Who is representing Detroit?

July 25, 2013

Since Kevyn Orr was appointed Detroit’s emergency manager on March 18, his approach always seemed a little off, especially when bankruptcy is concerned. For a Chapter 9 municipal bankruptcy to work, most of the parties must come to a mutual agreement about what each will sacrifice. Federal bankruptcy judges only have the authority to “cram down” a minority of creditors in a specific class when the majority agrees. Federal bankruptcy judge Steven Rhodes, for example, can’t force all bondholders in a class to take a 50 percent haircut. Absent that power, municipal bankruptcy usually lasts much longer than others, as parties come to an agreement.

This balancing act is no easy task for a bankruptcy leader (city official, receiver, emergency manager or lead attorney). But when Orr laid out his creditor proposal on June 14, his aggressive treatment of retirees and bondholders seemed to me like he was wielding a chainsaw where a paring knife would have been the best tool to begin the work. The law firm Jones Day, the firm Orr left before becoming emergency manager, had been involved in the corporate bankruptcy fight of Chrysler. Orr’s opening punch felt like a move from corporate bankruptcy.

We get a peek into Orr’s thinking through a series of emails between him, while he was still a lawyer at Jones Day, and state officials. The emails were made public by a FOIA request by a Detroit labor activist. A January 31, 2013 email from associate Dan Moss to Orr is a suggestion to “nationalize” Detroit’s bankruptcy issue and provide “cover” for state politicians:

Then a senior partner of Jones Day, Corinne Ball, suggests soliciting funds from the Bloomberg Foundation to pay for part of the costs of the bankruptcy process. What happened to local or state control? Would the Bloomberg Foundation get to have partial control of the process, or is this just a branding idea? Michigan’s Local Financial Stability and Choice Act 436 of 2012 gives no authority to Detroit’s emergency manager or any law firm to go out and shop for corporate sponsorship. What are these people thinking?

Note the date on these discussions is January 31; about six weeks before Orr and Jones Day were appointed to represent Detroit.

Maybe this is all a lot billable hours spent over nothing. But I found the discussion between a staff member of Michigan Governor Rick Snyder, Richard Baird, and Orr significant:

This message appears to say that a governor’ staff member told Orr that he had final say over the terms that Detroit’s Mayor Dave Bing and the city would be overseen and restructured.

Mayor Bing, in a statement, walked back any approval he had supposedly made about the “summary of partnership:”

I did not cut any type of secret deal with Lansing. Throughout this process, I have been very vocal about being against an Emergency Manager.

When it became obvious that Lansing had made the decision to bring in an Emergency Manager, I thought the best choice was for the City to work in partnership with Lansing to protect the interests of the citizens of Detroit.

To that end, I thought it very important to keep my Executive Team in place to carry out the day-to-day operations and continue to implement our restructuring initiatives.

Many local reports describe the citizens of Detroit as feeling “taken over.” These emails give me an unsettled feeling that no one is representing the citizens of Detroit, and that Bing has been marginalized. Orr and Jones Day are clearly representing the governor. This explains why today’s federal bankruptcy court ruling extended court protection to the governor, the state treasurer and Orr. They are the ones running the show now.

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Perfect title for a great post. Just like the little child who points out that the emperor is not wearing any clothes, the title boldly challenges the obvious absurdity, that the Jones Day firm which purportedly represents Detroit acts instead like it has other masters. But what should we expect when Bruce Bennett’s shameful track record of violating conflict of interest rules was deemed a resume enhancer by Stephen Brogan as his salivated over the coming trend of municipal financial failures. Embarrassments like SONICblue and Aureal should have resulted in disbarments and incarcerations, not as a ticket to hop from failing firm to failing firm. Thank you for seeing beyond the hype, and keep an eye on this case which may have some big surprises down the road.

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