By Chris Michaels
On Tuesday, 27 May 2014, the Detroit Institute of Arts responded to the objections made by financial creditors of the City of Detroit (the “City”) to a proposed plan that would protect its collection from sale. The Detroit Institute of Arts’ (“DIA”) collection has been at the center of controversy in Detroit’s Bankruptcy proceedings and whether the collection can be sold to satisfy its financial obligations has been hotly debated.
In the Response, attorneys for the DIA explained why the Museum’s collection should not be the subject of a forced sale to satisfy the City’s financial creditors. The subject of the filing hinges on the issue of whether the City’s Fourth Amended Plan of Adjustment (the “Plan”) should be enforced. Part of this Plan stipulates that outside funders will provide at least $466 million USD to address the City’s obligation to its pensioners. The provision of the funds, however, is contingent upon the City transferring any interest it might have in the Museum’s collection to the DIA, which then must keep the collection in Detroit in perpetuity. Objectors to this plan, including certain bondholders, creditors, and the insurer of City obligations, argued that the DIA collection is a “non-core” asset, which can be sold to satisfy the obligations of the City in its Bankruptcy.
In the Response, the DIA set forth its argument in support of the Plan. At the heart of its argument, the DIA contends that the collection: 1) is not an asset of the City; 2) any attempted sale of the collection would result in protracted litigation; and 3) the proposed Plan is in the best interests of both the City and its creditors.
In support of its claim that the collection is not a City asset that can be sold to satisfy its obligations, the DIA argues that the collection is, in fact, held in a Charitable Trust. As part of this line of reasoning, the DIA claims that under its Articles of Incorporation, as well as the 1885 Act that created the DIA, a Charitable Trust was established for the benefit of the public stipulating the DIA as the trustee. Under the Charitable Trust that was established, the DIA, as trustee, does not have the power to sell the collection to satisfy the debts of the City. Additionally, the DIA noted that under its 1997 Operating Agreement, any proceeds from deaccessions must be used solely to acquire additional artwork. The DIA also argued that the acts of donors confirmed the existence of a Charitable Trust and that through conveyance documents and other records, the intent of the donors was to benefit the Museum and its charitable purpose, not to benefit the municipality.
The DIA also argued that the collection is not an asset of the City because the collection is protected by an Implied Trust. The DIA contends that an Implied Trust was created between the City and the DIA through such actions as the solicitation of charitable donations for the Museum, adopting policies limiting deaccession, and representing to the Public that the City held the collection in trust. The DIA also maintained that the collection was protected by the Public-Trust Doctrine, whereby governmental entities have a duty to protect resources held in trust for the public.
In the second prong of its argument in support of the Plan, the DIA asserted that any attempted sale of the collection would result in protracted litigation. Here, the DIA in essence threatened that if the City tried to transfer its interest in the collection in an attempt to satisfy its creditors, the DIA would file suit to block the sale. Because of the expense associated with the litigation, the DIA argued that enforcing the Plan is a more attractive alternative than further litigation.
Finally, the DIA made the claim that the Plan would be in the best interests of the City and the creditors. This argument is bolstered by the fact that outside funders will provide $466 million to the City to address its obligations and because the alternative to the Plan, namely the attempted sale of the collection, would result in the aforementioned protracted litigation.
The Response in support of the Plan by the DIA ended with an argument that the Museum is more than just a fiscal asset of the City. The filing reads:
The Museum is a core feature of the City’s future. It is the Cultural cornerstone of Midtown Detroit, providing a stable anchor for the cultural district and for the surrounding neighborhoods. The Museum draws economic investment to Midtown Detroit, is a selling point for business attempting to attract and recruit talent to the City, and is an important factor in decisions by businesses that are seeking to locate in the City.
The fate of the DIA collection is scheduled to be decided by trial on 24 July 2014.
The DIA is represented by Arthur T. O’Reilly, Scott B. Kitei, and Daniel N. Adams from Honigman Miller Schwartz and Cohn LLP, and Richard Levin of Cravath Swain & Moore LLP.
Response of the Detroit Institute of Arts to Objections to the City’s Amended Plan of Confirmation, In Re: City of Detroit, Michigan, Case No. 13-53846 (Bankr. E.D.M.I. May 27, 2014).
About the Author: Chris Michaels is a litigation attorney in the Philadelphia office of the Atlanta, GA-based law firm, Cruser & Mitchell, LLP, where he actively pursues his interest in the field of art law. He may be reached at (518) 421-7238, firstname.lastname@example.org, or on Twitter @CMichaels88.
Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.