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February 4, 2014

Detroit Sues Over Debt Deals

Detroit leaders are suing to invalidate several Wall Street deals that allowed the city to borrow more than $1.4 billion in 2005 for its underfunded pension plans, arguing that the agreements were illegal and shouldn’t be repaid.

“In a lawsuit filed in U.S. Bankruptcy Court in Detroit, city lawyers said the deals reached under a former mayor, Kwame Kilpatrick, led the city to borrow more than the state’s debt limit, resulting “in the creation of city debt that was not authorized” by state law. Michigan cities, with few exceptions, can’t borrow more than 10% of the value of the “real and personal property” within their borders.

“The lawsuit, against the service corporations and the trusts the city created to do the deal, asks Bankruptcy Judge Steven Rhodes to determine that Detroit can stop repaying the debt. When first extended in 2005, the debt marked the largest municipal-financing deal ever offered in Michigan, according to court papers.

“City officials turned a blind eye to the requirements of state law,” city lawyers said in the lawsuit, which was filed Friday.”

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Read full Wall Street Journal article here

 
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