By Steve Thorpe
Legal News
Jaffe Raitt Heuer & Weiss, reacting to the upward trend in municipal bankruptcies, has created a specialized practice group.
“We began to understand what was unfolding in the state’s municipalities,” says Jay Welford, chair of the firm's new Insolvency and Reorganization Practice Group. “We were watching an old statute being ‘undone’ and a new statute, Public Act 436, being created. We knew what was going on with respect to the city of Detroit and that it was just the tip of the iceberg in the state and the country. We decided that there was a great need for expertise in the municipal insolvency area.”
Because Chapter 9 has been invoked so infrequently, few law firms have accumulated experience in the area. Jaffe believes it has demonstrated the highly-specialized expertise needed to navigate the many complex issues of a municipal insolvency.
Chapter 9 can be deceiving because the actual text is quite brief, but the implications are still unfolding.
“There are 10 pages in the bankruptcy code that make up Chapter 9, so there’s very limited guidance from the code,” says practice group member Paul Hage. “There’s also limited precedent because Chapter 9 has not been used much, with only one prior case in Michigan. This results in a lot of issues of first impression for talented lawyers – and there are a lot of very, very talented lawyers in these cases – to make creative arguments. I’ve told people that it must be similar to what it was like to practice when the bankruptcy code was first enacted. There is so much ‘unknown’ about what the law is.”
Welford specializes in insolvency, creditors' rights and leasing law representing creditors, debtors, secured lenders and lessors for more than 30 years. He lectures on bankruptcy and insolvency topics for the Commercial Law League of America, the American Bankruptcy Institute and the Law Education Institute. He’s also authored articles on bankruptcy and creditors' rights issues.
Hage specializes in representing asset purchasers, unsecured creditors' committees, debtors, secured and unsecured creditors, and trustees in bankruptcy proceedings.
Jaffe has represented both sides in municipal proceedings, which they maintain gives them a better perspective than most firms into the complex and evolving issues that arise.
In Detroit’s bankruptcy filing, Jaffe represented the insurer of $2.5 billion of bond debt. Working with the city of Highland Park’s insolvency, Jaffe provided advocacy and strategic counsel on behalf of the municipality itself.
This involvement allowed Jaffe to accumulate experience and eventually led to the decision to create the practice group. The firm was able to staff the group from within by drawing on different areas.
“We have 10 insolvency lawyers and another eight or so on the corporate side who are primarily in support roles in respect to the municipal finance issues,” says Welford. “Pulling from that corporate side will depend on the disciplines we need on a given engagement.”
They also tout the fact that they’ve been on both sides of the fence in municipal bankruptcy proceedings and that it gives the group a 360 degree view of the process. The needs and expectations of the various players can be quite different.
“When you’re on the creditor side, it’s much more a dollar and cents issue,” says Welford. “You’re trying to maximize the dollars for your constituency. If you’re representing a municipality, obviously what you’re trying to do is make the entity work. You’re dealing with issues other than dollars and cents including health and welfare, protection of citizens, and many other ongoing dynamics.”
Although past experience with other types of bankruptcy is valuable, Chapter 9 brings a whole new set of issues into the arena.
“With Chapter 9, you have an ‘overlay’ you don’t have in Chapter 11,” says Welford. “It’s the impact on the social fabric. Chapter 11 is much more dollars and cents and restructuring a balance sheet. In the Detroit case it’s not all dollars and cents. It’s how it’s going to ultimately impact the citizens of the city and the people of the state of Michigan.”
Both Welford and Hage expect this part of the firm’s business to grow and believe that the harsh realities municipalities face are not going away anytime soon.
“These issues have been bubbling up for decades,” Hage says. “Municipalities, whether perceived to be healthy or not, need to be thinking about these issues now. Leaders tend to just ‘kick the can down the road’ and wait for somebody else to get elected so it becomes their problem. So the problems only seem to get worse.”
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