“A Tour de Force of Legal Acumen” was the headline
of the Detroit Free Press article on the day that Bankruptcy Judge Steven
Rhodes announced his opinion confirming the City of Detroit’s Chapter 9
Plan of Adjustment. The headline of that article stemmed from a quote from
Detroit emergency manager Kevyn Orr, commenting on Judge Rhodes’
confirmation opinion. Receivership News had the privilege of
interviewing Judge Rhodes for this issue’s Judges Profile.
Prior to his appointment as a bankruptcy judge in the
Eastern District of Michigan in 1985, Judge Rhodes was first a prosecutor
and then a magistrate judge. He served as a bankruptcy judge from 1985 to
2015, sitting also on the Bankruptcy Appellate Panel of the Sixth Circuit
for two different terms totaling about 12 years. His list of
accomplishments, writings, speeches, and community service would fill a
few issues of Receivership News alone, so we thought we would focus on a
just a few in this interview.
As the judge presiding over the City of Detroit
Chapter 9 case, Judge Rhodes was “brilliant,” in the words of a lawyer
representing the City in that case. The Detroit Free Press
observed: “Throughout Detroit's 16-month bankruptcy, Judge Steven Rhodes
never forgot the profound impact of the case on city residents, employees
and retirees.” “He was conscious of his own
image and duty as a judge to stay out of the spotlight so the public's
focus was on the case, not the judge.” Judge
Rhodes handled the Detroit case with the firmness that the disputing
parties needed and a sensitivity that went above and beyond the call of
duty. As if presiding over the largest municipal bankruptcy in U.S history
wasn’t enough, Judge Rhodes just couldn’t sit still after his retirement
party, and he accepted the position as Emergency Manager for the Detroit
Public School System at the request of the Governor of Michigan.
This profile would also not be complete without a
mention of Judge Rhodes’ contribution to the receivership community as
well. He is the co-author of The Ponzi Book: A Legal Resource for
Unraveling Ponzi Schemes (with me), and he is a friend of both the
California Receivers Forum and the National Association of Federal Equity
Receivers, speaking and writing for both organizations.
Below Judge Rhodes shares with us his views on his
journey from the bench, to emergency management, to mediation, and the fun
he has had along the way.
PHELPS: What did you find rewarding about
your work as a bankruptcy judge?
RHODES: Only part of bankruptcy is about money and what to do when
there isn’t enough to go around. It’s much more about the mistakes people
make, the misfortunes they suffer, and their unsuccessful attempts to
overcome. Occasionally, it is also about fraud, sometimes small, sometimes
big. And these mistakes, misfortunes and frauds are not only on the
debtors’ side; they are as much on the creditors’ side.
All of this makes every case interesting. Dealing
with people and trying to help them make the decisions in their lives that
will facilitate their true fresh start was the most emotionally rewarding
part of the job. Intellectually most rewarding was the opportunity to work
on interesting and consequential issues with really good lawyers.
PHELPS: Do you miss being a bankruptcy judge?
RHODES: I miss the people – my staff, my colleagues, the lawyers
and the other professionals, but I do not miss the work. After almost 30
years of it and after the intensity of the Detroit case, I was done and
ready to retire, although that didn’t last very long!
PHELPS: How did you become interested in Ponzi
scheme cases? RHODES: Over the years,
I had
had a few small bankruptcy cases that appeared to be Ponzi schemes, but my
involvement in them was largely superficial. My real entry into the world
of Ponzi schemes occurred through speaking at conferences on fraudulent
transfer law. I then began to see how fascinating and unduly complex the
law of unravelling these schemes had become. It made me wonder whether
that law needs its own “fresh start.” Equally intriguing is the psychology
of both perpetrators and victims that allows such schemes to propagate.
And then there are also the societal questions about how to prevent Ponzi
schemes.
PHELPS: What motivated you to co-author
The Ponzi Book, A Legal Resource for Unraveling Ponzi Schemes?
RHODES: There are so many Ponzi schemes, and
so many judges, lawyers and other professionals working on unraveling
them. As you and I investigated the resources available for these
professionals, we found there was a need and a market for a logically
organized resource that collected all of the law pertinent to unraveling
Ponzi schemes – fraudulent transfer law, preference law, criminal law,
securities law, property law, tort law, bankruptcy law, and even foreign
law. Two years and 800+ pages later, we have a well-received book. It was
a fascinating journey. PHELPS: You
have done some speaking and writing on federal equity receivership cases.
What is it about the receivership process that has caught your attention?
RHODES: I have spoken at conferences put on by
both the California Receivers Forum and the National Association of
Federal Equity Receivers. The educational content I have seen at these
receiver organizations is extremely valuable, and I’ve certainly learned
more than a few things along the way.
What is so interesting about these cases is that in providing relief to
victims of a fraud in these types of cases, the federal district judge is
exercising full equity jurisdiction. The judge is therefore not bound by
statutory rules of decision. In creating solutions, the judge is guided
solely by conscience, good judgment and, of course, any precedential
authority. The receiver that the judge appoints is the means by which the
judge implements those solutions. This is unique in the law. In fact, it
is so unique and so contrary to what judges normally do that it is not
well-understood or effectuated. And that is unfortunate because when
judges do try to apply legal doctrine to cases in equity, the result is
sometimes unduly complex and even unfair.
PHELPS: How would you compare the bankruptcy process and the
receivership process for addressing fraud schemes?
RHODES: They are as different as they can
be. Although bankruptcy courts are said to be “courts of equity,” legal
doctrine is applied to all phases of the process, from the marshalling and
sale of assets to the ultimate distribution under the priorities
established in law. The receivership process is, as noted, an equitable
process. The judge’s discretion determines how to achieve a fair
resolution, although that basic principle of equity seems to have been
lost. PHELPS: Which is the better
process in Ponzi scheme cases?
RHODES: Actually, I don’t like either one.
On the bankruptcy side, trustees sometimes use fraudulent transfer claims
to coerce settlements from investors who have already lost all or almost
all of their assets in the fraud. The “good faith” defense that these
defendants offer is confusing, complex and expensive to administer. And
bankruptcy’s strict distribution scheme is not an equitable scheme that
accounts for prepetition distributions from the perpetrator.
On the receivership side, the potential to create, on
a case by case basis, a fair, expeditious and efficient result is there,
but that potential is not always realized because, unfortunately, judges
often prefer to apply legal rules of decision rather than the discretion
that equity allows. Beyond that, both
bankruptcy and receiverships suffer from the silly rule that puts the
trustee and the receiver “in the shoes” of the perpetrator. The resulting
issues of standing and in pari delicto are complex and unjustified. They
also create unfairness and increase delay and expense.
Now add to all of that a parallel criminal forfeiture
proceeding and the remedial process becomes a nightmare!
If I have to choose, I would give the nod to the
receivership process, but with two conditions. First, the receivership
judge must be willing to exercise the equitable jurisdiction that Congress
clearly granted in these cases. Second, all forfeited property should go
into the receivership estate to be distributed with the receivership
assets as the judge determines. PHELPS:
What lessons should people around the country take from the Detroit
bankruptcy case?
RHODES: 1. If a municipality is insolvent
and has no realistic plan to dig out, it should not wait eight years to
file bankruptcy like Detroit did. 2. An emergency manager that makes
decisions for the municipality during the case makes the process much more
efficient. 3. Strong mediation is a key to an efficient result. 4.
Municipal bond creditors and pension creditors are all unsecured creditors
unless their claims are secured in a way that bankruptcy law accepts. 5.
Municipal bankruptcy has no impact on municipal bond interest rates. 6.
Creditors should support, not oppose, municipal bankruptcy; municipalities
cannot print money and the alternative is chaos. 7. For every dollar that
a debtor borrows knowing it shouldn’t, there is a creditor lending that
dollar knowing it shouldn’t. PHELPS:
How did you deal with the pressure of the Detroit case?
RHODES: One day at a time. I insisted on
resolving every contested matter as promptly as possible with the minimum
due process that the constitution and law required. I had a great staff.
And the lawyers also made the job more bearable by narrowing the issues as
much as they could and by their great arguments on the remaining ones.
PHELPS: You have had personal experience with
emergency management in the Detroit case and now with the Detroit school
system. Are there any similarities in the work of an emergency manager and
the work of a receiver? RHODES: Both
obviously involve displacing management for the purpose of addressing the
consequences of an insolvency. Both a receiver and an emergency manager
begin their work with only the vaguest idea of what to expect and how
their work will proceed. Both work under the supervision of the appointing
authority. Both need substantial legal and accounting support and
expertise. Both are accountable to perhaps large numbers of people who are
deeply concerned about their futures and are vocal about those concerns.
The obvious difference is that more often than not, a
receiver’s goal is liquidation but an emergency manager’s goal is always
reorganization and revitalization.
PHELPS: What’s going on with the ABI band, the Indubitable
Equivalents, that you play in?
RHODES: I love playing in the band. It’s a
great group of guys and we are good! We recently had a blast playing at
the California Bankruptcy Forum May 2016 Annual Conference at the Indian
Wells Music Fest. We are about to reinvent and revitalize our set list
with many new tunes, so that we can continue to entertain our adoring
fans. PHELPS: What are your plans
following your work with the Detroit schools?
RHODES: I plan to retire. Again. And then next
spring, I plan to do some mediation and arbitration work through JAMS,
which is opening a new office in Detroit.
*Kathy Bazoian Phelps is a partner at Diamond McCarthy, LLP,
Los Angeles, and the co-author of The Ponzi Book: A Legal Resource for
Unraveling Ponzi Schemes. She frequently represents receivers and
trustees.
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