In Detroit's ruin, law firms see land of new opportunity

Sun Jul 21, 2013 8:14am EDT

A view of the Detroit skyline is seen looking south up Woodward Avenue in Detroit, Michigan July 19, 2013. REUTERS/ Rebecca Cook

A view of the Detroit skyline is seen looking south up Woodward Avenue in Detroit, Michigan July 19, 2013.

Credit: Reuters/ Rebecca Cook

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(Reuters) - With more than $18 billion at stake in Detroit's restructuring, big law firms and other advisers are clamoring to represent the city's many creditors - including some advisers not exactly known for municipal work.

The city, which filed the largest-ever U.S. municipal bankruptcy on Thursday, tapped high-priced lawyers from Jones Day, financial advisers from Ernst & Young and restructuring consultants from Conway MacKenzie, court papers show.

For creditors and related parties, there is clearly a lot at stake. That means bondholders, insurers, retirees and others are sure to be accompanied in court by platoons of lawyers.

Detroit owes more than $8 billion in bond debt, and the insurers likely on the hook for those costs have already retained big-name law firms to take their cases.

Federal Guaranty Insurance Co tapped Weil Gotshal & Manges, according to a source close to the matter, who declined to be named because the information was not public as of Saturday. An attorney for Weil declined to comment.

David Dubrow, a lawyer at Arent Fox, confirmed on Saturday that he has been tapped by Ambac Financial Group.

And, according to the court's electronic docket, Syncora hired Kirkland & Ellis, known for its corporate bankruptcy work, while Assured Guaranty retained Winston & Strawn, and National Public Finance Guarantee Corp hired Sidley Austin.

Bond insurers will play a key role in Detroit's case. While a portion of the city's $1.13 billion in general obligation bonds are secured by city assets, about $651 million of it is secured only by the ability to raise taxes. The city's emergency manager, Kevyn Orr, has said he will treat that portion of the debt as an unsecured claim.

That classification, which has been largely untested in federal courts, is likely to be hotly contested and possibly litigated by bondholders or their insurers.

Detroit also owes $5.7 billion in unfunded healthcare and other benefits to retirees, and has asked the judge to form a committee to look out for their interests. The Department of Justice may also appoint a committee of unsecured creditors in the case. Both moves would mean opportunities for professional advisers.

The city needs to negotiate new labor deals with unions, and its pension funds are underfunded by $3.5 billion, providing yet more opportunities for attorneys to advise creditors.

Chapter 9, the section of the bankruptcy code that governs municipal bankruptcies, is attractive for advisers, provided there is money to pay them. Unlike in Chapter 11, where billing is subject to court and regulatory review, Chapter 9 allows bills to stay between the adviser and its client.

In corporate restructurings, creditors, judges and the Justice Department pore over fees line by line, and can raise objections to unnecessary or overpriced items. Over the past few years, the Justice Department has ramped up its policing of high fees and has required bankruptcy lawyers to disclose more.

In municipal bankruptcies, fees could be subject to disclosure under the Freedom of Information Act, but they do not need to be reported publicly in court.

"You're used to being in a world where you have to explain yourself, and suddenly you don't anymore," said a bankruptcy lawyer, who asked not to be named.

The catch is that, unlike in corporate bankruptcies, there is no mechanism under Chapter 9 to make the bankrupt entity pay certain creditors' fees. And corporate bankruptcies are generally more lucrative for advisers because there is often more money to go around.

But with $18.5 billion in debt, Detroit is an outlier among municipal bankruptcies, where advisers see the potential for high fees without the hassle of having to justify them in court.

A NEW FRONTIER

In the past, only a small handful of professionals were known for having expertise in municipal restructuring. But a recent slew of Chapter 9 filings has yielded many new faces, and Detroit's bankruptcy will only continue that trend.

"Every time a case gets bigger, there are new players," said Richard Levin, a partner at Cravath Swaine & Moore who is representing the Detroit Institute of Arts in the restructuring.

Chapter 9 filings are rare, with only about 650 cases filed in the 75 years to 2012, mostly involving small municipal entities like sewer districts. But, the last three years have seen filings by the city of Harrisburg, Pennsylvania, Jefferson County, Alabama and the California cities of Stockton and San Bernardino.

And a concurrent lull in corporate bankruptcies has put strain on big restructuring firms like Weil Gotshal, which last month laid off 170 associates and support staff, driving professionals toward municipal work.

"Chapter 9 is not something I started out doing," said George South, a partner at DLA Piper who has become well-versed in the arena, representing creditor groups in the bankruptcies of both Harrisburg and Jefferson County.

PLENTY OF CONSTITUENCIES

In addition to general obligation bonds, Detroit owes nearly $6 billion in revenue bonds and $1.43 billion in pension certificates. Even though the bond insurers are likely to be the ones on the hook, the bondholders themselves will also "lawyer up."

Subsets of the holders may even band together to form committees if they feel a united front would better serve their interests, providing yet another potential path for advisers.

A number of other large law firms, including Brown Rudnick, Orrick Herrington & Sutcliffe and DLA Piper, are involved in the case or looking for ways in, according to people familiar with the matter.

Even if advisers lose out on big-money clients, Detroit's restructuring calls for a slew of projects and transactions that will require their own armies of professionals.

"There's all kinds of consulting opportunities," said Levin, whose client, the Detroit Institute of Arts museum, is at the center of a dispute over whether the city can sell the museum's art collection.

Orr, the emergency manager, has outlined in court papers his plans to create a new water and sewer management authority, transfer Detroit's Belle Isle Park to the state of Michigan, and restructure Coleman A. Young airport, which has not serviced commercial jets in 13 years but which the city must maintain to keep some federal subsidies.

Each of those moves will require lawyers, consultants and financial advisers to strategize the most cost-efficient execution, said Kenneth Klee, a Chapter 9 expert and bankruptcy lawyer at Klee Tuchin Bogdanoff & Stern.

"Chapter Nines require complete expertise in the area of municipal finance," Klee said. "If you only have bankruptcy expertise, that's not enough."

Eventually, hedge funds and other investment vehicles could find ways into the case, as Orr has stressed the importance of new investment, particularly with respect to the proposed new water and sewer authority, which could finance its operations with new bond issuance.

The case could be a boon for smaller law firms, too.

While large, corporate creditors are apt to tap similarly colossal law firms with whom they have preexisting relationships, smaller or locally-based stakeholders may opt to hire attorneys native to Detroit.

"There are a lot of talented lawyers in Detroit," Levin said. "I would think pensions and unions, for example, might opt for those guys."

(Reporting by Nick Brown; Edited by Martin Howell)

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Comments (18)
lex_70 wrote:
Welcome to the INCORPORATED STATES of AMERICA.

So let me get this right…. the US Government will bail out banks to the tune of:
$4.6 trillion Gross US Government Bailout Outlays
$3.3 trillion Net US Government Bailout Outlays (after repayment), $16.9 trillion US Government Bailout Guarantees

but they let one of its most famous cities go bankrupt and it’s public servants lose their benefits? Obviously they intend on selling off the PUBLIC assets to private interest.

What is wrong with you people of America? What is your major malfunction? When did you become a bunch of doormats?

Jul 21, 2013 8:28am EDT  --  Report as abuse
freddykruger wrote:
i cannot understand how our so called leaders in the USA will send billions of dollars in foreign aid while letting this happen to a once great US city! We also spend billions to explore space and the universe where there is no evidence of life, but no democrats or republicans are not caring or are outrage that the rich by extracting money by unscrupulous mean from the US economy are causing the destruction of our cities!These rich don’t care! I hope as on of the working poor that we completely vote them out. I don’t called this country incorporate. I call it United States of Thieves! There needs to be panic at voting time to vote, vote, vote the rich out everywhere! This is only power we have got left, and this is why they are tampering with the voting rights act and voter I.D. laws! Just like it is a felony to make a false claim that a business is using illegal immigrants, it needs to be a felony to make a false claim that there are is more than a few cases of illegal voting by dead or not existing people!there was a study done under the G.W. administration the there was about 7 instances in the history of voting for voter fraud. How about the many, many acts of government fraud. Of government waste and wrong doing on local, state and federal level. VOTE THEM OUT!

Jul 21, 2013 9:02am EDT  --  Report as abuse
xyz2055 wrote:
Where ever you see pain, suffering or financial strife…you are certain to see lawyers doing lazy circles above that situation. Like a flock of vultures.

Jul 21, 2013 9:30am EDT  --  Report as abuse
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