The pending retention of Jones Day to help financially crippled Detroit as it attempts to stave off what would be the largest municipal bankruptcy in U.S. history is getting fresh scrutiny this week from local politicians, who claim that hiring the firm to advise the city may create conflicts of interest given the recent appointment of former Jones Day restructuring partner Kevyn Orr to serve as the city’s emergency manager.
Orr resigned from the Jones Day partnership and began working for Detroit on March 15—the day after Michigan Governor Rick Snyder appointed him to serve as the city’s emergency manager. Orr’s appointment came as Detroit Mayor Dave Bing’s office was finalizing a $3.35 million contract with Jones Day under which the firm will advise the city for up to six months as it grapples with a $327 million year-end deficit and $14 billion in long-term debt.
At hearings Tuesday and Wednesday, Detroit city council members questioned Orr’s current ties to Jones Day and whether the firm represents any of the financial institutions that hold the city’s municipal bonds. Those questions notwithstanding, the council’s internal operations committee voted 2 to 1 Wednesday to approve the contract. The full council is scheduled to vote on the pact Tuesday.
The city’s hiring of Jones Day does not require council approval. Under the state law governing how Detroit copes with its current financial crisis, only Orr, in his capacity as emergency manager, has the power to finalize contracts. Even so, a spokesman for Orr says the emergency manager feels it is important to keep the public, through its elected officials, involved in the hiring process.
"People can raise objections if they want, but that doesn’t make them true," says the spokesman, Bill Nowling, who adds that Orr went to "great lengths" to separate himself from discussions with Detroit while still at Jones Day and that the contract has been negotiated exclusively with the mayor’s office.
A trio of ethics experts contacted by The Am Law Daily Wednesday agreed that Orr’s ties to Jones Day do not by themselves create a conflict of interest and that the city’s decision to employ a firm that Orr is familiar with and knows to be experienced in restructuring work is a smart one.
"It’s important to distinguish between the ethics and the politics," says Kenneth Mogill, a lawyer who teaches a professional responsibility course at Wayne State University Law School in Detroit.
Adds Diane Karpman, a legal ethics attorney in Los Angeles: "I think this whole political process going on shows that the process is working, and that there is no conflict. Everything is being investigated. He has no equity interest [in the firm]." Furthermore, Karpman says, "He has a duty to hire the best people he can."
Jones Day’s pending contract with the city states that the firm’s main objective in taking on the assignment is "to restructure [Detroit's] existing debt and other financial obligations in such a way as to avoid a bankruptcy filing if possible." The contract is subject to a monthly cap of $475,000, including expenses, according to a letter from Jones Day managing partner Stephen Brogan that is attached to the contract. Elsewhere in the contract—which will expire either on August 31 or with the commencement of a Chapter 9 municipal bankruptcy filing—the total amount to be paid for the firm’s work is capped at $3.35 million.
"We recognize that the situation facing the City is a dynamic one," Brogan writes in the letter, before adding that the nature of the work and the billing arrangement are subject to change (The firm lists hourly rates of between $425 and $1,050 for partners and counsel, between $250 and $775 for counsel and associates, and between $100 and $350 for paralegals and project assistants). In addition to Washington, D.C.–based Brogan, other Jones Day lawyers named in the letter as working on the assignment include bankruptcy and restructuring partners David Heiman in Cleveland, Bruce Bennett in Los Angeles, and Corinne Ball and Heather Lennox in New York.
In a statement provided to The Am Law Daily, Jones Day detailed its neutrality in the assignment. "Our duties and responsibilities on this engagement are to our client, the City of Detroit, and no one else," the statement reads. "We will fully meet those duties and responsibilities, vigorously representing Detroit and providing the highest level of legal services to Detroit consistent with our professional reputation and responsibilities." It adds that the firm does not represent any clients in matters adverse to Detroit.
Local news reports do, however, mention that Jones Day does work for Bank of America-Merrill Lynch, a Detroit creditor, and that the firm says it will receive conflict waivers from that client. Wayne State Law professor Peter Henning said that in a firm the size of 2,400-lawyer Jones Day, conflicts are bound to arise, but that shouldn’t necessarily disqualify them. "There are many varieties of conflicts, and some are less problematic," Henning wrote in an email. "So this is an issue the firm will have to deal with, and Mr. Orr will have to be very careful about dealing with conflicts because of his ties to his old firm."
The Jones Day lawyers involved in the assignment, whom Orr spokesman Nowling says have begun working in a limited due diligence capacity, are often employed on high-profile bankruptcy cases. Bennett, who joined Jones Day last spring from the collapsing Dewey & LeBoeuf, led a team representing the Los Angeles Dodgers in its $2.15 billion sale and emergence from bankruptcy in March 2012. Ball is currently leading a team advising Hostess Brands Inc. in its Chapter 11 case, and in 2009, The American Lawyer featured her in a cover story about Jones Day’s role in Detroit automaker Chrysler’s 42-day journey through bankruptcy court. (Heiman had his own role in the Chrysler bankruptcy, which The Am Law Daily first ferreted out with an inventive bit of photo sleuthing.)
Detroit’s decision to employ Jones Day came after the city fielded proposals from 14 law firms. Others jockeying for the work, according to a list provided from Mayor Bing’s office, include Detroit-based Am Law 200 firms Butzel Long; Dykema; and Miller Canfield; their Am Law 200 counterparts McKenna Long & Aldridge; Orrick, Herrington & Sutcliffe; Sidley Austin; Skadden, Arps, Slate, Meagher & Flom; and Weil, Gotshal & Manges; a handful of local firms; and a bankruptcy boutique.
Nowling says Orr is eager to get a law firm installed on the job so he can begin working to protect Detroit’s assets. "Creditors are not waiting for us to have counsel before they prepare a case against us," Nowling says. "We really have to get this done."