Retrospective: Bankruptcy judge reflects on career with the court

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By Barry Malone
Legal News

Retired Judge Steven W. Rhodes, formerly of the United States Bankruptcy Court, spoke about his time on the federal bench during a Sept. 16 luncheon sponsored by The Historical Society for the U.S. District Court for the Eastern District of Michigan.

Speaking at the Fort Shelby Doubletree Hotel in downtown Detroit, Rhodes discussed his nearly 30-year career on the court that culminated with overseeing the city of Detroit’s historic bankruptcy proceedings.

He was a magistrate judge for the U.S. District Court for the Eastern District of Michigan before joining the bankruptcy court.

Rhodes recalled receiving a phone call from U.S. District Court Judge Avern Cohn encouraging him to apply for the vacant bankruptcy court position.

Despite confessing that he knew nothing about bankruptcy, Rhodes applied for the position because, as he said, he always does what Judge Cohn “tells me to.”

He was appointed to the bankruptcy court in 1985. He took the bench in the shadow of a scandal that, according to Rhodes, had left the court with a stained reputation.

The scandal involved former bankruptcy attorney Irving August and a one-time bankruptcy court clerk named Kathleen Bogoff.

In the United States v. August, 745 F.2d 400, the government proved that August and Bogoff conspired to defraud the United States and impeded the administration of justice by manipulating the blind draw system in the bankruptcy court.

August and Bogoff were involved in a romantic relationship and Bogoff used her position to steer August’s bankruptcy filings to specific judges. During the period the conspiracy was occurring, August’s law firm filed about one-half of the Chapter 11 cases in the Eastern District of Michigan.

“One of my objectives, despite being low man on the totem pole, was to shepherd the court out of that dark time,” said Rhodes.

To do that, Rhodes said he sought to develop a strong working relationship with the bankruptcy bar.

He called it his “first priority” to persuade his colleagues on the bench and then the bar to revamp the local rules to increase efficiency.

At the time, all motions, even those unopposed, were set for hearings. 

According to Rhodes, the bankruptcy bar supported doing away with mandatory hearings on unopposed motions.

As years went by, the court had to find other means for efficiency.

Rhodes had spent many hours mediating and officiating disputes, a task that he enjoyed.

“A settled result was always better for the parties, more just for the parties than a litigated result,” said Rhodes. 

However, the in-chambers mediations were too time consuming, which led to the creation of the mediation panel.

The panel includes 26 lawyers who have been trained and certified to mediate cases at a reduced, or what Rhodes called an “unreasonably low” fee.  Rhodes said that the panel resolves approximately 50 percent of the cases it hears.

During Rhodes’s time at bankruptcy court, he observed changes in the demographics of the bankruptcy bar.

Rhodes said there are far more women members of the bankruptcy bar, particularly on the consumer side. He said he believed this demographic change has led to a heightened civility and a higher percentage of settlements.

Rhodes also has seen a change in debtors.

First, he said he saw many more young filers. Saying it used to be rare to see a filer under 30, it now has become far more common.

Rhodes suggested that this increase might be because of growing student loan debt, even though it is not dischargeable in bankruptcy.

Secondly, Rhodes said there are many more senior filers. A growing number of over 60 filers may be related to the inability to maintain their accustomed to standard of living,
Rhodes indicated.

In addition, he said there has been a significant increase in filers for whom medical debt was the primary reason for insolvency.

“Bankruptcy is a really inefficient health insurance plan for this country,” said Rhodes.

At the luncheon, Rhodes also spoke out on the issue of Chapter 11 venue shopping. Venue for bankruptcy under Chapter 11 is determined by place of incorporation, principal place
of business, or where it has assets.

According to Rhodes, most cases of large publicly held companies headquartered in Michigan are filed in New York and Delaware.

Since 1980, Rhodes said, just over 33 public companies headquartered in the Eastern District of Michigan have filed for Chapter 11 bankruptcy protections.

Of those 33, he said, 19 filed in other districts, including General Motors, Borders, Delphi, Kmart and Visteon.

“Forum shopping is a cause of injustice,” Rhodes said.

Calling it an “extraordinary honor” to be selected to oversee the city of Detroit’s bankruptcy, Rhodes said he was humbled to be assigned to the case.

“I had tremendous support from the lawyers in the case and they were great lawyers,” said Rhodes.

He remarked on the quality of advocacy and the civility displayed in court.

“Their work on the case is a great example of the public service done by lawyers.”

According to Rhodes, Detroit should have filed eight years earlier because in 2005, the city entered into a disastrous and likely illegal debt transaction.

“Bankruptcy is all about shared sacrifice to solve the problem,” said Rhodes, who said that without an emergency manager the Detroit case would have been much more complex.

Rhodes added that even though the financial management of the city was under the auspices of a state appointed emergency manager for a prescribed time period, it was returned to the elected officials of the City of Detroit.

Now, he said, it is imperative that the Detroit citizenry holds their elected officials accountable for good government.

“I sincerely hope that the people of Detroit take that to heart,” Rhodes said.

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