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

Kurdish Party Pushes Political Gamble to Run in Turkey Poll

HDP announces it will run as political party instead of fielding independent candidates in June election, but faces tough 10 percent threshold More

Twitter Targets Islamic State

New research shows suspending Twitter accounts of Islamic State, its supporters has been effective; group, its backers are facing 'significant pressure,' says terrorism expert More

Video Former Sudan 'Lost Boy' Becomes Chess Master in NYC

Majur Juac made the leap from being a refugee in Africa to a master chess champion in US, where he shares his expertise with students More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
NASA Monitors Earth’s Vital Signs From Spacei
X
Rosanne Skirble
January 27, 2015 5:05 PM
The U.S. space agency, NASA, is wrapping up its busiest 12-month period in more than a decade, with three missions launched in 2014 and two this month, one in early January and the fifth scheduled for January 29. As VOA’s Rosanne Skirble reports, the instruments being lifted into orbit are focused on Earth’s vital life support systems and how they are responding to a warmer planet.
Video

Video NASA Monitors Earth’s Vital Signs From Space

The U.S. space agency, NASA, is wrapping up its busiest 12-month period in more than a decade, with three missions launched in 2014 and two this month, one in early January and the fifth scheduled for January 29. As VOA’s Rosanne Skirble reports, the instruments being lifted into orbit are focused on Earth’s vital life support systems and how they are responding to a warmer planet.
Video

Video Saved By a Mistake - an Auschwitz Survivor's Story

Dagmar Lieblova was 14 when she arrived at Auschwitz in December 1943, along with her entire Czech Jewish family. All of them were to die there, but she was able to leave after several months due to a bureaucratic mix-up which saved her life. Now 85, with three children and six grandchildren, she says she has a feeling of victory. This report by Ahmad Wadiei and Farin Assemi, of RFE/RL's Radio Farda is narrated by RFE’s Raymond Furlong.
Video

Video Weekly Protests in Korea Keep Japanese WWII Atrocities Alive

Every week in Seoul protesters gather in front of the Japanese Embassy to demand an apology and reparations from Tokyo for the thousands of South Korean women who were forced into prostitution during World War II. Although this year marks the 70th anniversary of the end of the war, these protestors have helped keep the issue of comfort women alive and made it difficult for Japan to move beyond its past wartime atrocities. VOA's Brian Padden reports from Seoul.
Video

Video Exercise: New Prescription for Parkinsons Disease

Exercise could be the new prescription for Parkinson's Disease, a progressive disorder of the nervous system that affects movement. More than six million people worldwide suffer from Parkinsons and they're traditionally treated with medication and surgery. Shelley Schlender has more.
Video

Video Brussels Shaken as New Greek Leader Challenges Europe’s Austerity Drive

Greece’s youngest-ever prime minister, 40-year-old Alexis Tsipras, was sworn in Monday after his victorious far-left Syriza party entered a coalition with far right rivals. Tsipras says he will restore dignity to Greece by ending spending cuts. So begins a new chapter for the country at the epicenter of Europe’s economic crisis - a change that has sent tremors across the continent, as Henry Ridgwell reports from London.
Video

Video Obama Urges Closer Economic Ties During Historic India Visit

U.S. President Barack Obama says the United States and India must do better to capitalize on untapped potential in their economic relationship - by removing some of the roadblocks to greater trade and investment. As VOA correspondent Aru Pande reports from New Delhi, Obama spoke after participating in India’s Republic Day celebration.
Video

Video White House Grapples With Yemen Counterterrorism Strategy

Reports say the U.S. has carried out a drone strike on suspected militants in Yemen, the first after President Barack Obama offered reassurances the U.S. is continuing its counterterrorism operations in the country. The future of those operations has been in question following the collapse last week of Yemen’s government. VOA White House correspondent Luis Ramirez reports.
Video

Video Worldwide Photo Workshops Empower Youth

Last September, 20 young adults from South Sudan took part in a National Geographic Photo Camp. They are among hundreds of students from around the world who have learned how to use a camera to tell the stories of the people in their communities through the powerful medium of photography. Three camp participants talked about their experiences recently on a visit to Washington. VOA’s Julie Taboh reports.
Video

Video US, Japan Offer Lessons as Eurozone Launches Huge Stimulus

The Euro currency has fallen sharply after the European Central Bank announced a bigger-than-expected $67 billion-a-month quantitative easing program Thursday - commonly seen as a form of printing new money. Henry Ridgwell reports for VOA from London on whether the move might rescue the eurozone economy -- and what lessons have been learned from similar programs around the world.
Video

Video Oil Price Drop Troubles Texas Producers

As oil prices have fallen over the past several months, drilling operations have slowed in some parts of the United States - including Texas, the state that surpasses all others in energy production. The Lone Star State’s energy output has been boosted in recent years by development of resources trapped deep below ground in the Eagle Ford shale deposit, which stretches across south central Texas. As VOA’s Greg Flakus reports from Karnes City, Texas, the drop in oil prices has created concerns,
Video

Video Nigerian Elections Pose Concern of Potential Conflict in 'Middle Belt'

Nigeria’s north-central state of Kaduna has long been the site of fighting between Muslims and Christians as well as between people of different ethnic groups. As the February elections approach, community and religious leaders are making plans they hope will keep the streets calm after results are announced. Chris Stein reports from the state capital, Kaduna.
Video

Video As Viewership Drops, Obama Puts His Message on YouTube

Ratings reports show President Obama’s State of the Union address this week drew the lowest number of viewers for this annual speech in 15 years. White House officials anticipated this, and the president has decided to take a non-traditional approach to getting his message out. VOA White House correspondent Luis Ramirez reports.

Circumventing Censorship

An Internet Primer for Healthy Web Habits

As surveillance and censoring technologies advance, so, too, do new tools for your computer or mobile device that help protect your privacy and break through Internet censorship.
More

All About America

AppleAndroid