Report Details Work Behind Detroit's Big Bankruptcy Bills
In a report released late Tuesday, the court-appointed fee examiner responsible for monitoring the bills racked up by outside advisers steering Detroit through its historic bankruptcy offers the public its first detailed breakdown of the work being performed in exchange for the millions of dollars being paid out of the insolvent city's already depleted coffers.
The report—which covers $13.75 million in bills submitted by Detroit's advisers between July 18, 2013, when the city filed for bankruptcy, and the end of September—includes a total of $9.3 million paid to five law firms. That sum includes $6.6 million in fees and $143,274 in expenses for lead bankruptcy counsel at Jones Day; $575,840 in fees and $4,160 in expenses for Detroit-based Miller, Canfield, Paddock and Stone; and $1.5 million in fees and $54,103 in expenses to Dentons, which is representing an official committee of Detroit retirees who have been given a voice in the bankruptcy proceedings.
Examiner Robert Fishman, a Chicago attorney, plans to file quarterly reports to the court, with each covering periods from several months prior. Separately, a spokesman for Detroit city manager Kevyn Orr has offered periodic breakdowns of the Detroit restructuring adviser tab. The most recent update from Orr's office showed that Jones Day had been paid $17.3 million for its work on the case as of late January.
In his comments to the court, Fishman notes that the fees billed in the bankruptcy's first few months were substantial, but maintains that they are absolutely necessary.
"Due to the magnitude and complexity of the case, the novelty of the legal issues, the extremely tight time frames imposed by the court and the strong differences in opinion between the various parties about what to do and how to do it, it was (and continues to be) inevitable that the costs associated with the services … were going to be significant," he writes. "It is impossible (and inappropriate) to view these numbers in the abstract."
Fishman says in the report that while he has no power to force any adviser to cut its bill, he and his team scrutinized each line item and questioned any fees they considered unnecessary or overly vague. U.S. Bankruptcy Judge Steven Rhodes appointed Fishman in August to ensure that the fees "are fully disclosed and are reasonable."
Jones Day, the examiner's report shows, voluntarily wrote off $1.5 million in fees before submitting its bills to Fishman and trimmed another $54,200 based on his suggestions. Fishman says in the report that he chided Jones Day for offering insufficient detail on certain line items, for the firm's tendency to bill in half-hour blocks rather than more granular tenths of an hour, and for staffing certain matters with senior lawyers when assigning junior lawyers could have been sufficient.
Over hundreds of pages of line items—the report includes more than 1,600 pages of exhibits—Jones Day's work is itemized in categories such as labor and employment; pension matters; court hearings; city assets, services and revitalization; and eligibility issues. (After a series of lengthy hearings, Rhodes in early December officially signed off on Detroit's ability to restructure its $18 billion in debts through Chapter 9.)
The category that occupied the largest portion of the Jones Day lawyers' time is listed in its bills as "COP/Swap matters," a reference to a controversial $1.44 billion borrowing arrangement Detroit entered into in 2005 and 2006 as a way of covering the cost of its then underfunded pension liabilities. At the time, Detroit purchased interest-rate "swaps," which are now owned by UBS and Bank of America Merrill Lynch, that turned into bad bets when interest rates fell and Detroit's credit rating dropped.
On Friday, Detroit filed a lawsuit against two trusts and two service corporations created at the deal's inception in an attempt to invalidate the debt deal and void the swaps. Pepper Hamilton—which is serving as conflicts counsel in the bankruptcy and has a $278,928 tab in the fee examiner report—represents Detroit in the suit.
The bills also show that Jones Day partners Bruce Bennett and Corinne Ball are each charging the city $1,000 an hour, and that other partners—including David Heiman ($975 per hour) and Heather Lennox ($900 an hour)—are billing nearly as much.
The expense side of the ledger shows Jones Day lawyers making semifrequent trips to Detroit, with some of them seeking reimbursement for nearly $1,600 in airfare for one roundtrip ticket (other flights are listed as costing as little as $160). Every taxi ride, road toll, UPS payment and long distance phone call is also listed in painstaking detail.
The job of monitoring Detroit's advisers, of course, carries a separate price tag. Fishman submitted his own fee request Tuesday for the work that he and his advisers did between Aug. 8 and the end of September. The total: $67,757.