Detroit paid advisers $170 million in bankruptcy
DETROIT — The city of Detroit paid $170 million to lawyers, consultants and financiers for services during its historic Chapter 9 bankruptcy.
The tab reflects the significant cost of the most high-profile bankruptcy in the U.S. over the last two years, a process that gave Detroit the authority to slash $7 billion in debt, reinvest $1.7 billion over 10 years in services and save its endangered art museum.
The costs make Detroit's bankruptcy the most expensive in municipal history, but that was destined to be the case from the beginning.
Comparing Detroit's consultant fees to other cities is difficult because Detroit's bankruptcy was so unique, said Doug Bernstein, an attorney who represented nonprofit foundations that donated to the grand bargain that resolved the case.
"This is the first of its kind. The challenge is, you've got other cities that have gone bankrupt. But none the size of Detroit," Bernstein said. "You're not comparing apples to apples."
The municipal bankruptcy case in Stockton, Calif., for example, cost the city $13.8 million, according to recent court records available on the city's website. The city's bankruptcy exit plan was confirmed in late October.
Detroit received $5 million in fee reimbursement for restructuring professionals from the state of Michigan, which included the funds in its budget in 2013. When factoring in that figure, the total cost of the bankruptcy to the city was about $165 million.
Judge Steven Rhodes must still officially approve the fees as reasonable.
In confidential mediation talks after the bankruptcy, the city's advisers collectively agreed to slash millions off their bills, though exact figures for each firm were not immediately available. Investment bank Miller Buckfire's initial fee was supposed to be $28 million, but its final compensation was $23 million, according to today's bankruptcy filing. Ken Buckfire, president of Miller Buckfire, could not be reached for comment.
The size of concessions by other firms was not clear. Despite those concessions, critics say too many people got rich off the bankruptcy.
Mark Diaz, president of the Detroit Police Officers Association, said the fees seem high.
"This is coming from a city that said they couldn't afford to pay the police an appropriate wage for what we do," he said. (The police union agreed to a new contract in October that included an 8% pay increase after absorbing a 10% pay cut in 2012.)
Nonetheless, the fees came in under the amount Detroit emergency manager Kevyn Orr budgeted in the city's restructuring blueprint, called the plan of adjustment. He set aside $177 million to pay the fees.
Collectively, advisers to the city earned about $141 million. Advisers to the Official Committee of Retirees, whom the city agreed to reimburse, earned about $15 million. The fee examiner earned $1 million.
Private mediators earned $1 million, although the lead mediator in the bankruptcy, Chief Judge Gerald Rosen, and other judicial mediators did not receive any compensation.
An expert witness for Rhodes, Phoenix Management consultant Martha Kopacz, and her team earned $1.5 million.
In the fall, Mayor Mike Duggan expressed concern that the fees could approach $200 million. But he set aside his concerns after Judge Rhodes ordered the bankruptcy professionals to negotiate their fees with the city in mediation. Rhodes will determine whether the fees are appropriate.
Detroit corporation counsel Melvin (Butch) Hollowell said city officials will await Rhodes' ruling.
"We were very pleased with the mediation process and thankful to Judge Rosen and his team for their hard work throughout," Hollowell, the top lawyer for the city, said in a statement.
Other Chapter 9 bankruptcies have been decidedly less costly, though that's because they were also decidedly less complex. As of early December, San Bernardino had paid about $6 million for its legal fees, according to Reuters. San Bernardino declared bankruptcy in 2012 with about $1 billion in debt. The city is still in bankruptcy.
The fees in Jefferson County, Ala.'s Chapter 9 case topped $30 million, according to AL.com, a media site for news in Birmingham, Ala.
Jefferson County's case was the largest municipal bankruptcy on record until Detroit filed for bankruptcy in July 2014. Still, Jefferson County's case paled in size and complexity to Detroit's case. Jefferson County filed for bankruptcy in 2011 with more than $4.2 billion in debt. A federal judge approved Jefferson County's plan to exit bankruptcy in December 2013.
The five highest paid firms in the bankruptcy were:
■ Jones Day, the city's lead law firm: $58 million
■ Miller Buckfire, the city's investment bank: $23 million
■ Ernst & Young, the city's financial consultants: $20 million
■ Conway MacKenzie, the city's restructuring consultancy: $17 million
■ Dentons, the law firm for the retiree committee: $15 million
■ Advisers to the city's two pension funds earned $12 million, according to the bankruptcy filing. Those advisers, law firm Clark Hill and investment bank Greenhill, were required to report their fees to the court, but the city did not foot that bill.