District court: Detroit casino tax revenue part of bankruptcy estate

By Caroline Salls

Pittsburgh, July 11 – City of Detroit bond insurers Syncora Guarantee Inc. and Syncora Capital Assurance Inc. lost their appeal of a bankruptcy court order that said some casino tax revenues were property of the city’s bankruptcy estate and subject to the automatic stay imposed by Detroit’s Chapter 9 filing, according to an order filed Friday by the U.S. District Court for the Eastern District of Michigan.

The district court said Syncora argued on appeal that the casino tax revenues are not the property of the bankruptcy estate because the “lockbox” procedure under which the city deposited its swap obligation payments into one third-party custodial account in exchange for the release of the casino tax revenues deposited into another account, “is akin to an escrow arrangement that merely endowed the city with a contingent right to receive the deposited revenues.”

Syncora also maintained that the casino tax revenues are exempt from the automatic stay.

In affirming the August 2013 ruling by the U.S. Bankruptcy Court for the Eastern District of Michigan, the district court said Friday that “the bankruptcy court properly determined that the lockbox mechanism does not constitute an escrow arrangement” and that an exemption from the automatic stay is not applicable.

On July 3, the U.S. Court of Appeals for the Sixth Circuit ruled that the district court must rule on the Syncora appeal by July 14, before a ruling is made on confirmation of the city’s plan of adjustment.

“If the bankruptcy court confirms the city’s plan of adjustment before Syncora obtains judicial review of the merits of its appeal, Syncora may be left with no option but to seek an emergency stay of that plan,” the appeals court ruling said.

“The question presented in Syncora’s appeal – whether a substantial revenue stream is rightly considered property of the bankruptcy estate – is precisely the type of issue that should be reviewed before the bankruptcy court confirms the plan of adjustment.

“Without a final decision on that question, the city will not know what amount its coffers will contribute to the bankruptcy estate, the creditors cannot know the size of the pie they are being asked to share, and the bankruptcy court cannot be confident that it is considering a legally and financially viable plan.”

The appeals court said any party that wants to appeal the district court order should do so within three days of that decision so the appeals court can rule in a timely fashion.

Detroit filed for bankruptcy on July 18, 2013 under Chapter 9 case number 13-53846.

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