Detroit Today

Detroit Bankruptcy Judge Steven Rhodes, WDET Exclusive Interview

Tuesday, February 17, 2015

When Detroit entered bankruptcy a year and a half ago, Judge Steven Rhodes was assigned to preside over the action. The University of Michigan Law School grad oversaw the nation’s largest municipal bankruptcy; a precedent-setting case. He has been praised by colleagues and critics alike for his handling of the courtroom. Judge Rhodes announced last week he is retiring as a bankruptcy-court judge. In his first post-bankruptcy interview, Rhodes joins Laura Weber-Davis and Sandra Svoboda on Detroit Today.

Excerpts from the interview below...

In a wide-ranging interview, Rhodes talked about becoming a lawyer, being a judge and bringing his personal approach to the bench in the Detroit case.

Here are some highlights from the conversation.

Should the city have filed bankruptcy? “I was actually of the opinion that Detroit should have filed bankruptcy years before it actually did and I expressed that in one of my opinions. … The city’s slide into bankruptcy began really decades before. With the decline of the auto industry, with the migration of the auto industry, with the decline of population, with the racial issues and tensions. It’s for me to judge that one particular transaction contributed to it.”

His decision to involve individuals in the case: “Many of the people in the city of Detroit were angry about the filing. They felt their city had been taken away from them, that their democracy was taken away from them. They were also suffering from grossly inadequate municipal services, and so I felt it was important to give these people a voice in this progress.”

His disappointment that local media didn't sue the court for better access: “I had had several overtures from news media for permission to broadcast the proceedings, and this is strictly prohibited by judicial conference policies by federal courts… I was hoping that you all in the media would actually formally tee that up to me in some kind of a motion asserting your First Amendment rights, but it never happened."

The legality of the pension funding deal known as the COPS – Certificates of Participation: “It was structured to be an intentional evasion of the legal debt limits that municipalities by state law are required to stay within. It was too innovative, it was too creative and um that by itself should of been a reflag at the time.”

His decision to hold hearings on the issue of customer shutoffs by the Detroit Water and Sewerage Department: “It weighed on me very heavily … this was a very serious problem. That people obviously need water to survive and I was concerned that the city’s response was not adequate. … When a judge feels and sees injustice, I believe that a judge has the responsibility to do what he or she can about it. … That doesn’t mean in that every circumstance the can solve the problem. Sometimes there are practical reasons why he or she can’t, sometimes there are legal reasons. I felt that by calling out the water department and asking to speak personally with the decision makers and highlighting this problem in open court with the full attention of the media on the issue, I was doing what I could, even if I didn’t have jurisdiction to deal with it.”

The Michigan Legislature, in developing and ultimately passing bills to fund pensions and create oversight for the city: “I felt that the dabbling in the adjusting the debt in the bankruptcy by the Michigan Legislature would ultimately be counterproductive so I discouraged it.”

How important the “grand bargain” was to the case’s resolution: “It was the key to the ultimate prompt resolution of the case.”

Advice for resolving disputes: “The way to resolve them is not through litigation it’s through mediation and negotiation.”

Photo Credit: Michael Ference

Why it was important to have a speedy resolution to the Detroit bankruptcy case: “If we had to litigate even with one class of creditors, it would create delay, years of delay potentially, in the city’s ability to revitalize and restructure itself and that’s intolerable.”

His controversial ruling that public pensions are not protected from cuts during a bankruptcy proceeding, despite their guarantee from impairment by the Michigan Constitution. “I have to say from a legal perspective, it was not a particularly difficult decision. I looked at the Michigan law, the case law, the Michigan Supreme court case law says that pensions are contracts, pension obligations are contract obligations and we impair contract obligations all the time in bankruptcy, that’s what we do.”

One of the big differences between a municipal bankruptcy (Chapter 9) and a corporate bankruptcy (Chapter 11): “The basic line is that a bankruptcy judge has no authority, no jurisdiction over the city’s property, or its revenues, or its political decisions. That is a huge exception to our jurisdiction. Normally in a Chapter 11 case where it is a business, we have full jurisdiction over the property of the debtor over the decisions they make and what happens, but in municipal it is much more restricted.”

The “clawback” of the Annuity Savings Fund payments to retirees: “The pension plans would accrue to individual pensioners accounts, interest, at the assumed rate of return even if the actual rate of return was less. So this had the effect at eating away at the pension plans’ ability to fund future pensions. The whole issue of underfunding pensions was a major issue in the case and the city was concerned about that and properly so. … It was a settlement in which both parties made concessions. In the end the city wound up getting I think it was about 50 percent give or take what its original claim amount was. I felt it was a fair settlement given the strength of the case. My view based on the evidence before me was that the board of the GRS, General Retirement System, had quite likely acted imprudently in granting interest that it didn’t have from its returns.”

The city’s ability to meet the terms of the Plan of Adjustment: “My concern, to be very blunt, is with the city’s pension obligations because in municipalities around the country and in Detroit before it filed bankruptcy, the politics of municipalities are such that pension obligations do not have a natural constituency the way other needs of the city do, and they have a tendency to be deferred. … Beginning in about nine or 10 years, the city will have substantial pension obligations, and its fulfillment of those obligations will be crucial to maintaining the city’s relation to its retirees.”

The city owed hundreds of millions of dollars to two bond insurers, Syncora and Financial Guaranty Insurance Co. Settlements, some of the final ones of the case, gave the companies development options, including the Joe Louis Arena site, city-owned parking garages and future options on land: "It was done really as a matter of necessity. My own feasibility expert had made it clear in court that the cupboard was bare in terms of paying these last two settling creditors money from future revenues of the city. So Judge Rosen and these attorneys got creative. … In the long term it’s a win-win. The whole concept of giving creditors a stake in the outcome of a municipality in this very direct way is unprecedented. … The development opportunities that these creditors have will accelerate the city’s revitalization so I think that in the long term the price the city paid by giving up these properties will be more than outweighed by the benefit it will obtain from this accelerated revitalization.”

Photo Credit: Michael Ference

How bankruptcy as both a legal case but also a problem for individuals: “The most interesting thing about bankruptcy in particular, is that every case is interesting from a human perspective: how people get into financial trouble, how they try to work their own way out, the difficulties they have. And every case was interesting on a human perspective … The same is true in business cases, even the larger business cases that I have because they’re all run by people and they make mistakes and they have bad luck and the question is what can we do in the bankruptcy system to help them."

His law school experience at University of Michigan Law School: “The thing I liked most about law school was studying with my classmates. That’s the thing about law: the more you work together on addressing a legal issue, the higher the discussion, the better the result, the more you learn, and that’s what I enjoyed about law school." He says he found the same benefits in teaching by being able to learn more in a communal way.