law firm Kirkland & Ellis’s “highly personal attack” on two mediators in the city’s bankruptcy case.

In a 22-page opinion, Judge Steven Rhodes said that Kirkland lawyers, who represent bond insurer Syncora Guarantee Inc., called into question the “moral character” of U.S. District Judge Gerald Rosen and attorney Eugene Driker in court papers they filed earlier this month. And he made it clear that he wasn’t happy about it.

“In the 13 months since this case was filed, the Court has observed that the attorneys for the many parties have consistently and uniformly conducted themselves with the highest degree of professionalism and civility. That conduct has demonstrated that zealous advocacy does not require any less than that even when the litigation is high-stakes, complex and, at times, emotional. It has brought honor to those attorneys, the bar and our legal process. That record of achievement in this case came to an end [with Syncora’s court filing on Aug. 12].

In that filing, Kirkland’s James Sprayregen and five others said that Mr. Driker and Judge Rosen were “agenda-driven, conflicted mediators who colluded” against financial creditors like Syncora as they negotiated an $816 million deal that would increase what city retirees get repaid and also transfer the city’s valuable art collection to a charitable trust. They pointed out that Mr. Driker’s wife had been a longtime member of the Board of Directors of the Detroit Institute of Arts—a conflict too big for him to be able to negotiate a deal impartially, they argued.

But Judge Rhodes noted that the mediators were not in a position to “pick winners and losers” or collude as Syncora had alleged.

These allegations misunderstand the nature of mediation. Even assuming that the mediators are as powerful as Syncora argues that they are outside of this case, and even assuming that the mediators did suggest solutions and compromises during their mediation sessions, as their role requires, it is nevertheless the parties who decide whether and how to resolve their disputes.

Judge Rhodes also pointed out that the mediators helped negotiate deals with other financial creditors like UBS AG and Merrill Lynch Capital Services Inc., water and sewer bond investors and even other bond insurers like Ambac Assurance Corp and Assured Guaranty Corp.

Under federal law, a bankruptcy judge can “protect a person with respect to scandalous or defamatory matter.” Judge Rhodes gave the firm and Syncora until Sept. 12 to defend themselves against sanctions.

In a statement provided to Bankruptcy Beat, Mr. Sprayregen said that he and his colleagues “respectfully disagree” with the judge’s ruling.

“We still have concerns about the fairness of the mediation process,” he said.

Detroit’s lawyers also asked for Syncora to publicly apologize to Judge Rosen and Mr. Driker. Judge Rhodes declined but not “because a public apology is not warranted here,” he said in the opinion.

It is, and to Mrs. Driker, too. Rather, the Court concludes that a coerced and therefore insincere apology is not a true apology at all; it is not an acknowledgment of a mistake or an expression of regret.

The attack was part of Syncora’s larger fight against the city’s plan, which cuts $7 billion of the city’s debt. A trial on that plan is scheduled to begin next week.

With roughly $18 billion in debt, Detroit became the largest city in U.S. history to file for Chapter 9 municipal bankruptcy protection on July 18, 2013. The city’s tax revenue fell after the real-estate crash and the city’s population decline.

Write to Katy Stech at [email protected]. Follow her on Twitter @KatyStech.