Detroit's municipal bankruptcy, which was already the nation's largest by debt, population affected and number of creditors, now appears to have become its costliest in legal and professional fees after just one year.
With the anniversary of its $18 billion Chapter 9 petition coming on July 18, Detroit has been billed more than $75 million in fees and expenses from 19 professional services firms through late June. It has paid out about $64 million of that so far, according to city records, including more than $38 million paid to law firms.
According to city records, it still owes another $7.6 million in outstanding balances to the same 19 companies for the same period — mainly due to a bankruptcy court order last September to withhold 15 percent of most professional fees until after the invoices clear a review by a fee examiner.
Robert Fishman of Chicago-based Shaw Fishman Glantz & Towbin LLC submitted the last quarterly fee examiner review to the bankruptcy court in May, detailing just under $36 million in gross fees and expenses claimed through Dec. 31.
The next report, for the quarter ending March 31, is expected later this summer. But the 16 professional firms he tracks in those reports have already submitted more than $40 million in new invoices since then, with the city paying out more than $32 million since Jan. 1.
Raking in the biggest paydays were Cleveland law firm Jones Day, the city's lead bankruptcy counsel collecting just over $26 million through late June, followed by audit and professional services firm Ernst & Young LLP with just under $9.5 million since the bankruptcy petition. The two companies are still owed at least $1.8 million and $1.3 million respectively, according to city records obtained by Crain's.
Close behind were global law firm Dentons at $7.7 million and turnaround and crisis management firm Conway MacKenzie Inc. at $7.1 million paid since the bankruptcy petition. They are still owed about $1.1 million combined.
"The other (municipal bankruptcies) I'm aware of are not anywhere close to that figure," said Frank Shafroth, director of the Center for State and Local Government Leadership at George Mason University.
"I have some hopes for Detroit that they're going to get out. If you spend more than $70 million, the odds are you want to come out of that with a plan that's going to work. But Detroit is like San Bernardino and Stockton (Calif.) in that they all have issues with the pensions, and a state constitution that protects those issues. If that's able to get into the appeals court system, you could have legal costs that go one for years."
Before the Detroit petition, the costliest Chapter 9 bankruptcy was considered to be Jefferson County, Alabama, where professional fees topped $35 million with much of it in legal bills before the county exited bankruptcy in December. Shafroth estimates municipal Vallejo, Calif., has spent more than $13 million in various fees, and Stockton, Calif., around $12 million.
He expects that legal costs are only going to climb for communities like Detroit in the run-up to the confirmation hearing that begins next month and runs through September.
"You're going to get a chunk of new bills then, because you've got a lot of issues still to work out, and adversarial parties like Syncora (Guarantee Inc.) and (Federal Guarantee Insurance Corp.) that are well-capitalized," he said. "The cash register is about to get really heavy."
Miller, Canfield, Paddock and Stone PLC, which penned a restructuring legal services contract with the city days before the bankruptcy petition last July worth up to $1.2 million, has billed more than $2.5 million since mid-2013 and received payment for just over $2 million as of late June.
But Michael McGee, CEO of Miller Canfield, said the firm has taken on an evolving role in the bankruptcy case has progressed since last year.
Van Conway, president and CEO of Conway MacKenzie, noted that his firm is billing at a 25 percent discount from its usual rates, and it has not billed at all for time that he and Senior Managing Director Donald MacKenzie have put in on restructuring services for Detroit.
The company has assigned about 10 directors and other employees to operations restructuring for 27 city departments, representing about 80 percent of the city's payroll. An amended contract signed with Detroit last summer allows Conway MacKenzie to bill up to $19.5 million through Sept. 30, and Conway said the firm is currently on pace to come in under budget.
He also said other top-billing firms have legitimate, even unavoidable, expenses.
"You've got to put Jones Day aside as (a billing total) because you have to consider how much they defend frivolous lawsuits. How many people are going to contest the way the city proceeds with its case? Maybe 30, maybe 300. The firm's expenses are going to be driven by claims that are adverse to the city — some of which are frivolous, but all of which it has to defend," he said.
"The value proposition (in professional fees) really is, how many hundreds of millions in debt service will you be out from under when we emerge from bankruptcy? When you look at it in those terms, then everyone would pay that all day long in their business."
Ken Buckfire, president and managing partner of strategic advisory services firm Miller Buckfire & Co. LLC, declined to comment on his firm's invoices to the city, citing a policy against discussing client assignments.
The firm has billed Detroit about $5 million since last July and received about $3.4 million over the same period, according to the city. An amended services contract signed just before the bankruptcy calls for Buckfire's firm to receive $2 million if Detroit requests an opinion on a possible sale or lease of the Detroit Water and Sewerage Department to a regional authority, growing to a possible fee of $8 million, or 0.75 percent of the transaction value, if such a deal goes forward.
Jeremy Engdahl-Johnson, director of media relations for Milliman Inc., also declined to comment on its bills to the city other than to say its contract with Detroit was recently renewed. Milliman has billed the city about $1.2 million since the bankruptcy petition, according to city and court records, and has received payment for about $935,000.