02.05.14

The Daunting Costs of Municipal Bankruptcy. Detroit shelled out $13.75 million in fees and expenses for law firms and restructuring consultants during the first three months of its massive Chapter 9 bankruptcy case, according to a new report released Tuesday.
Legal bills in the largest municipal bankruptcy case are expected to balloon after bills roll in for October, November and December, when the city and its creditors were in court on an almost weekly basis for a nine-day eligibility trial and numerous hearings.
Chicago attorney Robert Fishman, the court-appointed fee examiner in Detroit’s bankruptcy, issued his first quarterly report Tuesday showing the city’s lawyers and some of its numerous consultants sent taxpayers bills totaling $11.4 million for their services.
The report was initially due Jan. 15, but Fishman requested an extension from U.S. Bankruptcy Judge Steven Rhodes, citing administrative hurdles and the holiday season.
Detroit taxpayers also got billed $1.96 million for attorneys and financial consultants working for the Official Committee of Retirees, a court-appointed panel set up to give Emergency Manager Kevyn Orr a negotiating partner. Law firms and consultants also billed the city for nearly $410,000 in expenses, according to Fishman’s report. Jones Day, the city’s lead law firm and its deep bench of attorneys, billed the city $6.59 million in fees and $143,273 for expenses from the July 18 bankruptcy filing through Sept. 30, 2013, according to the report. Other invoices include Conway MacKenzie Inc, which billed $2.26 million; Miller Buckfire & Co. LLC, $1.23 million; and Miller, Canfield, Paddock & Stone, $575,840.

Some of Detroit’s consulting and law firms were not included in the initial report. They include the city’s financial consultants at the firm Ernst & Young and the law firms of Kilpatrick & Associates, Dykema Gossett; and Ottenwess, Allman & Taweel law firms.
Fishman, who is being paid $600 an hour to examine the legal bills and contest charges, noted in a court filing Tuesday he does not have power to reject bills and “is limited to recommendations and challenges made through the preliminary reports and the resolution discussions.”

Fishman filed a motion Tuesday asking Rhodes to approve his law firm and an accounting consultant’s first quarterly bills of $65,796 in fees and $1,960.90 for expenses.
“Although the fees incurred by the professionals during the reporting period are substantial by any measure, the fee examiner believes that all of the requested fees are commensurate with the complexity and speed of the case, and the quality of the services that the professionals have provided,” Fishman wrote in a court filing Tuesday. “Furthermore, the fee examiner believes that all of the requested expenses were necessarily incurred by the professionals in connection with the services rendered.”
In August, the watchdog proposed rules against “unreasonable” expenses including, charging taxpayers for booze, hotel-room movies and first-class flights.

In the court filing Tuesday, Fishman warns that “due to the magnitude and complexity of the case, the novelty of the legal issues,” the costs of professional fees related to restructuring Detroit’s $18 billion debt will be “significant.”

“It is impossible (and inappropriate) to view these numbers in the abstract,” Fishman writes in the filing. “They must be tested against the circumstances of the case, such as the amount of debt being addressed, the number of competing interests that have to be considered, the number of diverse problems that must be simultaneously considered and solved, and the uncharted waters of a Chapter 9 case of this magnitude.”
From The Detroit News: http://www.detroitnews.com/article/20140205/METRO01/302050039#ixzz2sRrgSf4IAs the Motor City is revving up for what it hopes to be its final lap, the city has requested that the U.S. Bankruptcy Court dissolve a committee set up by a trustee to represent unsecured creditors that the Trustee believes is required by federal law. The committee, which was set up last December by the U.S. Trustee in the wake of U.S. Bankruptcy Judge Steven Rhodes’s decision finding the Motor City eligible for federal bankruptcy protection, is composed of bond insurer Financial Guaranty Insurance Co., the city’s two pension funds, the Wilmington Trust Company, which is the trustee for the city’s pension certificates, and a tort lawyer. Motor City attorneys have advised the court that the creditors on the committee are already well represented in the case, so that the committee might end up doing more to hinder than to help resolve the precedent-setting chapter 9 municipal bankruptcy: “The city interacts with these parties on virtually a daily basis…Thus the appointment of these parties to the creditors’ committee — the purpose of which is to provide representation for otherwise unrepresented unsecured creditors — is wholly unnecessary….The city believes that the appointment of the creditors’ committee comprised largely of parties already participating in mediation will not advance, and may well disrupt, the mediation…The risk is particularly significant where four of the five creditors’ committee members already are participating in mediation, with their own counsel, to advocate their individual interests.

The Odor of Pay to Play. In Jefferson County, Alabama, which emerged from municipal bankruptcy last December, and where the terms “SEC” and “pay-to-play” can have multiple connotations, ranging from the Southeast Conference for college sports to the Securities and Exchange Commission, and where “Pay-to-Play” can create similar confusion whether it be for football and basketball players in the SEC or some of the pay-to-play corruption which was at the heart of the county’s municipal bankruptcy, such as by former county commissioner Larry Langford, who is serving 15 years on pay-to-play charges.

To date, more than 20 contractors, county employees, elected officials and those participating in the financings have been indicted or pled guilty to crimes. Even though the County is now out of municipal bankruptcy, the stench from the sewer-related financing deals lingers as two former JPMorgan bankers are pushing to exclude different expert witnesses in a pay-to-play federal suit involving the county’s sewer deals in the case brought by the Securities & Exchange Commission alleging that Charles LeCroy and Douglas MacFaddin arranged $8.2 million in payments to friends of certain county commissioners and local broker-dealers who had no official role when more than $3.2 billion of sewer refunding warrants were issued in 2002 and 2003. According to the SEC, the alleged payments were made to ensure that JPMorgan would win bond underwriting and swap business from the county, the SEC has charged. One of the experts JPMorgan is seeking to exclude, Robin Kole, a former municipal banker and muni derivatives market specialist, had written a 14-page report that said the former bankers and JPMorgan disclosed the payments in accordance with prevailing standards, customs, and practices in the municipal swap market in 2002 and 2003. She concluded that there were no strict disclosure guidelines for swaps, which certain county officials received letters about the swap transactions, that those who received payments were advisors to the county, and the payments were only in connection with the swaps. Ms. Kole’s report also said that “disclosure guidelines in the municipal bond market during the relevant time period would have applied only to municipal securities and not to municipal interest rate swaps.” Nevertheless, the non-football SEC charges that “substantial evidence” demonstrates payments were made as part of the bond transactions, not just the swaps.

While discovery is proceeding in the five-year-old case, U.S. Judge Abdul Kallon has not yet set a trial date, because JPMorgan has, so far, been unable to depose CDR Financial Products Inc. senior vice president Douglas Goldberg, who has already pled guilty to a conspiracy to rig bids for municipal bond investment contracts. Judge Kallon has refused to allow Mr. Goldberg to be deposed until after his sentencing, currently set for March 20. CDR was Jefferson County’s swap adviser during the time it issued warrants and entered derivatives to rebuild an aging sewer system under a federal consent decree. Former senior Republican leaders in the U.S. House Financial Services Committee and elected leaders in Jefferson County believe the swaps were the linchpin to plunging the county into what at the time was the largest municipal bankruptcy in history. Jefferson County filed for bankruptcy in November 2011 and exited Dec. 2, 2013 after selling refunding warrants to write down the 2002 and 2003 sewer warrants.
Is There a Smoking Chimney? As Pennsylvania’s capitol city of Harrisburg awaits approval from the Commonwealth Court of Pennsylvania to exit from state receivership—the alternate route the city chose to filing for federal municipal bankruptcy—in the wake of the court’s approval last September of the Harrisburg Strong recovery plan, a plan which hinged upon the sale of the incinerator to the Lancaster County Solid Waste Management Authority and a long-term lease of parking assets from the city and the Harrisburg Parking Authority to the Pennsylvania Economic Development Financing Authority, Moody’ yesterday reported that contingent liabilities for nonessential, noncore enterprises can pose significant credit risks for local governments. Author Josellyn Yousef wrote: “Only a small percentage of local governments take on contingent liabilities for nonessential enterprises. But for those that do, the effects on those governments’ credit quality can be devastating.” The so-called smoking gun in Harrisburg involved the municipality’s guarantee of $310 million of debt on its incinerator, where the escalating financing costs for the incinerator were a critical factor in pushing the city towards insolvency. According to the report, such municipal enterprises are much riskier than general government and essential public services, because of their limited abilities to increase revenue in a competitive market environment—noting that the Great Recession increased the propensity of some such municipalities to guarantee the debt of what the report terms “nonessential enterprises,” such as sports and entertainment facilities, nursing homes, real estate developments, and fiber-optic telecommunications systems. The rating agency reports it evaluates the credit risk from contingent liabilities through examining three drivers: the likelihood of the enterprise’s need for financial support, the municipality’s financial capacity to cover the debt service, and the municipality’s willingness to meet contingent obligations.

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