Hon. Steven Rhodes addresses a class of Michigan Law students about the consequences of Detroit’s bankruptcy.
By Sharon Morioka
Michigan Law
Nearly 11 years after the City of Detroit exited bankruptcy, the presiding judge, the Hon. Steven Rhodes, recently spoke to a class of Michigan Law students about the complexities of the case and its continued implications for the city’s future.
In July 2013, Rhodes was simultaneously on the cusp of retirement and facing the most remarkable case in his nearly 30 years as a judge for the US Bankruptcy Court in the Eastern District of Michigan. He was set to preside over the largest municipal bankruptcy case in US history as the City of Detroit confronted $18 billion of debt with no prospect for paying it.
Fast forward a mere 17 months and the city exited bankruptcy with a plan that most of its retirees, employees, and financial creditors all supported. The plan shed more than $7 billion of the city’s debt and later enhanced its credit rating to investment rate; it had been junk. The plan also included a 10-year, $1.7 billion investment to restore municipal services and aid revitalization.
Despite the speed and success of the process, it was not without pain. Then-Gov. Rick Snyder had appointed Kevyn Orr to be the city’s emergency manager in the spring of 2013, raising considerable backlash among the city’s residents who deemed the appointment undemocratic. Orr recommended the bankruptcy filing that began the process that Rhodes discussed on October 22 with Professor Allyn Kantor’s Alternative Dispute Resolution class.
He described how skillful mediators were able to resolve the case and allow the city to change its story from a near-certain obituary to one of remarkable progress that continues to this day.
Following are four takeaways from the presentation.
—————
1. Detroit’s bankruptcy wasn’t simply a financial issue; it also was a people issue.
The city’s inability to provide services had a profound effect on its citizens, creating obstacles to their pursuit of basic values, from health and education to personal security.
“It’s those values that ground the very reason why we Americans create government,” Rhodes said. “All of those values were impaired because the City of Detroit could not provide adequate municipal services.”
He held the governments of both the city and the state as well as Democrats and Republicans responsible for decades of inaction. That failure, he added, had to be reversed and a path to achieve a new direction had to be created.
As it turns out, that path was created in his bankruptcy court. Rhodes said Snyder’s decisions to appoint Orr and authorize the bankruptcy filing were necessary and long overdue.
“They were the only decisions that could create any opportunity to break through Detroit’s decades-long paralysis about its decline and to create the potential, at least, for a hopeful future for the city and its people.”
Those decisions, however, did not come without consequences.
“There was widespread belief that the state takeover of the city by the appointment of the emergency manager was racially motivated,” Rhodes said of the majority Black city and despite the fact that Orr is Black. “They also felt politically disenfranchised and financially threatened.”
—————
2. Thanks to a successful mediation, the city exited bankruptcy within a short period of time.
Rhodes said five factors allowed the city to exit bankruptcy in 17 months.
First, to borrow a phrase from the movie “Glengarry Glen Ross,” Rhodes said he had to “always be closing” to deal with the tsunami of motions, objections, responses, briefs, and adversary proceedings that the parties and their lawyers filed. He did allow one exception: He always honored a suggestion from the mediators to apply the brakes when they advised him that it would facilitate mediation.
Second, he cited “miraculous” mediation. He knew that litigation, rather than mediation, would be followed by years of appeals and uncertainty. He added that the smartest thing he did was to appoint his chief district judge,
Gerald Rosen, to be the mediator in the case.
“I suggested to him that his deliverable, when he was done, should be a confirmable plan of adjustment,” said Rhodes. “And he delivered.” Rosen went on to write a book, “Grand Bargain: The Inside Story of Detroit’s Dramatic Journey from Bankruptcy to Rebirth,” about the bankruptcy.
Third was “really good lawyering,” including cogent briefs and arguments; stipulations, wherever possible; well-organized exhibits; and to-the-point witness examinations. Two other things also stood out: The lawyers were extraordinarily civil, even while they advocated zealously for their clients. They also possessed “the trifecta of skills”—good litigation skills, good negotiation skills and mediation skills, and a good judgment to know when to litigate and when to negotiate and mediate.
Fourth, the emergency manager structure that the Michigan Legislature created was essential. Rhodes said that, while it deeply disturbed him that the authority of their democratically elected leaders was taken away from city residents, it was necessary.
“It is unimaginable that this case could have been so successfully and promptly concluded if, instead, Detroit’s democracy had remained in place and every one of the thousands of decisions that were made in the case were required to go to the city council and the mayor for their approval. …I’m not sure the city could have survived.”
Fifth, after all was said and done, he pondered why creditors agreed to adjust their debts on terms that the city could afford to pay. There was a strong measure of self-interest and realization that the deal on the table was the best deal they were going to get. But Rhodes also believes that the basic mission to help the people of Detroit compelled the city’s creditors, the state of Michigan, and the foundations to help the city.
“I believe all of this is at least one reason why so many of the creditors agreed to share in the sacrifice and support the city and its plan, its future, despite the hardship that the plan asked of them.”
—————
3. But the process was not without challenges.
While successful, the bankruptcy process was not without challenges. For Rhodes, the most persistent challenge was the fact that the case was as much political as legal because everyone in the city had a stake in its outcome.
“The residents’ interests were the ultimate goal of the case,” he said. “Yet we have this federal law and this constitution, according to our Supreme Court, that denied them any right to be heard.”
That right was legally limited to the city, through the emergency manager, and its financial creditors. Rhodes, however, “willingly violated” the Constitution and gave residents standing in two circumstances: at the beginning of the case, when the issue was when the city would be eligible to file bankruptcy, and at the end of the case, when the issue was whether to confirm the plan.
Allowing residents to speak sent a message about the openness of his process and was profoundly important to Rhodes.
“They allowed me to understand firsthand the cruelty…that resulted to the people of the city from the city’s failure to provide adequate services.”
He also gave the media as much access to the proceedings as possible despite a policy in the federal courts that prohibited simultaneous broadcasting or webcasting of proceedings.
“I thought the public had a right to see what its elected and unelected people—like me—were doing with this future.”
—————
4. The city and its people now look forward.
While Rhodes and the others met those challenges, he has had lingering concerns about the future of the city. For example, he has the impression that Detroit’s schools have not progressed academically, which likely discourages families from moving into the city.
Initially, he also was concerned whether Detroit would be able to maintain its obligations to fund the city’s pensions. Fortunately, it has maintained all of its obligations and had enough cash to restore almost all of the cuts that the plan required.
He also was concerned whether city leaders would maintain their commitment to its revitalization. Mayor Mike Duggan maintained that commitment, Rhodes said. And he hopes, when the city elects a new mayor and city council in November, the government will continue that commitment.
Rhodes also spoke about the future of the Detroit Institute of Arts (DIA). During the bankruptcy process, the DIA’s holdings, which the city owns and are worth billions of dollars, came into creditors’ focus. Both Rhodes and Orr decided it would be inappropriate to sell the art due to its cultural value. Instead, the bankruptcy settlement transferred the art from the city into a trust so that it would never again be subject to the claims of creditors.
“Now I’m as optimistic as I possibly can be about the city’s future,” Rhodes said. “There are people everywhere rooting for the city of Detroit. So this case was a dream case for me. …I’m thankful for the work of the lawyers and the other professionals in the case and for the work of the mediators. We were truly all partners on the team.”
Michigan Law
Nearly 11 years after the City of Detroit exited bankruptcy, the presiding judge, the Hon. Steven Rhodes, recently spoke to a class of Michigan Law students about the complexities of the case and its continued implications for the city’s future.
In July 2013, Rhodes was simultaneously on the cusp of retirement and facing the most remarkable case in his nearly 30 years as a judge for the US Bankruptcy Court in the Eastern District of Michigan. He was set to preside over the largest municipal bankruptcy case in US history as the City of Detroit confronted $18 billion of debt with no prospect for paying it.
Fast forward a mere 17 months and the city exited bankruptcy with a plan that most of its retirees, employees, and financial creditors all supported. The plan shed more than $7 billion of the city’s debt and later enhanced its credit rating to investment rate; it had been junk. The plan also included a 10-year, $1.7 billion investment to restore municipal services and aid revitalization.
Despite the speed and success of the process, it was not without pain. Then-Gov. Rick Snyder had appointed Kevyn Orr to be the city’s emergency manager in the spring of 2013, raising considerable backlash among the city’s residents who deemed the appointment undemocratic. Orr recommended the bankruptcy filing that began the process that Rhodes discussed on October 22 with Professor Allyn Kantor’s Alternative Dispute Resolution class.
He described how skillful mediators were able to resolve the case and allow the city to change its story from a near-certain obituary to one of remarkable progress that continues to this day.
Following are four takeaways from the presentation.
—————
1. Detroit’s bankruptcy wasn’t simply a financial issue; it also was a people issue.
The city’s inability to provide services had a profound effect on its citizens, creating obstacles to their pursuit of basic values, from health and education to personal security.
“It’s those values that ground the very reason why we Americans create government,” Rhodes said. “All of those values were impaired because the City of Detroit could not provide adequate municipal services.”
He held the governments of both the city and the state as well as Democrats and Republicans responsible for decades of inaction. That failure, he added, had to be reversed and a path to achieve a new direction had to be created.
As it turns out, that path was created in his bankruptcy court. Rhodes said Snyder’s decisions to appoint Orr and authorize the bankruptcy filing were necessary and long overdue.
“They were the only decisions that could create any opportunity to break through Detroit’s decades-long paralysis about its decline and to create the potential, at least, for a hopeful future for the city and its people.”
Those decisions, however, did not come without consequences.
“There was widespread belief that the state takeover of the city by the appointment of the emergency manager was racially motivated,” Rhodes said of the majority Black city and despite the fact that Orr is Black. “They also felt politically disenfranchised and financially threatened.”
—————
2. Thanks to a successful mediation, the city exited bankruptcy within a short period of time.
Rhodes said five factors allowed the city to exit bankruptcy in 17 months.
First, to borrow a phrase from the movie “Glengarry Glen Ross,” Rhodes said he had to “always be closing” to deal with the tsunami of motions, objections, responses, briefs, and adversary proceedings that the parties and their lawyers filed. He did allow one exception: He always honored a suggestion from the mediators to apply the brakes when they advised him that it would facilitate mediation.
Second, he cited “miraculous” mediation. He knew that litigation, rather than mediation, would be followed by years of appeals and uncertainty. He added that the smartest thing he did was to appoint his chief district judge,
Gerald Rosen, to be the mediator in the case.
“I suggested to him that his deliverable, when he was done, should be a confirmable plan of adjustment,” said Rhodes. “And he delivered.” Rosen went on to write a book, “Grand Bargain: The Inside Story of Detroit’s Dramatic Journey from Bankruptcy to Rebirth,” about the bankruptcy.
Third was “really good lawyering,” including cogent briefs and arguments; stipulations, wherever possible; well-organized exhibits; and to-the-point witness examinations. Two other things also stood out: The lawyers were extraordinarily civil, even while they advocated zealously for their clients. They also possessed “the trifecta of skills”—good litigation skills, good negotiation skills and mediation skills, and a good judgment to know when to litigate and when to negotiate and mediate.
Fourth, the emergency manager structure that the Michigan Legislature created was essential. Rhodes said that, while it deeply disturbed him that the authority of their democratically elected leaders was taken away from city residents, it was necessary.
“It is unimaginable that this case could have been so successfully and promptly concluded if, instead, Detroit’s democracy had remained in place and every one of the thousands of decisions that were made in the case were required to go to the city council and the mayor for their approval. …I’m not sure the city could have survived.”
Fifth, after all was said and done, he pondered why creditors agreed to adjust their debts on terms that the city could afford to pay. There was a strong measure of self-interest and realization that the deal on the table was the best deal they were going to get. But Rhodes also believes that the basic mission to help the people of Detroit compelled the city’s creditors, the state of Michigan, and the foundations to help the city.
“I believe all of this is at least one reason why so many of the creditors agreed to share in the sacrifice and support the city and its plan, its future, despite the hardship that the plan asked of them.”
—————
3. But the process was not without challenges.
While successful, the bankruptcy process was not without challenges. For Rhodes, the most persistent challenge was the fact that the case was as much political as legal because everyone in the city had a stake in its outcome.
“The residents’ interests were the ultimate goal of the case,” he said. “Yet we have this federal law and this constitution, according to our Supreme Court, that denied them any right to be heard.”
That right was legally limited to the city, through the emergency manager, and its financial creditors. Rhodes, however, “willingly violated” the Constitution and gave residents standing in two circumstances: at the beginning of the case, when the issue was when the city would be eligible to file bankruptcy, and at the end of the case, when the issue was whether to confirm the plan.
Allowing residents to speak sent a message about the openness of his process and was profoundly important to Rhodes.
“They allowed me to understand firsthand the cruelty…that resulted to the people of the city from the city’s failure to provide adequate services.”
He also gave the media as much access to the proceedings as possible despite a policy in the federal courts that prohibited simultaneous broadcasting or webcasting of proceedings.
“I thought the public had a right to see what its elected and unelected people—like me—were doing with this future.”
—————
4. The city and its people now look forward.
While Rhodes and the others met those challenges, he has had lingering concerns about the future of the city. For example, he has the impression that Detroit’s schools have not progressed academically, which likely discourages families from moving into the city.
Initially, he also was concerned whether Detroit would be able to maintain its obligations to fund the city’s pensions. Fortunately, it has maintained all of its obligations and had enough cash to restore almost all of the cuts that the plan required.
He also was concerned whether city leaders would maintain their commitment to its revitalization. Mayor Mike Duggan maintained that commitment, Rhodes said. And he hopes, when the city elects a new mayor and city council in November, the government will continue that commitment.
Rhodes also spoke about the future of the Detroit Institute of Arts (DIA). During the bankruptcy process, the DIA’s holdings, which the city owns and are worth billions of dollars, came into creditors’ focus. Both Rhodes and Orr decided it would be inappropriate to sell the art due to its cultural value. Instead, the bankruptcy settlement transferred the art from the city into a trust so that it would never again be subject to the claims of creditors.
“Now I’m as optimistic as I possibly can be about the city’s future,” Rhodes said. “There are people everywhere rooting for the city of Detroit. So this case was a dream case for me. …I’m thankful for the work of the lawyers and the other professionals in the case and for the work of the mediators. We were truly all partners on the team.”
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