After Judge Rhodes denied (as predicted) the expansive relief requested by creditors in the Detroit bankruptcy to perform a top-to-bottom appraisal of the collection of the Detroit Institute of Arts, attention has focused on those creditors’ objection to the “grand bargain” within the overall plan of adjustment.  The creditors (and some academics) have argued that the grand bargain is a “preferential transfer,” that it puts some creditors (pension holders) in a better position than other creditors (lenders, in particular) in violation of bankruptcy principles.

This week, DIA itself responded forcefully and eloquently to that argument

The motion response by DIA gives a fascinating history of the museum and its place within the city.  The museum was charted a “public arts institution,” and later charted in 1885  as the Detroit Institute of Arts Corporation (DIA Corp), with the charitable purpose “founding of a public art institute in the City of Detroit.”  At a certain point, the city began to support the museum financially, but the Michigan Supreme Court ruled in 1899 that this was unconstitutional, because DIA Corp was not a municipal entity.  To resolve that tension, DIA Corp placed some (but not all) of its assets in the city of Detroit itself, on the understanding that the city would maintain them for the public’s benefit.  A 1918 amendment to the charter addressed an issue with the ability of DIA Corp to transfer its assets, and gave the city the authority to take and to hold charitable gifts for art purposes.  This was formally deeded (including the building, the land, and the collection) in June, 1919.  That commenced several decades of public-private collaboration.

In 1997, the city and DIA Corp. signed an Operating Agreement (the filing attributes the impetus to declining city financial support).  Crucially, that Operating Agreement confirmed that the art was held in trust, and could only be used for art purposes.  The trust relationship was embedded in the museum’s collections policy. 

DIA’s first argument in support of the plan of adjustment, therefore, is that the art is held in trust for the public, and is not even a city “asset.”  Even the city, let alone the creditors, cannot deny that relationship, according to the museum (and the city does not contest that description of the relationship).  If the trust was not an explicit creation of the articles and agreements, then it was at least implied, the museum argues. 

Interestingly (and shrewdly), the filing leaves alone completely whether the city could be forced to sell the DIA collection.  Instead, the museum proceeds from the hypothetical assumption that the city wanted to, and explains why even then it would be forbidden.  This is quite smart, because there is little question that the city cannot be forced to.  As DIA points out, the outcome of the “grand bargain” is far better than the alternatives, particularly lengthy litigation. 

The filing plays an important role.  It lays out the history of the institution, and its importance.  It makes a case, however, that is not pie in the sky wishful thinking, but grounded in the law of trusts.  And it playfully chides the creditors for suggesting that the museum must yield to more “grubby” realities. 

Left open for another day is the preferential transfer argument, but that would really only extend to what happened to the proceeds of the “grand bargain,” that is, if Detroit makes the deal should the proceeds benefit other creditors more substantially.  Expect the creditors to take up that oar before too long.