Cost of Detroit’s Historic Bankruptcy Reaches $126 Million
The cost of Detroit’s historic bankruptcy has reached $126 million and counting, surpassing the bills the big auto makers faced when they were in similar straits, reported The Wall Street Journal. An internal report on fees to outside advisers shows costs have roughly grown by four times since December when the city reported the total ... Read More »
The cost of Detroit’s historic bankruptcy has reached $126 million and counting, surpassing the bills the big auto makers faced when they were in similar straits, reported The Wall Street Journal.
An internal report on fees to outside advisers shows costs have roughly grown by four times since December when the city reported the total bill at nearly $28 million. The city’s leading law firm on the case already has charged $47 million.
City officials describe the nation’s largest municipal bankruptcy case as entering its final phase with the hope of exiting by year’s end. The trial phase of the bankruptcy is under way and expected to stretch into October.
Detroit’s municipal bankruptcy case has been both complex with more than 100,000 creditors and fast-paced with a goal of exiting bankruptcy as soon as possible so the city can again be run by locally elected officials.
The cost is surpassing such corporate bankruptcy filings as General Motors Co., which came in around $110 million, and Chrysler at around $77 million. Still, Detroit is unlikely to set any records. Bankruptcy fees for the U.S. administration of Lehman Brothers Holdings Inc., for example, surpassed $2.2 billion.
The price tag for Detroit is significantly higher than the total amount reviewed so far by fee examiner Robert Fishman, who was appointed by the court to oversee costs. Court filings show he has largely signed off on more than $50 million in fees through March. Occasionally, Mr. Fishman has called out some professional fees as unreasonable, questioning the need for media relations services whose work includes monitoring newspaper articles about the case.
The city of 688,000 residents already has paid nearly $104.5 million of its $126 million bill for lawyers, accountants, financial advisers and experts on everything from police work and pension funds to art appraisals and public relations, according to a Sept. 5 spreadsheet reviewed by The Wall Street Journal.
On Friday, the chief mediator in the case began a new round of nonstop talks between lawyers for holdout creditors and lawyers for the city. Because of that, Judge Steven Rhodes has put on hold the trial over the city’s plan to cut about $7 billion of Detroit’s estimated $18 billion in long-term obligations to allow for additional time to negotiate.
The city remains cash poor but not broke. With its bankruptcy filing, Detroit stopped paying certain debts, including payments to its pension funds, freeing up cash to pay its lawyers and consultants. The city had a cash balance of $156.8 million for the quarter that ended June 30.
City officials contend the fee charges aren’t out of line. “Obviously the longer we’re here, the more cost,” said Bill Nowling, spokesman for Detroit Emergency Manager Kevyn Orr, who has been running the city since March 2013.
Mr. Nowling added the fees need to be put into context: the city’s debt-cutting plan written by consultants envisions eliminating $7 billion in city debt and reinvesting $1.4 billion into blight removal and city services.
Stephen J. Lubben, an expert in corporate governance and business ethics at Seton Hall University School of Law in Newark, N.J., said the fees struck him as consistent with many corporate bankruptcy cases, but “here obviously it’s money that otherwise could go to Detroit creditors or even the residents of Detroit, who arguably could have better use for $126 million.”
Mr. Nowling said the total fees may rise to roughly $150 million by the time the city exits bankruptcy protection. Mayor Mike Duggan declined through a spokesman to comment about the bankruptcy fees, citing Mr. Orr’s role in running the case on the city’s behalf.
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