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

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

  Artwork, Bankruptcy, budget, detroit, DIA, emergency manager, pensions

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.

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