Plan to save Detroit pensions, DIA artwork likely illegal, expert says

Bankruptcy

It was pitched as a blockbuster plan to save retirees’ pensions and artwork at the Detroit Institute of Arts.

DIA
Detroit Institute of Arts

Trouble is, the $816 million deal “is almost certainly illegal,” said David Skeel, a professor of bankruptcy law at the University of Pennsylvania Law School.

The deal was to work like this: A new trust would buy Detroit’s art for $816 million and give all of the money to help finance Detroit’s pensioners. The money would come from foundations, the state of Michigan and the DIA.

Here’s how Skeel explains it in the Washington Post:

The only problem is the bankruptcy law. A city’s treatment of its creditors in bankruptcy must be “in the best interests of creditors” and cannot “discriminate unfairly.” Best interests means that creditors must get more in bankruptcy than they would outside of bankruptcy; and no unfair discrimination means that Detroit can’t give a much higher recovery to one group of general creditors than to another.

The art-for-pensions deal runs roughshod over both requirements. Because the art would be used to pay only one group of creditors — the pension recipients — the excluded creditors may be worse off in bankruptcy than if Detroit had never filed. And Detroit’s current debt adjustment plan would include this influx of cash in a package that gives pensioners at least 95 percent of what they are owed while giving bondholders less than 20 percent.

In addition to these legal issues, the scheme has put members of the judiciary in an increasingly unjudicial role. The bankruptcy judge has resisted creditors’ requests to investigate the art to determine its value so they could explore alternative arrangements. The chief mediator in the case, a federal judge, has met with representatives of the foundations, lobbying them for money for the deal. Both judges are highly respected, but some worry whether the rule of law is being respected.

Steve Neavling

Steve Neavling lives and works in Detroit as an investigative journalist. His stories have uncovered corruption, led to arrests and reforms and prompted FBI investigations.

  • Dust Buster

    lets see another article about detroit and somebody pissed away a bunch of money and somebody is butt hurt and begging for more.

    why is that?

  • More than likely Skeel is correct. While the judge hasn’t imposed conditions, which if he did would clearly cross the line, his repetitive rejection of negotiated deals has the same effect. The pension proposal appears to clearly discriminate to the benefit of the retirees alone.
    The sad part of this is that it could lead to a virtually endless stream of litigation that would consume money and resources for years to come and could negate a lot the relief the bankruptcy was intended to provide. It also could hamper Detroit’s ability going forward in that the amount of future liabilities would remain unsettled.

    • Dust Buster

      the bigger question is why do democrats, unions and urban politicians continue to steal rob and mismanage funds. then how do the people that rip them off get them to blame someone else that had nothing to do with it? unionistas and welfare handout types need to pull up their diaper and shut it up and go work. you cant keep being parasites your entire life

      • Aanna1123

        But, being a judgmental parasite is okay? Look who is stealing from Michigan now! Engler and Snyder were/are doing the same exact thing you’re talking about! Don’t just listen to one side for your facts because you end up sounding like the idiot you have proven to be

  • falseprophet

    Imagine that, an illegal deal from Detroit pension fund. How shocking.