Kevyn Orr, the emergency manager appointed by Michigan Governor Rick Snyder to try to resolve the Detroit financial crisis, has effectively replaced the Detroit mayor, former NBA legend Dave Bing. However, it is Orr who in the upcoming weeks will need to hit the equivalent of a three-point shot at the buzzer if Detroit is to avoid becoming the largest municipal bankruptcy case in history.
The conundrum Orr faces is straight-forward. Detroit will succeed in emerging from the depths of its fiscal morass only if substantial concessions are made by the city’s bondholders and bond insurers, labor unions, pension funds, and other creditors. Moreover, the hope of being able to reach any agreement of a scope which could address Detroit’s long term problems almost certainly hinges on a substantial financial contribution from the State of Michigan. Such concessions and state financial support may only be obtainable if Detroit were to file for bankruptcy under Chapter 9 of the Bankruptcy Code. Unfortunately, as the recent examples of large Chapter 9 cases — Jefferson County in Alabama, and the cities of Stockton and San Bernardino in California — amply demonstrate, a Chapter 9 bankruptcy case can be an unwieldy and ruinously expensive proposition. Jefferson County has seen its legal costs run into the tens of millions. Stockton and San Bernardino are both grappling with complex issues regarding the relative priorities of bond debt and public pension obligations, which may ultimately need to be resolved by the Supreme Court. Detroit would dwarf all three in size and complexity. Given the likely expense and duration that a Detroit Chapter 9 case would entail, the cure could well be worse than the disease.
Orr’s Herculean task, then, is somehow to obtain the needed concessions and state financial support that would replicate the outcome of a Chapter 9 bankruptcy while avoiding an actual bankruptcy filing.
To that end, Orr’s suggestion last week that part of the collection of the Detroit Institute of Arts, widely considered one of the finest art museums in the country and home to famous masterpieces by Van Gogh, Matisse and Caravaggio, could be sold as part of a plan of adjustment in a Chapter 9 case, should probably be viewed as part of a broader strategic campaign. Just as Orr is trying to wrest concessions from bondholders and municipal employees by describing the potential parade of horribles that would befall them under Chapter 9, this shot across the bow of one of the cultural crown jewels of the entire State of Michigan is strongly redolent of a message to voters and elected state government officials that the collateral damage of a Detroit bankruptcy would not be contained.
Legally, it is highly questionable whether the DIA could ever be forced to sell an art masterpiece. Even if legal title to the paintings belong to the city (which owns the museum), one of the key differences between a Chapter 9 municipal bankruptcy and a Chapter 11 corporate bankruptcy is that a Chapter 9 does not give rise to the creation of a bankruptcy estate over which a bankruptcy court has jurisdiction. Put another way, a can be liquidated corporation in order to satisfy creditors. A municipality cannot.
Orr’s trial balloon regarding the sale of artistic masterworks has been widely criticized and ridiculed. If, however, the suggestion can in some way help pave the way towards a resolution of Detroit’s financial woes, it could be looked back upon as a master stroke.