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Lawyers in Detroit bankruptcy may face scrutiny on fees

The word 'Bankruptcy' is seen painted on the side of a vacant building by street artists as a statement on the financial affairs of the city
The word 'Bankruptcy' is seen painted on the side of a vacant building by street artists as a statement on the financial affairs of the city

By Tom Hals

WILMINGTON, Delaware (Reuters) - Detroit's bankruptcy filing last month brought a double-barreled bonus for lawyers - lots of much-needed work, and, due to a quirk of municipal bankruptcy law, no apparent need to disclose the fees they charge.

But before lawyers from big-name firms could start totting up their billable hours, Judge Steven Rhodes made clear he wasn't happy with the lack of transparency. He said he wants to appoint an examiner to make sure fees charged to the city are fully disclosed and reasonable.

While fee examiners have been appointed in many of the biggest corporate bankruptcies, Rhodes appears to be the first judge to propose one in a Chapter 9 municipal bankruptcy, according to a search of the Westlaw legal database.

Legal experts said making the appointment may stretch Rhodes' authority and that the city's lawyers would have grounds to contest an examiner. A spokesman for the U.S. Bankruptcy Court in Detroit said Rhodes would not comment.

In reality, it is unlikely lawyers will object to added oversight given that they are being paid from taxpayer funds. In the overheated political atmosphere surrounding the case, having an independent examiner approve fees could give a degree of cover to lawyers who often bill as much as $1,000 an hour.

In a matter of days, a top-flight attorney could bill more than an entire family makes in a year in Detroit, where the median annual household income is around $28,000.

The city's attorneys will be squaring off against, among others, Detroit's retirees, who have already vowed to block the bankruptcy. The majority of retired non-uniformed city workers collect less than $18,000 in pensions annually.

Acrimony in the case is already running high, with steady social media attacks on Emergency Manager Kevyn Orr's bills for room service deliveries of crab cake dinners, even though his spokesman has said he is not billing the city for such items.

With more than $18 billion of debt, Detroit filed for bankruptcy on July 18, in the midst of a long dry spell for large corporate bankruptcies that has resulted from a recovering economy and rock-bottom corporate borrowing costs. The few big cases still in the courts, including American Airlines and Eastman Kodak Co, are nearing an end.

"Everybody nationally in the bankruptcy world, particularly on the debtors' side, is scrambling for work," said Douglas Bernstein, a lawyer with Plunkett Cooney in Bloomfield Hills, Michigan. "That's why so much attention is being paid to this case."

The outcome of Detroit's bankruptcy could set important precedents that will impact how other cities deal with billions of dollars in pension and bond obligations. With so much at stake, Detroit and its bond insurers and unions are likely to splash out on the best legal help.

The city has retained the law firm of Jones Day, which brought Chrysler through bankruptcy in 2009. With more than 100 lawyers on the case, Jones Day picked up about $25 million in fees from Chrysler, according to court records.

Jones Day declined to comment for this story.

Legal work was only a small part of the total cost for Chrysler. The auto maker also paid for accountants, financial advisers and tax specialists for a final tab of almost $100 million. A similar set of professionals is expected to rack up fees in the Detroit bankruptcy.

In a Chapter 11 case like Chrysler, creditors and the court can review and object to each firm's detailed fee applications, which can run hundreds of pages and must account for time in six-minute intervals.

One of Chrysler's lawyers was Kevyn Orr, who is now Detroit's state-appointed emergency manager and the person leading the city's transit through the bankruptcy process.

By way of example, on April 20, 2010, Orr worked on the Chrysler case as a Jones Day partner and spent 3.5 hours preparing for a court hearing and 4.6 hours in court that day. Orr's time cost Chrysler $6,075, according to court documents.

Orr also billed Chrysler $459.40 for a flight between his Washington office and New York for the hearing, $71 to change his flight time and $4 to change his seat on the flight. He spent $376.43 for a hotel room in connection with the trip.

The section of the bankruptcy code that required Orr to make such detailed disclosures is absent in Chapter 9, which is used for municipal bankruptcies such as Detroit's.

The 10th Amendment of the U.S. Constitution reserves certain powers to the states to manage their internal affairs, and as a result a U.S. Bankruptcy Court cannot interfere with a state's control over its municipalities. Legal experts said that prevents a judge from telling a city whom to hire and how much to pay.

That's why in the case of Jefferson County, Alabama, the biggest Chapter 9 bankruptcy prior to Detroit, there are no court records with detailed fee and expense disclosures. The county has voluntarily said it has paid $38 million in legal fees since it filed for bankruptcy in 2011.

Nevertheless on July 23, Rhodes, the judge in the Detroit case, proposed the appointment of a fee examiner to "assure the court, the city, the creditors and the public that the city's professional fee expenses are fully disclosed and reasonable."

Fees and expenses would be disclosed monthly, under the judge's proposal.

Rhodes will discuss the proposal at a court hearing Friday and is likely to take suggestions on how an examiner would be selected and paid for. Legal experts doubt anyone will challenge his authority to make the appointment.

"Do you really want to poke momma bear? Is that something you want to argue with Rhodes about?" said Nancy Rapoport, a professor at the University of Nevada, Las Vegas, who has served as a fee examiner in Chapter 11 cases such as that of Pilgrim's Pride, the poultry company.

Already, a public records request by the American Lawyer magazine has revealed Jones Day brought in $1.4 million in the six weeks after it started work for Detroit in March.

If an independent examiner says legal fees of $1,000 an hour are reasonable, that might ease the pressure.

"If (a fee request) passes muster it certainly has the potential to give them some cover and it shows the judge is taking the fees seriously," said Bernstein, the attorney in Bloomfield Hills.

Fee examiners often review applications and work out questions with the applicant away from the court, but not always.

In the General Motors' bankruptcy, fee examiner objections eventually forced the judge to decide the appropriate number of attorneys for certain tasks. Judge Robert Gerber at times even ruled when lawyers should have taken public transportation instead of taxis.

"Most fee examiners try to justify their existence by cutting fees," said Kenneth Klee, who represents Jefferson County.

(Reporting by Tom Hals in Wilmington, Delaware; Editing by Jeffrey Benkoe and Claudia Parsons)

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