On July 18, 2013, the city of Detroit became the largest municipality in the United States ever to file for bankruptcy. Before filing the petition in bankruptcy court, Detroit’s emergency manager, Kevyn Orr, orchestrated a detailed accounting of the city’s assets to report to creditors. It was immediately clear that the city’s most valuable asset was its art collection, which is housed at the Detroit Institute of Art (DIA). Containing a breadth of works by artists like Van Gogh and Rembrandt, experts estimate the collection could bring in over $4 billion if sold, or a steady stream of income if monetized. Though income from the sale or monetization of the DIA collection would have satisfied a number of creditors, opponents argued that the collection could not be sold. They asserted that the art is held in trust for the public and that it must be kept on display at the DIA.
On November 7, 2014, Judge Stephen W. Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan approved a debt adjustment plan that did not involve the sale or monetization of the DIA collection. Instead, the city transferred ownership of the collection to an independent charitable trust in exchange for an $816 million contribution from the museum. Because the contribution fell short of the collection’s full value, the city received less capital to put toward reducing pension liabilities than it could have obtained through sale or monetization. In order to mask deep pension cuts, the city structured payments in reliance upon an expected pension investment return of 6.75%. If actual returns fall short of the expected rate, the city will be required to pay the deficiency. Martha Kopacz, a court-appointed fiscal policy expert, cautioned that the expected rate of return “was too aggressive for a fragile city that could not afford investment losses.” In order to spare the DIA from monetization or sale, the distressed city has taken on a significant, controversial risk.
Detroit’s bankruptcy rights are shrouded in mystery due to the lack of scholarly attention paid to Chapter 9 of the Bankruptcy Code (Chapter 9). Municipal bankruptcies are rare: since the mid-1950s, just over sixty cities, towns, villages, and counties have filed for bankruptcy under Chapter 9. However, as a growing number of American cities teeter on the brink of insolvency, questions regarding municipal bankruptcy are beginning to arise. Faced with massive debts and limited access to credit markets, city leaders throughout the country are becoming concerned that their ability to provide essential services may soon be severely crippled. The eyes of those leaders are all on Detroit.
This Comment argues that Detroit had the legal authority to monetize its art collection as part of its debt adjustment plan, and asserts that if the city had done so, it would have emerged from bankruptcy in a stronger position. Section II provides an overview of the factual and legal issues related to Detroit’s freedom to monetize its art collection in bankruptcy. Part II.A stresses the role cities play in providing essential services to citizens and highlights the financial problems limiting their ability to fulfill this role. Part II.B provides an in-depth examination of municipal bankruptcy proceedings. Though municipal bankruptcy has become a popular topic as of late, there is very little scholarship devoted to the disposition of publicly owned assets as part of a Chapter 9 debt adjustment plan. Part II.C examines Detroit’s current financial situation, the city’s recently approved restructuring plan, and the alternatives considered. Part II.C then presents the arguments raised for and against monetizing the art in bankruptcy, focusing in particular on public trust objections. Opponents of the sale employed the term “public trust” in two ways. First, they used it in “the legal sense of setting aside property for the benefit of the public.” Second, they used it to refer to “the public’s trust in art museums” as an ethical consideration. Part II.D explores the public trust doctrine and its application to artwork. Part II.E focuses on the public’s trust in museums as an ethical consideration and applies the concept to the sale of art.
Section III argues that Detroit could have and should have monetized the DIA collection as part of its restructuring plan. Part III.A contends that, even though property rights are a state law issue, the decision would ultimately have been up to the U.S. Bankruptcy Court for the Eastern District of Michigan. Part III.B asserts that the bankruptcy court would have rejected any public trust–related objections to the monetization of the art. Part III.C contends that the city does not have to comply with the ethical guidelines imposed on private museums. Part III.D suggests approaches to monetizing the art that would have reduced the risk of public trust objections altogether. Part III.E argues that, from a public policy perspective, sale or monetization of the art would have been a preferable approach.