How Jones Day Won Role of Trying to Save Detroit
Editor's note: This article was originally published on May, 13, 2013.
There was little fanfare surrounding the March 11 announcement out of Detroit Mayor Dave Bing's office that the financially crippled city, which faces more than $15 billion in long-term debt obligations, had hired Jones Day as restructuring counsel. The official four-paragraph press release, which emphasized the firm's size and credentials, ended with the following quote from Bing: "The experience of the Jones Day law firm will be a valuable asset as we proceed with our plan for restructuring the City of Detroit.”
Behind the scenes, however, the two months leading up to the announcement were anything but ho-hum, as Jones Day and a bevy of other firms competed for the opportunity to help a city that was once an industrial powerhouse and the fourth-largest municipality in the country regain some semblance of fiscal stability. In the end, 14 firms, including nine from the ranks of The Am Law 200, officially pitched the city in response to a solicitation letter seeking lawyers to conduct "a complete and independent legal review" of Detroit's "current and future financial and operational situation." Jones Day emerged as the victor after earning the top score—by one point—on a 24-point scale established by investment bankers at Miller Buckfire serving as consultants to the city.
Jones Day's first formal contact with Detroit officials about the restructuring assignment came in January when a team of its lawyers flew to Detroit Metro Airport to pitch delegations representing the city and state governments. At the time, the officials were weighing whether or not to install an emergency manager in Detroit as authorized by Michigan lawmakers the previous month. Four other firms—Foley & Lardner (working with bankruptcy boutique Klee, Tuchin, Bogdanoff & Stern); McKenna Long & Aldridge; Los Angeles bankruptcy and restructuring boutique Stutman Treister & Glatt; and Weil, Gotshal & Manges—made similar presentations at an airport hotel.
Bing's office broadened the search on February 27 by inviting more than a dozen firms, including those with whom it had already met, to submit official proposals by March 6 [read the RFP here]. Fourteen firms responded with proposals that Miller Buckfire rated in such categories as each firm's ties to Detroit and Michigan; its experience with large debtor-side bankruptcies, Chapter 9 municipal bankruptcies, and public finance work; and the potential for conflicts to arise if it took on the assignment. Guided by that matrix, and without conducting additional interviews, the city selected Jones Day on March 8, just two days after the deadline for submitting bids had passed. The firm, which received 21 out of 24 possible points on the Miller Buckfire matrix, signed a $3.35 million contract with the city on March 20 that runs at least through the end of September.
As Detroit worked to line up its legal counsel, Governor Rick Snyder of Michigan continued to push for the appointment of an emergency manager who would have complete control over how the city is run. On March 14, six days after the city chose Jones Day, Snyder appointed Jones Day partner Kevyn Orr to the emergency manager position. Orr immediately resigned from the firm's partnership and began his 18-month term on March 25.
Jones Day's selection raised the ire of local citizens and politicians who claim the firm has a conflict of interest because of its relationship with Orr. Ethics experts, as well as lawyers at the other firms bidding for the work, almost universally say they see no conflict, likening the arrangement to a bankruptcy trustee hiring his or her own firm to advise on the assignment.
Orr spokesman Bill Nowling defends the Jones Day selection by explaining that once Orr knew he was being considered for the larger role, he recused himself from Jones Day's pitch process. (That recusal is evident in Jones Day's proposal, which does not list Orr among the members of the firm's team.) The two selections were also made by different bodies; Orr was chosen by state officials, while Bing led the law firm hiring process.
Nowling says Orr came to the state's attention after participating in Jones Day's January pitch at the airport, and officials asked for permission from Jones Day management to interview him for the emergency manager position. Orr, a University of Michigan Law School graduate, fit a somewhat narrow set of requirements, Nowling says, including being a high-profile bankruptcy expert from a firm with an international presence and someone who, like more than 81 percent of Detroit residents, is black. "That was an important consideration," Nowling says.
Since taking on the emergency manager role six weeks ago, Orr has done a complete evaluation of the city's current state, resulting in a sobering 44-page report released late Sunday detailing Detroit's years-long practice of spending more than it took in and its failure to provide citizens with adequate services. The findings include details about the city's $326.6 million spending deficit, as well as the long-term debt obligations that top $15 billion.
Orr said at a press conference Monday that he could know in as soon as six weeks if the city can turn itself around without filing for Chapter 9 bankruptcy protection—an outcome most of the 14 bidding firms emphasized should come only as a last resort.
For the handful of local firms that vied for the restructuring role, the desire to represent their hometown added a personal dimension to the process that heightened the sense of disappointment that came with not being chosen for the assignment.
"We would have appreciated the opportunity (to do the work), especially since we have somewhat of a specialized vested interest in seeing the city succeed in their efforts," says Sheryl Toby, a partner at Michigan-based Dykema Gossett, which pitched for the assignment. "I think everyone really hopes for success. Detroit represents something different from other types of city restructuring; it has a culture to it. It’s not just pure numbers."
Here's a look at how each of the firms fared in the ratings, based on Miller Buckfire's 24-point scale, and what they planned to do for the city. Click on the point total for each firm to view a PDF of each proposal.
1. Jones Day, 21 points
Laid out in 209 pages, Jones Day's winning proposal highlighted the firm's extensive experience on bankruptcy assignments, as well as its expertise in municipal finance, public-private partnership, governmental entity representation, labor, employee benefits, and public pension work. With approximately 2,400 lawyers, Jones Day was the largest firm to submit a bid, a fact it noted along while mentioning that its founding in Cleveland gives it roots in the Midwest. The lead partners listed in Jones Day's bid "to help make Detroit a strong, safe, financially sound, and vibrant 21st-century city," are New York–based Corinne Ball, an American Lawyer "Dealmaker of the Year" in 2010 for her work on Chrysler's Chapter 11 case and one of "The Decade's Most Influential Lawyers," according to sibling publication The National Law Journal; Bruce Bennett in Los Angeles; Heather Lennox in Cleveland; and Jeffrey Ellman in Atlanta. In addition to listing more than 100 representative clients, Jones Day's proposal detailed many of the bankruptcy matters it has handled, including its roles as lead counsel in Chrysler's Chapter 11 case; derivatives counsel in the Lehman Brothers bankruptcy; counsel to Hostess Brands; and special labor counsel in the General Motors bankruptcy. The pitch also repeatedly mentioned the experience some Jones Day lawyers had representing Orange County in its bankruptcy, though that work came before the lawyers joined the firm. Jones Day proposed a three-phased fee structure, offering at each stage to charge less than the amount expected to be billed: $1.125 million for an initial analysis; $1.9 million for planning; and up to $575,000 per month during the implementation phase. Any litigation, major transactions, or internal investigations were to be billed hourly in addition to these estimates.
2. Foley & Lardner (with Klee, Tuchin, Bogdanoff & Stern), 20 points
To bolster its qualifications, Milwaukee-based Foley teamed up with Los Angeles restructuring and corporate boutique Klee Tuchin, estimating that the smaller firm would do 20 percent of the work. The firms touted a combined 63 restructuring lawyers nationwide and 35 lawyers in Detroit specifically. Founding Klee Tuchin partner Kenneth Klee, a professor at UCLA School of Law, helped write the Chapter 9 statute and is currently working for Jefferson County, Alabama, in the largest municipal bankruptcy filing in U.S. history to date—an ignominious title Detroit would lay claim to if it does wind up seeking Chapter 9 protection. The firms estimated that the first phase of the project would cost between $1.5 million and $1.75 million, based on blended hourly rates of $525 for Foley attorneys and blended Klee Tuchin rates of $850. Even without winning the assignment, Foley maintains ties to Detroit government: Partner Thomas Spillane serves as legal counsel for the Detroit Financial Advisory Board, which was established through the so-called Financial Stability Agreement struck in April 2012 between Detroit and Michigan governments. That consent decree was a precursor to the more serious implementation of an emergency manager.
3. Miller, Canfield, Paddock and Stone (seeking local counsel role only), 19 points
The firm requested to be appointed as local counsel only, a role it essentially already holds following the December approval of a $300,000 contract "to provide legal advice and litigation representation pertaining to implementing the City's ongoing restructuring" as dictated by last April's financial stability agreement. That contract [PDF] covers the period from August 1, 2012, through June 30, 2014, and dictates that the firm's attorneys charge $275 per hour, a lower price than the $385 blended rate Miller Canfield offered in its March proposal to the city. Miller Canfield will now report to Orr. The firm also has close ties to Detroit government from within its ranks. Partner Saul Green, listed as a member of the team pitching for the restructuring work, served as deputy mayor of the city from 2008 to 2011. Like Jones Day, Miller Canfield was accused of having a conflict of interest when its hire was discussed at City Council in December. Over public opposition, the council ultimately voted 5 to 4 to approve the city's pact with the firm. Bing said publicly that he opted to hire Miller Canfield for the role last year because he could no longer rely on the city's own corporation counsel's office, some of whose lawyers sued him in an effort to block the financial stability agreement from taking effect.
3. Orrick, Herrington & Sutcliffe, 19 points
In its 86-page pitch, Orrick laid out with great specificity "Where the City is Today" and "Where the City Wants to Be." The firm said it was willing to do anything to meet its client's needs: "If that means working more than twelve or fifteen hours a day, seven days a week, we will do that." Orrick anticipated that it could determine what contracts exist within two or three weeks; that it would spend another three or four weeks restructuring those contractual obligations; and that it would then move into phase three of putting a restructuring plan in place. Orrick highlighted its experience with public-private partnerships, and suggested that "the city may be interested in monetizing some of its assets" through such so-called P3s. Orrick has more experience than most firms when it comes to Chapter 9 assignments, including advising Goldman Sachs in connection with Orange County's emergence from bankruptcy in 1994; representing Vallejo, California, in its Chapter 9 filing and plan confirmation (which earned partner Marc Levinson an American Lawyer Dealmaker of the Year nod); and counseling Stockton, California, during an intensive 90-day mediation with creditors that preceded its bankruptcy filing last year. The firm proposed discounted rates of $795 for partners, $695 for counsel, $595 for associates, and $250 for paralegals.
5. Dykema Gossett, 18 points
Miller Buckfire managing director Kenneth Buckfire and Detroit's CFO Jack Martin first came to meet with the Michigan firm—founded in Detroit in 1926—at its offices in mid-January, says Sheryl Toby, coleader of the firm's bankruptcy practice. In a 100-page pitch, Dykema described a team to be led by three partners, including Toby, "to ensure that whenever the need arises—24/7—and whatever the nature of that need, you can reach an attorney who can immediately address it." The firm's attorneys frequently represent Michigan public agencies and have consulted the state on its retirement plans for 18 years. Because of its many Michigan clients, Dykema listed several potential conflicts, including its representation of the state government in the negotiation of Detroit's financial stability agreement. Dykema said its lawyers would charge hourly rates ranging from $235 to $625, with the firm assuring the city that it would be willing to negotiate flexible-fee arrangements. Toby said she and her partners believe their intimate knowledge of Detroit and the state "would have been extremely beneficial within this process," but she recognized that a firm with a strong New York presence might have been favored because of the importance of Detroit's municipal bonds.
5. Sidley Austin, 18 points
The firm's rough estimate had it completing the assignment for no more than $10 million, with hourly partner rates of between $675 and $1,100; counsel between $475 and $1,100; and associates between $370 and $715. Though the Chicago-based firm lacks a Detroit office, it stressed its heft: Its pitch said that the equivalent of 120 lawyers at the firm are devoted to restructuring work full-time. The firm emphasized its public finance practice, which has seen it represent municipal bond insurers in all aspects of municipal workouts. It also has debtor-side bankruptcy experience, including handling Chapter 11 cases involving Budget Group Inc.; Dynegy Holdings; and Tribune Company. The pitch said the firm was unaware of any potential conflicts it might have in taking on the assignment.
7. McKenna Long & Aldridge, 17 points
Atlanta-based McKenna said its bills would not exceed $825,000, the lowest overall price submitted by the handful of firms that offered an estimate of their total fees. The firm also distinguished itself by boasting that its municipal restructuring practice is solely dedicated to representing the interests of government, rather than bondholders, unions, or others in conflict with municipalities. With weaker ties to Michigan than some, McKenna tried to gain points for its public finance and municipal privatization experience and lack of conflicts. The assignments McKenna touted include: serving as general counsel to Canada's government when it invested $3.775 billion in Chrysler's restructuring; working as lead counsel to rural Kentucky electric cooperative Big Rivers Electric Corporation in its restructuring of $1 billion in secured debt and $150 billion in unsecured debt; and its current representation of the receiver for the financially distressed city of Harrisburg, Pennsylvania.
7. Weil, Gotshal & Manges, 17 points
The New York firm's Chapter 11 experience included working for the debtors of some of the largest bankruptcies in recent years: General Motors, which it sped through bankruptcy in 40 days; American Airlines; Lehman Brothers; and Washington Mutual. Weil proposed top-shelf rates of between $800 and $1,075 an hour for partners and counsel and between $450 and $795 for associates. The bid estimated the first 30 days would cost $575,000, and that "in the absence of litigation, extended negotiations or a chapter 9 filing," the next six months would not exceed $3 million (after applying a discount and not including expenses). Its municipal experience included working for New York City on its 1975 debt restructuring.
9. Lewis & Munday, 14 points
This 20-lawyer, minority-owned firm has worked with Detroit and its affiliated public agencies on development projects for years, including helping to create a General Motors plant in the Poletown section of the city and working on the expansions of sports venues Comerica Park and Ford Field. The firm started its public finance practice 40 years ago because of assignments from Detroit. Both of the firm's founders, municipal finance lawyer David Baker Lewis and real estate lawyer and firm chairman Reuben Munday, were listed as members of the pitch team. The firm partners planned to charge $400 an hour, while its associates were to bill $225 an hour.
9. Skadden, Arps, Slate, Meagher & Flom, 14 points
Skadden proposed conducting diligence for the city within 60 days for a flat rate of $100,000 and crafting a "creative" fee structure after that, based on hourly rates of between $840 and $1,220 for partners and of counsel; between $845 and $930 for counsel and special counsel; and between $365 and $795 for associates. The firm, which has no offices in Michigan, proved its allegiance to the state by citing Skadden attorneys' collective donation of $1.3 million to a University of Michigan Law School capital campaign in 2012. The firm said it was unaware of any potential conflicts. Jay Goffman, the global leader of Skadden's corporate restructuring group—named one of the decade's most influential lawyers in 2010 by The National Law Journal for his work pioneering prepackaged bankruptcies—would be the relationship partner, assisted by George Panagakis in Chicago and Gregory Craig in Washington, D.C. Skadden listed dozens of examples of out-of-court restructuring assignments, prepackaged reorganization experience, and traditional Chapter 11 work.
11. Butzel Long, 12 points
With a competitive rate of $275 an hour, 130-lawyer Butzel suggested partnering with other firms to get the job done, and recommended two: Weil, with which Butzel said it had successfully collaborated in connection with the General Motors restructuring; and Cummings, McClorey, Davis & Acho, on municipal law aspects. Butzel, whose Detroit roots date back to 1854, already works as labor counsel for the city. In an interview earlier this year, partner Thomas Radom said that while he hopes Detroit can avoid bankruptcy, the option seems plausible. "Some people feel they’ve already given, and they're not willing to give any more," he said. "If they have to give more, they might say, 'Then let a judge decide.' "
11. Plunkett Cooney, 12 points
The Michigan firm is familiar with the state's emergency manager laws—which have gone through several iterations in recent years—in part through its representation of an emergency manager in Pontiac, namesake of the famed General Motors car and home of the Silverdome, where the National Football League's Detroit Lions once played. The 156-attorney firm proposed charging $275 for partners, $225 for senior attorneys, and $175 for associates. Plunkett planned to call in boutique firm Stevenson Keppelman Associates to advise on pension and employee benefits matters. Douglas Bernstein, who would have co-led the firm's team, says he has doubts that the city can turn itself around without filing for bankruptcy, but if Detroit does slide into Chapter 9, one major question will be when federal bankruptcy law supersedes Michigan's constitution. That issue would come into play for such matters as what to do with public pensions, which are protected under state laws, Bernstein says. Whichever path the city takes, he says, "Detroit is a unique one in that you'd like to be part of the solution."
13. Jaffee Raitt (seeking local counsel role only), 10 points
Founded in Detroit in 1968, Jaffee proposed being hired to assist primary counsel with issues of Michigan law and procedure. The 102-attorney firm said it has "among the largest" restructuring practices in the state, with 10 attorneys practicing in the area full-time. In bankruptcies, the firm represents a mix of unsecured creditors' committees, debtors, creditors, and trustees. One recent out-of-court assignment listed was Jaffee's representation of the Detroit Symphony Orchestra in the restructuring of $56 million in debt. Partner rates ranged from $225 to $550 with associates billing between $175 to $295.
14. Stutman Treister & Glatt, 9 points
One of the first firms called in to pitch the city, Stutman ended up with the lowest marks. The 32-lawyer restructuring firm lost points for its lack of a Michigan connection and the absence of any lawyers specializing in public finance, municipal privatization, state and local law, and ancillary practices such as labor and employment. Recognizing those weaknesses, the firm, which has offices in Los Angeles and New York, welcomed the opportunity to work in conjunction with a full-service firm of Detroit's choosing. Stutman's extensive municipal bankruptcy experience includes advising California's Orange County in its 1994 Chapter 9 bankruptcy and serving as the mediator in Stockton, California's recent Chapter 9 proceedings. The firm's proposed fee structure estimated monthly fee caps of $400,000 for a one-year period, not to exceed $4.8 million. Rates ranged from $833 to $959 an hour for shareholders and senior counsel, and from $437 to $671 for other lawyers. Stutman senior shareholder Gary Klausner said by email that the firm was "very pleased to have been selected for an interview" given the importance of the assignment and "that the City had the entire universe of bankruptcy practices to choose from."