News / USA

    Law Firms See New Opportunity in Detroit

    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 restructuring, 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."

    You May Like

    US, Somalia Launch New Chapter in Relations

    US sends first ambassador to Somalia in 25 years; diplomatic presence and forces pulled out in 1993, after 18 US soldiers were killed when militiamen shot down military helicopter

    Brexit Vote Ripples Across South Asia

    Experts say exit is likely to have far-reaching economic, political and social implications for a region with deep historic ties to Britain

    Russian Military Tests Readiness With Snap Inspections

    Some observers see surprise drill as tit-for-tat response to NATO’s recent multinational military exercises in Baltic region

    Featured Videos

    Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
    Testing Bamboo as Building Materiali
    X
    June 27, 2016 9:06 PM
    For thousands of years various species of bamboo - one of the world's most versatile plants - have been used for diverse purposes ranging from food and medicine to textiles and construction. But its use on a large scale is hampered because it's not manufactured to specific standards but grown in the ground. A University of Pittsburgh professor is on track to changing that. VOA’s George Putic reports.
    Video

    Video Testing Bamboo as Building Material

    For thousands of years various species of bamboo - one of the world's most versatile plants - have been used for diverse purposes ranging from food and medicine to textiles and construction. But its use on a large scale is hampered because it's not manufactured to specific standards but grown in the ground. A University of Pittsburgh professor is on track to changing that. VOA’s George Putic reports.
    Video

    Video Orphanage in Iraqi City Houses Kids Who Lost their Parents to Attacks by IS

    An orphanage in Iraqi Kurdistan has become home to scores of Yazidi children who lost their parents after Islamic State militants took over Sinjar in Iraq’s Nineveh Province in 2014. Iraqi Kurdish forces backed by the U.S. airstrikes have since recaptured Sinjar but the need for the care provided by the orphanage continues. VOA’s Kawa Omar filed this report narrated by Rob Raffaele.
    Video

    Video Re-Opening Old Wounds in a Bullet-Riddled Cultural Landmark

    A cultural landmark before Lebanon’s civil war transformed it into a nest of snipers, Beirut’s ‘Yellow House’ is once again set to play a crucial role in the city.  Built in a neo-Ottoman style in the 1920s, in September it is set to be re-opened as a ‘memory museum’ - its bullet-riddled walls and bunkered positions overlooking the city’s notorious ‘Green Line’ maintained for posterity. John Owens reports from Beirut.
    Video

    Video Brexit Resounds in US Presidential Contest

    Britain’s decision to leave the European Union is resounding in America’s presidential race. As VOA’s Michael Bowman reports, Republican presumptive nominee Donald Trump sees Britain’s move as an affirmation of his campaign’s core messages, while Democrat Hillary Clinton sees the episode as further evidence that Trump is unfit to be president.
    Video

    Video New York Pride March A Celebration of Life, Mourning of Loss

    At this year’s march in New York marking the end of pride week, a record-breaking crowd of LGBT activists and allies marched down Manhattan's Fifth Avenue, in what will be long remembered as a powerful display of solidarity and remembrance for the 49 victims killed two weeks ago in an Orlando gay nightclub.
    Video

    Video NASA Juno Spacecraft, Nearing Jupiter, to Shed Light on Gas Giant

    After a five-year journey, the spacecraft Juno is nearing its destination, the giant planet Jupiter, where it will enter orbit and start sending data back July 4th. As Mike O'Sullivan reports from Pasadena, California, the craft will pierce the veil of Jupiter's dense cloud cover to reveal its mysteries.
    Video

    Video Orlando Shooting Changes Debate on Gun Control

    It’s been nearly two weeks since the largest mass shooting ever in the United States. Despite public calls for tighter gun control laws, Congress is at an impasse. Democratic lawmakers resorted to a 1960s civil rights tactic to portray their frustration. VOA’s Carolyn Presutti explains how the Orlando, Florida shooting is changing the debate.
    Video

    Video Tunisian Fishing Town Searches for Jobs, Local Development Solutions

    As the European Union tries to come to grips with its migrant crisis, some newcomers are leaving voluntarily. But those returning to their home countries face an uncertain future.  Five years after Tunisia's revolution, the tiny North African country is struggling with unrest, soaring unemployment and plummeting growth. From the southern Tunisian fishing town of Zarzis, Lisa Bryant takes a look for VOA at a search for local solutions.
    Video

    Video 'American Troops' in Russia Despite Tensions

    Historic battle re-enactment is a niche hobby with a fair number of adherents in Russia where past military victories are played-up by the Kremlin as a show of national strength. But, one group of World War II re-enactors in Moscow has the rare distinction of choosing to play western ally troops. VOA's Daniel Schearf explains.
    Video

    Video Muslim American Mayor Calls for Tolerance

    Syrian-born Mohamed Khairullah describes himself as "an American mayor who happens to be Muslim." As the three-term mayor of Prospect Park, New Jersey, he believes his town of 6,000 is an example of how ethnicity and religious beliefs should not determine a community's leadership. Ramon Taylor has this report from Prospect Park.
    Video

    Video Internal Rifts Over Syria Policy Could Be Headache for Next US President

    With the Obama administration showing little outward enthusiasm for adopting a more robust Syria policy, there is a strong likelihood that the internal discontent expressed by State Department employees will roll over to the next administration. VOA State Department correspondent Pam Dockins reports.
    Video

    Video Senegal to Park Colorful ‘Cars Rapides’ Permanently

    Brightly painted cars rapide are a hallmark of Dakar, offering residents a cheap way to get around the capital city since 1976. But the privately owned minibuses are scheduled to be parked for good in late 2018, as Ricci Shryock reports for VOA.

    Special Report

    Adrift The Invisible African Diaspora