Jan. 13 (Bloomberg) -- Supporters of the Detroit Institute of Arts pledged to pay $330 million to help resolve the city’s record bankruptcy and save its Picassos and Van Goghs from going on the auction block.
The donors want the money to go to retirees, whose pensions may be underfunded by as much as $3.5 billion and who have challenged the city’s right to be in bankruptcy. In return, the Detroit Institute of Arts, or DIA, collection would be protected in any bankruptcy settlement, according to a statement e-mailed today by the U.S. District Court in Detroit.
“All recognize that if these two goals can be accomplished, a third absolutely critical goal of facilitating the revitalization of the city in the aftermath of the bankruptcy will be greatly advanced,” according to the statement.
Detroit filed the Chapter 9 case in July claiming it can’t pay about $18 billion in debt while providing essential services to the city’s 700,000 residents. Creditors have pressed city officials to consider selling some art, or finding some other way to use the DIA to raise money.
Last month, New York-based Christie’s Inc. said DIA art that had been purchased with taxpayer money was worth as much as $866 million.
The DIA has opposed any sale, citing a legal opinion from Michigan’s attorney general in June that concluded the art is held in a charitable trust and can’t be part of any auction to satisfy the city’s debts.
U.S. District Judge Gerald Rosen, who is chief of the federal court in Detroit, is overseeing a group of mediators who are trying to help the city and its creditors negotiate an end to the bankruptcy.
A committee headed by the presidents of the Ford Foundation, the Kresge Foundation, the John S. and James L. Knight Foundation and the Community Foundation for Southeast Michigan would oversee efforts to raise money for the bankruptcy, according to the statement.
The art institute’s operations are funded by a special property tax in three surrounding counties that generate $23 million a year in revenue. Sale of the art collection to pay creditors could result in repeal of the tax, museum officials have said.
The collection includes Diego Rivera’s two-story tall murals from 1933 titled “Detroit Industry,” as well as pieces by Edgar Degas, Pablo Picasso and Vincent van Gogh.
Kevyn Orr, the city’s emergency financial manager, hired Christie’s to value the art. He hasn’t said whether the city plans to sell any pieces to pay creditors.
“Today’s announcement offers hope that by working collaboratively, the city, its creditors and labor stakeholders can reach a negotiated solution that will resolve all claims and improve the services that are admittedly and critically necessary,” Orr said in an e-mailed statement.
The $330 million deal is less than the $500 million Orr told the Associated Press last month he would like to see raised by private donors.
The proposal was first reported by the Detroit Free Press. Afterward, city art booster Paul Schaap offered an additional $5 million.
Even $500 million may be difficult to sell to creditors as a good deal for them, in light of the appraisal by Christie’s, so celebration among art enthusiasts would be premature, said Michael Bennett, law professor at Northeastern University in Boston specializing in intellectual property and art law. The appraisal pegged 2,800 works at the DIA at between $454 million and $867 million. The appraisal considered only art works purchased for the museum with tax dollars.
Using donations exclusively to boost pensions may be difficult without support from bondholders and other unsecured creditors, Jim Spiotto, a bankruptcy attorney with Chapman Strategic Advisors LLC, said in an interview.
That’s because under the U.S. Bankruptcy Code similar debts must be treated the same. The federal judge overseeing the case, Steven Rhodes, has said the pension debt is unsecured and similar to some of Detroit’s bonds.
Making the donations exclusive to pensions would be easier than trying to force a sale on the DIA, said Spiotto, who has helped museums restructure debt outside of bankruptcy.
“There are lots of ways of trying to structure” a donations deal, Spiotto said. “Clearly what they are doing is far easier than trying to monetize the art through a sale.”
A group of art foundations said the proposal was intended to be part of a larger plan to adjust the city’s debt. Rhodes has said he would like the city to file that plan in March.
In addition to the Ford, Knight and Kresge foundations, the group includes the William Davidson Foundation, Fred A. and Barbara M. Erb Family Foundation, Hudson-Webber Foundation, the McGregor Fund and the Charles Stewart Mott Foundation, they said in an e-mailed statement.
The case is In re City of Detroit, 13-bk-53846, U.S. Bankruptcy Court, Eastern District of Michigan (Detroit).
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