Investigative
7:00 am
Fri August 16, 2013

Hundreds of millions of dollars in legal fees still pocket change in Detroit bankruptcy

The alternative to paying expensive lawyers to negotiate the bankruptcy is to watch creditors strip the City of Detroit of every scrap of an asset.
Credit Lester Graham / Michigan Radio

Detroit’s bankruptcy proceedings involve massive amounts of money. A lot of creditors and possibly city retirees are likely to lose a lot of money. But, there are some people who are going to make a lot of money because of this bankruptcy.

Filing bankruptcy, restructuring debt, reorganizing Detroit’s operations are all incredibly complicated and incredibly expensive.

The Detroit Free Press suggested legal fees could top $100 million.

And who’s cashing in?

First and foremost: advisers, consultants, and law firms.

Sara Randazzo is a staff reporter for American Lawyer which covers the legal industry. She reported the Jones Day law firm is burning through its contract fast. It’s a $3.3 million six month contract and Jones Day billed almost half of that in the first six weeks.

“It’s clear if that if this bankruptcy goes another year, year-and-a-half, that it’s probably going to get much higher than that,” Randazzo said during a telephone interview.

At the existing rate, Jones Day will bill for the entire contract within three months.

Compare that $3.3 million with the approximately $25 million dollars Jones Day billed for negotiating the Chrysler bankruptcy.

Randazzo also reported the City of Detroit’s original contract with another law firm, Miller Canfield, increased from 300 thousand to two million dollars.

All these highly-paid lawyers and consultants have a big job ahead of them. That’s because Detroit’s finances are a mess. The city has issued bonds to make payment on other bonds.

Erik Gordon is a professor of law and business at the University of Michigan. He puts it this way.

“Detroit has been like the person who borrows too much on their credit card, buys the car they can’t afford, goes on the vacation they can’t afford and then the way they solve the problem is they get a second credit card to pay for the first credit card and they’re paying gigantic interest at that point and they will never get out of it. That’s where Detroit finds itself.”

By the way, that $100 million in legal fees the Free Press suggested could be a lot more than that.

Bill Nowling is the spokesman for the Detroit Emergency Manager, Kevin Orr. Nowling acknowledges it could be double that amount or even higher and still within the kind of costs you'd expect in such a complicated bankruptcy.

“Well $18 billion, one or two percent (is) a couple hundred million dollars. So, I mean, those numbers can seem staggering. But, in the context of the overall transaction, they’re within the standards for other transactions.”

Nowling says to figure out how to fix decades of messed up city government and services, and then walk away with a shred of a chance of having something left of financial health for the city, it’s going to take expensive lawyers to take on the creditor’s expensive lawyers.

“We have to be able to have an A-team of attorneys in place to go and literally do legal battle with them every day. Because, if we don’t, then we’re putting the taxpayers of the City of Detroit and the residents at risk.”

All those millions and billions are a little mind boggling. So, let’s do it this way. We’re talking about 18 billion dollars of debt. That’s 18 thousand million. A couple of hundred million to straighten out 18 thousand million is kind of like giving a financial advisor a couple of hundred bucks to help you figure out how to deal with your 18 thousand in debt. Starts to make a little more sense, right?

Erik Gordon at the University of Michigan says that’s the kind of cost that’s fairly standard in bankruptcy.

“If you look at it as an absolute number, it’s a huge amount of money, but it’s a grain of sand on the beach compared to the finances of Detroit. And the way you have to look at it is it’s a lot less than they were piddling away month by month and getting nothing. At least with this they have a chance of getting a fresh start and rebuilding Detroit.”

So, like it or not… those consultants and advisors and lawyers are going to make a lot of money because the alternative is to watch creditors strip the city of every scrap of an asset they can get their hands on- not a great option.

Detroit city leaders of the past should have known this was coming someday.

Someday is here now.

This story was edited to correct the spelling of Sara Randazzo's name.