| July 21
July 21 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
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
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
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
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
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."