Law, Technology & Arts Blog

The Last Vestiges of Better Days: The Detroit Institute of Arts and Debtor-in-Possession Financing

Posted in Arts, Government and Regulation by LTA-Editor on September 23, 2013
Detroit Industry, North Wall, Diego M. Rivera, Detroit Institute of Arts

Detroit Industry, North Wall, Diego M. Rivera, Detroit Institute of Arts

By Chris Young

Those of us who have been following Detroit’s Chapter 9 filing continue to wait patiently for the upcoming October 23 court hearing on the city’s eligibility to file a Chapter 9 bankruptcy plan. Commentators expect “battles in federal court, potentially setting national precedents on matters ranging from whether bondholders get repaid when cities run out of money to whether public pensions, previously thought to be sacrosanct under the Michigan Constitution, are protected in municipal bankruptcies.”

Events thus far have served to ratchet-up the drama. Since filing for bankruptcy protection on July 18, 2013, emergency manager Kevyn Orr and local officials have come under fire for what some characterize as an attempt to navigate around the debt-saddled municipality’s obligations to its public pensioners, just one set of obligations within an overall debt load of $18 billion. Specifically, unions, pensioner groups, and the city’s other creditors have objected to Detroit’s Chapter 9 eligibility. To show that Detroit is eligible, Orr and his team of Jones Day attorneys must establish, among other things, that the city is insolvent, has made good faith efforts to restructure obligations, and enjoys the state’s blessing to proceed in bankruptcy.

If eligible for Chapter 9 protection, Detroit is poised to procure debtor-in-possession (“DIP”) financing to help meet its obligations. Just like Chapter 11 debtors, a Chapter 9 debtor-municipality may seek financing notwithstanding its bankruptcy filing. According to one source, Orr disclosed plans to place Detroit’s Institute of Art’s assets as collateral to secure potential DIP financing. But of course, like anything else in this drama, it remains unclear whether such a proposal would be feasible.

For one thing, opinions vary widely with respect to whether the city-owned works of art could be sold. Michigan Attorney General Bill Schuette contends that the art is held in public trust, and thus cannot be sold. Even vague rumors of non-liquidity could give potential investors cold feet.

Cities across the country with pressing public-employee pension obligations were already interested in the outcome of this federal, state, and municipal pas de trois. The possibility that Detroit could offer its publicly acquired art as collateral for DIP financing offers similarly situated cities a possible roadmap out of debt. After all, there is no reason to believe that once a city has offered art as collateral, museum closures will follow. The possibility of foreclosure of such collateral forces us to ask whether which is more important to Detroit’s future—dust-filled museum halls, empty save for valuable paintings and sculptures, or ensuring that the city’s pensioners, now shamefully vulnerable after so many years of public service, receive the security for which they bargained.

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