By Joel Kurth and Darren A. Nichols, Detroit News, March 29, 2013
Detroit — Global law firm Jones Day could have a crucial — and perhaps lucrative — role in the fight to save Detroit from insolvency, prompting concerns about possible conflicts in the emotional debate about the city’s restructuring.
Jones Day was retained by the city to serve as its restructuring attorney three days before one of its partners, Kevyn Orr, was appointed emergency manager by Gov. Rick Snyder. The firm is expected to work closely with Orr to renegotiate Detroit’s nearly $15 billion in long-term debt.
Supporters of Orr call it an ideal pairing, adding familiarity and expertise to what could be make-or-break negotiations. Detractors fear it’s a dangerous conflict because Jones Day also represents major banks and bondholders to whom Detroit could owe millions of dollars.
“The question is: Who are they representing? Are they representing the interest of the city of Detroit, or are they just looking to get paid?” asked Ed McNeil, special assistant to the president of the city’s largest union, AFSCME Council 25.
“The fear is that big corporations are the ones who are going to be making out, not Detroiters.”
The city “evaluated several firms with local and national prominence,” said Jack Martin, the city’s chief financial officer.
“The evaluation panel concluded that Jones Day was the best firm to meet the needs of the City of Detroit at this time,” he said.
The City Council is expected to consider the contract next week, but its details — including compensation and duration — aren’t yet known.
Orr resigned from Jones Day the day after his March 14 appointment. He told The Detroit News that bankruptcy trustees typically hire their own law firms and argued that partnering with Jones Day will help because of its expertise in restructurings.
Jones Day released a statement Thursday to The News saying “our duties and responsibilities are to our client, the City of Detroit, and no one else.” Orr wasn’t involved in negotiations to hire the firm, said Bill Nowling, his spokesman.
“It’s been completely transparent and he has been forthright about not being a part of the process thus far,” he said.
Critics question both the timing of the deal and relationship to Orr. Troy attorney Ben Gonek said Michigan has several qualified firms that could do the work for less money. The average hourly rate for Jones Day attorneys handling the Chrysler LLC bankruptcy in 2009 was $690 an hour; Orr billed $750 an hour.
“The question is: Is he using his position to generate money for his old firm?” Gonek asked.
Supporters, including former Benton Harbor emergency manager Joseph Harris, said it’s ludicrous to argue Orr would do anything but get Detroit the best deal. “If this guy gets Detroit through this, he can write his own ticket,” said Harris, a former Detroit chief financial officer. “He has every reason to show he’s done the impossible, which is save Detroit when everyone was predicting bankruptcy. If anyone is going to get it done, he’s going to.”
Conflicts aren’t uncommon during complex restructurings — and must be resolved by parties signing waivers acknowledging them, said Douglas Bernstein, a Bloomfield Hills attorney who specializes in municipal bankruptcy. He said conflicts are less uncommon for Jones Day, a Cleveland-based firm with more than 2,400 attorneys in offices worldwide who represent half the Fortune 500 companies.
“They have been in business for a long time and they’ve managed to get a lot of business, so they have to deal with conflicts,” said Bernstein, whose firm, Plunkett Clooney, was not invited to bid on the restructuring contract.
“There are two schools of thought. One is it’s better to deal with someone you know and trust. The opposing view is you don’t want your client on the opposing side of the table.”
Big Four banks are clients
Orr is best known as one of the attorneys who helped guide Chrysler through bankruptcy, but his other clients — and those of Jones Day — have opponents of the emergency manager concerned.
Jones Day represents the Big Four banks involved in the financial meltdown of 2008 — Wells Fargo, Bank of America, Citigroup and JP Morgan Chase. Bondholders aren’t publicly identified, but Orr and Jones Day will have to negotiate with them to restructure debts.
Harris was involved in similar negotiations when he was working for Detroit in 2009 that saved the city $400 million after UBS AG and SBS Financial Products moved to terminate loans because Detroit’s bond ratings were downgraded to junk status.
Orr said the discussions are his forte. “I’ve got guns. We are not afraid. This is what we do,” he told The News this month.
Court records show Orr represented Wells Fargo during the bankruptcy of Ravenwood Healthcare, a Louisiana company that owned nursing homes. Wells Fargo also is “the No. 1 bank associated with foreclosures in Detroit,” said Melvin “Butch” Hollowell, general counsel for the Detroit Branch NAACP.
Hollowell said he fears Orr and Jones Day would move to sell city assets such as the Detroit Water and Sewerage Department or Belle Isle to pay the debts.
“The fox is watching the henhouse … Detroit has tremendous resources and the last thing we need is Mr. Orr treating the city as his clients have,” Hollowell said.
Greg Bowens, a spokesman for the group that filed a lawsuit Thursday seeking to end the emergency manager law, said “there’s huge potential conflicts” because Orr’s former clients “may be creditors of the city.”
In its statement, Jones Day said it has no relationships to “prevent us from fulfilling our commitments” to Detroit.
‘It’s better for the city’
Orr’s other major clients included AmeriDebt and National Century Financial Enterprises Inc., both of which ran afoul of law enforcement for allegedly fraudulent business practices.
AmeriDebt was a credit counseling company whose clientele was largely poor, and in 2003 regulators alleged the firm scammed $172 million in hidden fees from 300,000 customers. Orr was the attorney for its founder, Andris Pukke, in at least one civil lawsuit and handled his bankruptcy after he agreed to personally repay victims, court records show.
Orr represented National Century Financial Enterprises in its bankruptcy in 2002. Its collapse led to the bankruptcies of more than 200 hospitals and clinics nationwide and involved nearly $3 billion in corporate fraud, according to prosecutors. Its CEO, Lance Paulson, was sent to prison for 30 years in 2009.
“There are certainly red flags that pop up as it relates to Jones Day,” Hollowell said. “It doesn’t sound like Kevyn Orr is on the side of the ordinary guy trying to make it.”
Harris and others including former Detroit City Councilwoman Sheila Cockrel said Orr’s credentials are impeccable. He also defended H&R Block from a class-action suit, handled the bankruptcy of a massive aluminum company and represented Nextel Communications.
Cockrel called Orr a “straight arrow” who will “go to the mat for his client.”
“The financial issues are so huge that having an emergency manager working in tandem with a law firm that he has a high degree of comfort with is good for Detroit,” Cockrel said. “It’s better for the city than another firm just as qualified that doesn’t have the connections.”
City Council President Charles Pugh declined comment.
Detroit Mayor Dave Bing said he selected Jones Day after seeking bids from 11 firms that handled at least three major restructuring packages similar in size to Detroit. Four are from Michigan. The others included McKenna Long & Aldridge, which employs former Washington, D.C., Mayor Anthony Williams and Thurbert Baker, who was mentioned as a possible emergency manager candidate. Also considered was Orrick, Herrington & Sutcliffe, a law firm that was the bond counsel to the state of California and advised Vallejo and Stockton, Calif., during bankruptcy.
Farmington Hills attorney Bertram Marks said there are too many questions about why Jones Day was hired, who prompted the deal and what it will do.
“The public has concerns and the easiest way to allay them is to be transparent about the relationship,” said Marks, the general counsel to the Counsel of Baptist Pastors of Detroit.