The Hon. Steven W. Rhodes of the U.S. District Court for the Eastern District of Michigan has ruled that Detroit may proceed with its Chapter 9 bankruptcy. Judge Rhodes explained his ruling for over an hour from the bench, finding Chapter 9 itself to be constitutional, and addressing other challenges including the requirements of Michigan state law, whether the city had bargained in good faith, and the extent to which pensions could be cut in the eventual plan to emerge from bankruptcy. The written decision is not yet available, but check back later in the day and it will be posted here.
Most relevant for our purposes, the judge made a passing reference to the possible sale of the collection of the Detroit Institute of Arts (DIA), which is the property of the city. As he explained his finding that the city is insolvent (a prerequisite for bankruptcy protection), he noted that some objections to the bankruptcy claimed that the city could have avoided insolvency by selling DIA’s collection. He dismissed that objection, stating that a one-time cash infusion would not have addressed the city’s systemic financial problems.
So, the question of what, if any, role DIA’s collection will play in the bankruptcy is very much in play. DIA itself may have at least two opportunities to weigh on the issues surrounding its collection. First, as discussed last week, there is a motion pending by several creditors to take over the appraisal of the DIA collection currently underway by Christie’s. As we noted, that motion seemed more like an attempt to pressure Detroit and Christie’s to move more quickly than an actual hope to gain control the valuation process. DIA is not a party to the bankruptcy, but it could conceivably file an interested party opposition to that motion. The appraisal by Christie’s, while undoubtedly being done with the highest standards, is obviously an intrusion on DIA’s operations in the ordinary course. Having participated with the appraisal to date in good faith, DIA could certainly make an appeal to the court that a second set of appraisers would be an intrusion on the museum not justified by the purported benefits. And, critically, the opposition could be a first bite at the apple to set DIA’s view of the deaccessioning debate out for the court.
Second, the endgame for all of this is a filing of the city’s plan of adjustment, apparently scheduled tentatively for March 1. Although we know of no legal impediment to Emergency Manager Kavyn Orr should he propose either to sell or otherwise capitalize the DIA collection, there too the museum could object to the plan and set forth either why the law prohibits the sale (if there is such a reason), or more likely why the sale is bad idea in the context of the purpose of the plan.
That is not as far-fetched as it may seem initially. Neither the court nor the creditors can force the sale of DIA’s collection, but the court was clear in its comments today that it intends to protect, for example, the city’s pensions against draconian cuts (that is to say, they will be cut, but the court will consider how deeply to allow them). It made numerous references to the vitality and future of the city. The museum or others may well find a receptive audience if they argue that stripping the museum either of its art, or of its independence, is inconsistent with these priorities for the city moving forward. Judge Rhode’s comments that pre-bankruptcy sale of the collection would not have avoided insolvency could imply that he will be skeptical of a similar approach in any plan of adjustment.
Expect everyone involved to put their thinking caps on immediately.