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Holdout creditors in Detroit bankruptcy question secret order

(Reuters) - A group of holdout creditors is asking the federal judge overseeing Detroit historic bankruptcy case to unseal an unusual secret mediation order made last week so that they can understand the terms of mediation.

The "supplemental order regarding mediation confidentiality" was filed June 12 under seal, meaning its contents were not publicly disclosed.

Syncora Guarantee Inc and Financial Guaranty Insurance Co (FGIC), which insured Detroit bonds, and European banks that own Detroit pension debt said in a court filing late on Tuesday that they have a right, as mediating creditors, to view the order.

They noted that some parties in the case, including the city, have asserted "mediation privilege" in answer to the creditors' subpoenas and document requests.

"To understand whether any claimed privilege is valid and applicable and to determine how to respond, the creditors must first understand the parameters of, and the terms governing, the mediation," the filing stated.

Mediation ordered by U.S. Judge Steven Rhodes has led to several major settlements between creditors and Detroit, a city sinking under $18 billion of debt and other obligations.

But Syncora, FGIC and the European banks have been fighting Detroit over its plan to void $1.4 billion of pension debt sold in 2005 and 2006 as well as Detroit's settlement with two investment banks over interest-rate swaps associated with the debt. FGIC guaranteed payments on about $1 billion of the debt, which Detroit defaulted on last year. Syncora insured some pension debt and the swaps.

Melissa Jacoby, a professor at the University of North Carolina School of Law, said the fact that the mediation order was sealed is surprising, adding it seems improbable that "such an experienced and responsible judge" would have something in the sealed order that would compromise the rights of the excluded parties. As for the holdout creditors, they may be laying the foundation for appeals in the case, she said.

“Whether or not they are taking the optimal strategic path, I do think some of the financial creditors are positioning themselves for an appeal, and/or imposing more pressure to get a better settlement. It is not too late for the latter," Jacoby said.

Last week, Syncora, which faces more than $400 million in losses in the case, lashed out in court filings against judicial action and inaction, including recent public comments by a federal judge acting as a mediator in the case.

Judge Rhodes will preside over a hearing that starts in August to decide whether Detroit's plan to adjust its debts and exit the biggest municipal bankruptcy in U.S. history is feasible and fair to its creditors.   

The European banks asking for the order to be unsealed were Hypothekenbank Frankfurt AG, Hypothekenbank Frankfurt International S.A., Erste Europäische Pfandbrief- und Kommunalkreditbank Aktiengesellschaft in Luxemburg S.A.

(Reporting By Karen Pierog and Tom Hals; Editing by Peter Galloway)

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