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Detroit Institute of Art Collection--Available to Creditors?

posted by Adam Levitin

I have a piece on Salon about whether creditors should be able to force the liquidation of the Detroit Institute of Arts collection.  The DIA collection is apparently municipal property, although the DIA is an independent non-profit entity that basically operates the collection. Some of the highlights of the collection, such as Diego Rivera's amazing murals inspired by the Ford River Rouge plant are physically part of the DIA building (I'm not sure who owns the building). 

The legal issue about the DIA collection is sort of the twin of the pension issue:  both are about the ability of the states to order the bankruptcy process. The pension issue about about states' ability to specify the treatment of liabilities in bankruptcy, while the DIA collection is about states' ability to specify the treatment of assets in bankruptcy.  

While I tend to think that states in fact have substantial ability to specify treatments of both liabilities and assets in Chapter 9, the case is perhaps stronger regarding assets.  One of the stars in the bankruptcy firmament is Butner v. United States, which teaches us that bankruptcy law uses state law inputs regarding property rights. Thus, if Michigan has defined the DIA collection as being held in trust for Michiganders, then the DIA collection is property of the estate under 541, but creditors have no real claim on it. 

The actual status of the DIA collection (in trust or not) might end up being an issue in the bankruptcy, but if it is held in trust, the treatment should be clear. But even if the property is not held in trust as a formal legal matter, it does not necessarily follow that it will be sold off to pay back the general obligation bondholders.  

First, there's nothing in Chapter 9 that enables creditors to force an asset sale. Instead, the only real leverage they have is the requirement that a plan be in their "best interests," but it is far from clear that necessitates a sale of the art, not least because the funds are not necessarily going to the GO bondholders.  (Remember that Chapter 9 "best interests" is not the same as Chapter 11 "best interests" because there is no Chapter 7 liquidation baseline for comparison in Chapter 9). 

Second, the priority of the GO bonds is not clear, which in turn makes the best interest analysis trickier. They might be senior to the pension obligations or junior to them.  To wit, the GO bonds are backed by "full faith and credit" (whatever that means).  The GO bondholders think that means they get paid hell or high water. I'm not sure that the "full faith and credit" means anything more than that the GO bonds are a legal obligation.  But even if it means hell or high water, that isn't the same thing as priority--it might instead mean that they are not dischargeable.  And to the extent that the pension obligations are protected in chapter 9 via the MI constitution and section 943(b)(4), the pensions are functionally senior to the GO bonds.  


If the pensions are, for one or more reasons, functionally senior to non-dischargeable G.O. bonds, then did the emergency manager negotiate in good faith, in offering the pension plan trustees 10 cents on the dollar, the same offer made to other, general, non-priority, unsecured, creditors?

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