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

Pundits Split Over Long-Term US Role in Afghanistan

Security pact remains condition for American presence beyond 2014; deadline criticized More

US Eyes Islamic State Threat

Officials warn that IS could pose a threat to US homeland More

Video Ukraine: Captured Troops Proof of Russian Role in Separatist Fight

Moscow says Russian troops crossed into Ukrainian territory by mistake More

Featured Videos

Your JavaScript is turned off or you have an old version of Adobe's Flash Player. Get the latest Flash player.
Scientists Unlock Mystery of Bird Flocksi
X
George Putic
August 25, 2014 4:00 PM
How can flocks of birds, schools of fish or herds of antelope suddenly change direction -- all the individuals adjusting their movement in concert, at seemingly the same time? British researchers now have some insights into this behavior, which has puzzled scientists for a long time. VOA's George Putic has more.
Video

Video Scientists Unlock Mystery of Bird Flocks

How can flocks of birds, schools of fish or herds of antelope suddenly change direction -- all the individuals adjusting their movement in concert, at seemingly the same time? British researchers now have some insights into this behavior, which has puzzled scientists for a long time. VOA's George Putic has more.
Video

Video Ukraine: Captured Troops Proof of Russian Role in Separatist Fight

Ukrainian officials say they have captured Russian soldiers on Ukrainian territory -- the latest accusation of Moscow's involvement in the conflict in eastern Ukraine. VOA's Gabe Joselow reports from the Ukrainian side of the battle, where soldiers are convinced of Russia's role.
Video

Video Rubber May Soon Come From Dandelions

Synthetic rubber has been around for more than a century, but quality tires for cars, trucks and aircraft still need up to 40 percent or more natural rubber content. As the source of natural rubber, the rubber tree, is prone to disease and can be affected by bad weather. So scientists are looking for replacements. And as VOA’s George Putic reports, they may have found one in a ubiquitous weed.
Video

Video Jewish Life in Argentina Reflected in Yiddish Tango

Jewish people from across Europe and Russia have been immigrating to Argentina for hundreds of years. They brought with them dance music that was eventually mixed with Argentine tango. The result is Yiddish tango -- a fusion of melodies and cultural experiences that is still evolving today. Elizabeth Lee reports on how one band is bringing Yiddish tango to Los Angeles.
Video

Video Peace Returns to Ferguson as Community Tries to Heal

Thousands of people nationwide are expected to attend funeral services Monday in the U.S. Midwestern city of St. Louis, Missouri, for Michael Brown, the unarmed African-American teenager who was fatally shot by a white police officer August 9 in the St. Louis suburb of Ferguson. The shooting touched off days of violent demonstrations there, resulting in more than 100 arrests. VOA's Chris Simkins reports from Ferguson where the community is trying to move on after weeks of racial tension.
Video

Video Meeting in Minsk May Hinge on Putin Story

The presidents of Russia and Ukraine are expected to meet face-to-face Tuesday in Minsk, along with European leaders, for talks on the situation in Ukraine. Political analysts say the much welcomed dialogue could help bring an end to months of deadly clashes between pro-Russia separatists and Ukrainian forces in the country's southeast. But much depends on the actions of one man, Russian President Vladimir Putin. VOA's Daniel Schearf reports from Moscow.
Video

Video Artists Shun Russia's Profanity Law

Russia in July enacted a law threatening fines for publicly displayed profanity in media, films, literature, music and theater. The restriction, the toughest since the Soviet era, aims to protect the Russian language and culture and has been welcomed by those who say cursing is getting out of control. But many artists reject the move as a patronizing and ineffective act of censorship in line with a string of conservative morality laws. VOA's Daniel Schearf reports from Moscow.
Video

Video British Fighters on Frontline of ISIS Information War

Security services are racing to identify the Islamic State militant who beheaded U.S. journalist James Foley in Syria. The murderer spoke English on camera with a British accent. It’s estimated that several hundred British citizens are fighting for the Islamic State, also called ISIL or ISIS, alongside thousands of other foreign jihadists. Henry Ridgwell reports for VOA from the center of the investigation in London.

AppleAndroid