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Tuesday, February 4, 2014

Detroit Claims that Its Financing Contracts Were Illegal

According to this article from The New York Times, Detroit filed suit on Friday, seeking to invalidate complex transactions that it used to finance its debts.  Detroit claims that the contracts at issue were illegal and are thus unenforceable.

Detroit at NightThe transactions brought in $1.4 billion for the city, but it now claims that they were an unlawful scheme to get around a ceiling on the amount of debt the city could take on and that it thus has no obligation to make payments on the "certificates of participation" issued in connection with the transactions.  Detroit is also seeking to cancel some related "interest-rate swaps" with two banks that obligate the city to pay tens of millions of dollars annually to the banks.  Just a few weeks ago, Detroit had offered to pay $165 million to get out of the contracts, but the bankruptcy judge rejected that as "too much money."  Paying nothing seems like a better deal for the city, if they can find a legal basis to get out of the obligation.  

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