Detroit has filed one of the largest U.S. municipal bankruptcies this Thursday. The entire restructuring will consider more than $18 billion dollars. Attorneys from all parts will be able to represent various groups with interests in the matter. Perhaps this is a type of legal gold rush. At this time, creditors and related parties as well as insurers, bondholders and retirees will be in court with a legion of lawyers behind them.
The city of Detroit owed more than $8 billion in bond debt. They are not the first and probably not the last municipality to file for bankruptcy. They follow Boise County, Idaho, Central Falls, Rhode Island, Harrisburg, Pennsylvania, Jefferson County, Alabama, Stockton, Mammoth Lakes, and San Bernardino, California.
With such huge court proceedings inevitably drawing many firms to Detroit, several well known law firms have been confirmed to be working at the front lines. Firms Weil Gotshal & Manges, Arent Fox, Kirkland & Ellis, Winston & Strawn, and Sidley Austin have lawyers that will be handling corporate bankruptcy claims.
The city has mostly unsecured assets backing their general obligation bonds. About $1.3 billion are secured by city assets, from which $651 million is secured only by the ability to raise taxes. According to Reuters, the city’s emergency manager, Kevyn Orr, has said that he will treat $651 million as an unsecured claim. This has been untested in courts and will be hotly contested by bondholders. Ultimately the city will have to renegotiate deals, as unions and pension funds are underfunded.
As the industry lags in the doldrums many firms responded with layoffs, but at this time, there is enough work in municipal bankruptcies to go around. Other firms that may be involved in this large bankruptcy case include Brown Rudnick, Orrick Herrington & Sutcliffe, and DLA Piper. As new investments are spurred, for example, Detroit’s new water and sewer authority, “hedge funds or other investment vehicles could find ways into the case,” especially since financing new projects will happen with new bond issuance. Firms small and large may be able to benefit from this bankruptcy. At this time, it may seem like an oasis in the desert.