Citing a desire to prevent a repeat of the controversial outside counsel arrangement now playing out in Detroit—where emergency financial manager Kevyn Orr is relying on legal advice from, and approving payments to, his former firm, Jones Day—a Michigan lawmaker has introduced legislation aimed at curbing the powers of state-appointed officials like Orr.
The push comes amid revelations that Jones Day, initially retained to provide restructuring advice to the financially crippled city under a six-month, $3.35 million contract, now has a contract that, with Orr’s approval, is capped at $18 million and extends through fall 2014.
Introduced by Michigan state representative Doug Geiss, the bill would prevent emergency managers from hiring a former employer for any open contract, and would specifically prevent any company that employed the emergency manager in question or in which that individual had an ownership interest from representing the municipality in a Chapter 9 bankruptcy proceeding. In addition to Detroit, emergency managers currently run four other cities and three school districts in the state.
Geiss, a Democrat, said Wednesday that he modeled the proposed legislation on existing regulations designed to head off potential conflicts of interest involving other government officials.
“When you have one person solely responsible for entering into contracts, extensions, and modifications, you have the ultimate conflict of interest,” Geiss says. “Meaning there are no checks and balances. . . . If done in any other legislative body, it would not be tolerated.”
Geiss’s proposal, first reported by the Detroit Free Press, comes on the heels of the newspaper’s analysis of the skyrocketing adviser tab related to Detroit’s financial restructuring. The city, with Jones Day as lead counsel, filed for Chapter 9 bankruptcy protection July 19, citing a desire to restructure an estimated $18 billion in long-term liabilities. City records show that Jones Day’s revised contract was approved two days before the Chapter 9 filing.
A chart provided to The Am Law Daily by Detroit’s law department lists 15 contractors advising the city on its restructuring, a group that includes accountants, bankers, lawyers, and others. The total value of the contracts is $60.6 million, $19.1 million of which has been paid out to date, according to the document. Jones Day has received $3.35 million of that sum.
Jones Day isn’t the only law firm on the Detroit payroll, though it is doing the majority of the bankruptcy and restructuring work.
Detroit-based Miller, Canfield, Paddock & Stone is listed in the city filing as having a $750,000 contract that covers collective bargaining advice and is due to expire at the end of next year. Pepper Hamilton is named as conflicts counsel, and listed as having its fees capped at $850,000. Local employee benefits firm Stevenson & Keppelman is set to receive up to $100,000.
As The Am Law Daily has previously reported, Miller Canfield has a second, $1.2 million contract with the city, which was signed last December to allow the firm to provide restructuring advice. (Initially set at $300,000, the cap on that pact was raised earlier this year). Orr spokesman Bill Nowling said Wednesday that the brunt of Miller Canfield’s work under that contract has not been restructuring or bankruptcy related, which is why it was not included on the city’s list of advisers.
Dentons, hired in late August to advise a retiree committee in the bankruptcy proceeding, is also not yet included on the chart, though the firm’s fees will be paid for by the city.
Jones Day’s hiring this spring was met with fierce criticism by local residents and politicians who saw the firm as too close to Orr, who came to the city’s attention through Jones Day’s pitch process and resigned from the firm’s Washington, D.C., office to take the emergency manager job at the behest of Michigan Governor Rick Snyder. Jones Day competed with 13 other law firms to win the assignment, receiving one point higher than the second-place finisher in a scoring process. Detroit’s city council voted to approve Jones Day’s contract April 16, more than a month after Detroit officials initially tapped the firm for the job on March 8 (Snyder announced Orr’s hire March 14).
Geiss, an engineer as well as a politician, chided the city’s hiring of Jones Day: “I would argue that there are many people within the bankruptcy law world that could handle this business as well as, if not better than, Jones Day. For the sake of simply appearances, go with that second bid.” (Nowling said Tuesday that Orr has not reviewed Geiss’s proposed legislation and has no stance on the issue.)
Additional documents provided by the city’s law department show the scope of Jones Day’s assignment began to broaden a few months after the firm began working in mid-March. In a June 14 letter sent to Orr, Jones Day managing partner Stephen Brogan proposed dropping a $475,000 monthly cap on “core restructuring work” and emphasized that Jones Day “will serve as lead counsel in all aspects of the City’s restructuring efforts (whether in-court or out-of-court),” language not in the firm’s initial contract and engagement letter.
Jones Day’s revised contract, approved by Orr, is now set to expire September 15, 2014, a year later than the initial agreement was to lapse. In the firm’s first three and a half months on the job, it billed $3.7 million, an amount that did not include considerable write-offs, according to our past reports. Neither Brogan’s letter, nor a supplemental letter sent July 17 from Jones Day partner David Heiman to Orr, mentions raising the contract cap to $18 million (Heiman said in an email Wednesday “I am not sure what the 18mm cap is,” and referred questions to Jones Day partner Jeffrey Ellman, who declined to comment.) The city has failed to provide any documentation past the chart of advisers explaining how and why the cap was raised.
Instead, Brogan’s letter says, “Our fees will be determined by the time devoted by each lawyer or other service provider involved in the engagement and the hourly billing rates assigned to each such person.” Brogan proposes “lean staffing” of the assignment, as well as an across-the-board 10 percent reduction of its billable time. Cleveland-based Heiman is leading work for the firm on the Detroit case, along with partners Bruce Bennett, Heather Lennox, Ellman, and Corinne Ball. For a detailed breakdown on Jones Day’s work during its first three and a half months, see our previous stories here and here.
U.S. Bankruptcy Judge Steven Rhodes, who still has to rule on the eligibility of Detroit’s bid to restructure through bankruptcy, has already named a fee examiner to keep tabs on bills submitted by the city’s advisers. So far, none of those bills have appeared on the bankruptcy docket, though the examiner, Robert Fishman, has so far submitted $47,897 in requested reimbursement for his work on the case, as well as work by his legal and financial advisers.