Detroit’s bankruptcy started with a mad dash to a federal courthouse, much as Orange County, California’s did in 1994, when it undertook a billion-dollar restructuring.
A difference between the two cases is their size. Orange County went into court with $1.7 billion in losses from a $7.5 billion investment pool it controlled, while Detroit’s July 18 filing listed $18 billion in debt, a record for a U.S. municipal bankruptcy.
What they shared was a need for speed and the lawyer who led the way: Bruce Bennett, the Los Angeles-based bankruptcy attorney who helped push both filings into court to shield his clients from potentially disruptive actions by creditors.
Detroit, Michigan’s biggest city, sought bankruptcy protection after decades of population decline and dwindling manufacturing jobs left it too poor to pay bondholders, retired cops and current city workers. It filed its petition minutes before a state judge could rule on requests by the workers and retirees to bar the city from bankruptcy.
“I said, ‘Enough of these outside lawsuits, let’s get into bankruptcy court,’” Republican Governor Rick Snyder said in a July 19 press conference. Later that day, the state-court judge ruled the bankruptcy improper and ordered Snyder to withdraw the petition. The Michigan attorney general is pursuing an appeal.
Almost 20 years earlier, when Orange County anticipated an uncontrollable rush by creditors to withdraw money from the pool, Bennett and his colleagues put the municipality under court protection, according to attorney Lee Bogdanoff, who worked with him on the case.
Bennett, 54, and his colleague David Heiman, 68, are now in charge of Detroit’s day-to-day legal strategy, which for the next four months will focus on defending Snyder’s decision to file. They are partners at Jones Day, a firm with more than 2,400 lawyers worldwide.
The two have been working out of the spotlight, which so far has been trained on the governor and Kevyn Orr, who was a partner at Jones Day when Snyder named him as Detroit’s emergency manager in March.
The focus may shift to Bennett, Heiman and the rest of their legal team when they enter the federal courthouse in downtown Detroit July 24 for an initial hearing in the case. Heiman is the case manager, while Bennett will lead the litigation and debt-restructuring efforts, Orr’s spokesman, William Nowling, said in a text message.
Detroit filed under the U.S. Bankruptcy Code’s Chapter 9, which is reserved for municipalities and the rules of which differ from those imposed on companies in Chapter 11. Unlike companies, municipalities don’t need to ask the bankruptcy court for permission to pay any bills they ran up before filing for court protection, including wages, utilities and rents.
While under court protection, Detroit can stop paying some debts, is temporarily immune from most lawsuits and may be able to ask a judge to cancel contracts, including union agreements.
The first key job for Bennett and Heiman will be to fend off the city unions, pension managers and bondholders that don’t want Detroit to have the court’s protection.
When Orange County filed what was then the biggest U.S. municipal bankruptcy, Bennett developed a strategy that quickly returned cash to other government agencies that had money in the investment pool, said Bogdanoff, of Klee Tuchin Bogdanoff & Stern LLP in Los Angeles.
That decision helped prevent smaller agencies from following Orange County into bankruptcy. Bennett also decided that the county would borrow money in the middle of the case to help pay creditors, something that hadn’t been done before, Bogdanoff said.
The county also sued Merrill Lynch & Co. to cut losses in the $7.5 billion fund. To settle claims over derivatives-trading losses that had led to the bankruptcy, Merrill, now a unit of Bank of America Corp., paid $400 million to the county and creditors who had put money into its investment pool.
All creditors were fully repaid, Bogdanoff said.
Heiman is a senior figure in U.S. bankruptcy circles, “a dean of the national bankruptcy bar,” said Derek Abbott, a lawyer at Morris, Nichols, Arsht & Tunnell LLP in Wilmington, Delaware. “He’s very polished.”
Heiman has handled corporate restructurings including the bankruptcies of Federated Department Stores and automaker Chrysler LLC of Auburn Hills, Michigan, just outside Detroit.
All his cases have prepared him for his latest job, Heiman said in an e-mail. “I do like Michigan, and Detroit, so maybe Chrysler helped in that respect. What really prepares is being on a great, cause-oriented team.”
Joe Farnan, a retired federal judge, said Bennett is one of the five best bankruptcy lawyers working today, with a gift for creative legal solutions, although he’s not always the best man to sell those ideas to a reluctant client who may need soothing.
“He’s not fuzzy and warm,” Farnan said in an interview.
Bennett declined to comment for this story.
During the bankruptcy of Major League Baseball’s Los Angeles Dodgers, Bennett came up with a way to lock in the value of future TV rights, said Farnan, who was the court-appointed mediator on the case. The solution made the Dodgers so valuable that real estate developer Frank McCourt agreed in 2011 to sell rather than fight to keep the franchise, Farnan said.
The team was sold for about $2 billion to a group that included Guggenheim Partners LLC and its top executive, Mark Walter, as well as Magic Johnson, the Hall of Fame basketball player. When the deal was signed, Johnson gave Bennett a Los Angeles Lakers jersey with the words “Go Dodgers” on the back.
In defending Detroit’s right to stay in bankruptcy, Heiman and Bennett will prepare for a proposed court hearing this fall the same way non-bankruptcy lawyers get ready for a trial: interviewing witnesses under oath, collecting documents and providing information to creditors about why the city filed.
To keep Detroit under court protection, the pair will need to convince U.S. Bankruptcy Judge Steven W. Rhodes that the bankruptcy petition was filed in good faith and that the city either made a reasonable effort to negotiate with creditors, or that talks weren’t practical.
Rhodes, 64, is a 28-year veteran of the bench and a co-author of a book on the law of unraveling Ponzi schemes. He presided over the bankruptcy case of auto-parts maker Collins & Aikman Corp. and also served as chief judge of the Detroit bankruptcy court when it changed its rules at the end of 2008 to make it a more attractive venue for carmakers seeking to reorganize.
The judge keeps cases moving and won’t be swayed by public opinions aroused by a high-profile case, said Judy Calton, a bankruptcy partner at Honigman Miller Schwartz & Cohn LLP in Detroit. “He’ll keep people’s feet to the fire.”
Heiman, who grew up in Cincinnati and got his law degree from the University of Cincinnati, is based in Cleveland, where he founded Jones Day’s bankruptcy division in 1984.
Both men are married fathers of two.
Jones Day was hired by Detroit over Klee Tuchin, which is handling the $4 billion bankruptcy of Jefferson County, Alabama.
Leading a major case like Detroit’s can be exhilarating and exhausting, said Kenneth Klee, the lawyer in charge of Jefferson County’s case.
In June, Jefferson County announced a settlement with JPMorgan Chase & Co., a group of hedge funds and bond insurers that would cut debt by more than $1 billion by imposing the biggest losses on creditors ever in a Chapter 9 bankruptcy.
The proposal, which has the support of creditors that hold a majority of the county’s $3 billion sewer warrants, goes before a court for approval in November, which would allow the county to exit bankruptcy by the end of the year, about two years after it filed.
While Orr has said he hoped Detroit would emerge from bankruptcy by the late summer or fall of 2014, Klee said the city’s case will probably last three years.
“It is very, very satisfying work,” Klee said. “It is demanding. It takes a huge physical toll. It takes a toll on your relationships and your families.”
The case is City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
To contact the reporter on this story: Steven Church in Detroit at email@example.com