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Detroit bankruptcy judge tosses hold-out creditor's charges

(Reuters) - A U.S. Bankruptcy Court judge late on Thursday removed allegations made by one of Detroit's remaining hold-out creditors against mediators in the city's historic municipal bankruptcy case.

Judge Steven Rhodes chastised Syncora Guarantee Inc for claiming in an Aug. 12 court filing that mediators, Chief U.S. District Court Judge Gerald Rosen and attorney Eugene Driker, are biased.

"The court finds that the allegations concerning the mediators ... are scandalous and defamatory," Rhodes' ruling stated.

It added that the bond insurance company's "highly personal attack" on Rosen was legally and factually unwarranted, unprofessional and unjust.

James H.M. Sprayregen, an attorney at Kirkland & Ellis representing Syncora said they "respectfully disagree with Judge Rhodes."

"We still have concerns about the fairness of the mediation process," he said in a statement. "These issues will be addressed more specifically in further court proceedings.”

In its court filing, Syncora lashed out at mediators, including Rosen, who brokered the so-called grand bargain, with allegations of improper conduct and conflicts of interest.

The grand bargain taps into money pledged by philanthropic foundations, the Detroit Institute of Arts and the state of Michigan to ease pension cuts for city retirees. The deal is also aimed at protecting the museum's artwork from being sold to pay Detroit creditors.

Meanwhile, the city, which defaulted on pension debt insured by Syncora and Financial Guaranty Insurance Co and is seeking to void it altogether, is offering a recovery of only pennies on the dollar to the bond insurers in its plan to adjust $18 billion of debt.

"The plain truth is that the mediators in this case acted improperly by orchestrating a settlement that alienates the city’s most valuable assets for the sole benefit of one creditor group," Syncora's filing stated.

Detroit's attorneys countered by accusing Syncora of making "false and malicious allegations" and asking Rhodes to strike those allegations from the court record. A hearing on Detroit's motion was held Monday.

Rhodes denied the city's request to also remove Syncora's assertion that if approved by the court, the grand bargain amounts to a "judicially sanctioned fraudulent transfer."

"The court concludes that Syncora’s fraudulent transfer argument is based on evidence resulting from discovery and is therefore timely," Rhodes said in the ruling.

The judge also declined Detroit's request for a public apology to the mediators from Syncora and its attorneys, who were given a Sept. 12 deadline to explain why they should not face sanctions.

While the city has won settlements with most of its biggest creditors, Syncora, which has a $400 million exposure mainly from insuring pension debt and related interest-rate swaps, has emerged as Detroit's No. 1 opponent in the case.

The bond insurer was ordered into another round of mediation with the city and others over the $1.4 billion of pension debt this week.

A hearing to determine if Detroit debt adjustment plan is fair and feasible is scheduled to begin on Tuesday.

(Reporting by Karen Pierog; Editing by Jeremy Laurence)

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