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Settlement Sentiment: Judge Offers Ray of Hope for Detroit Institute; Christie’s Offers Dicey Art Appraisal

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In today’s 150-page order authorizing Detroit’s Chapter 9 bankruptcy, U.S. Bankruptcy Judge Steven Rhodes gave the beleaguered Detroit Institute of Arts some hope to cling to.

As reported by Nathan Bomey, Brent Snavely and Alisa Priddle in the Detroit Free Press:

Rhodes expounded on his ruling, saying pensions can be cut because they are contracts and urging the city to be cautious about “one-time” sale of assets unless it contributes to the city’s “operational revenue” [emphasis added].

Although Judge Rhodes didn’t specifically mention the proposed sales of art from the Detroit Institute of Arts, such disposals would seem to fall within the category of the “one-time” asset sales that the judge frowns upon.

Here’s the relevant passage from the judge’s opinion (on pp. 109-110):

Sales of City assets [such as the DIA's art] would not address the operational, structural financial imbalance facing the City….The undisputed evidence establishes that the “City’s expenditures have exceeded its revenues from fiscal year 2008 to fiscal year 2012 by an average of $100 million annually.”

When the expenses of an enterprise exceed its revenue, a one-time infusion of cash, whether from an asset sale or a borrowing, only delays the inevitable failure, unless in the meantime the enterprise sufficiently reduces its expenses and enhances its income. The City of Detroit has proven this reality many times. In any event, when considering selling an asset, the enterprise must take extreme care that the asset is truly unnecessary in enhancing its operational revenue [emphasis added].

To the extent that the DIA attracts money-spending art lovers to Detroit and contributes to an attractive environment that can help lure businesses back to the city, it enhances the city’s tax revenues and overall economic health. As Rhodes suggests, the museum shouldn’t be gutted by a shortsighted, one-time sale of the artistic “assets” that burnish the city’s luster as a cultural destination and as a key contributor to quality of life in a city that desperately needs some.

What might those “assets” actually bring in a “one-time” sale? Yesterday, Christie’s, the auction house engaged by Detroit Emergency Manager Kevyn Orr to assign a monetary value to some of the DIA’s art, issued a five-page preliminary report placing the fair market value of 2,781 works from the museum’s voluminous collection at approximately $452-866 million. The appraisal covered objects that “were either purchased entirely by the City, or in part with City funds.”

What does “fair market value,” in this context, really mean? For the purposes of this appraisal, Christie’s calls it, “the price at which a work of art would change hands between a willing buyer and a willing seller in the relevant marketplace.” Presumably that $452-866 million price includes the often hefty sale commissions that go to the auction house or dealer handling the transactions. So Detroit’s share of the actual sale proceeds (which could vary significantly from the appraised value) would be less than the full amount paid by buyers.

[UPDATE: Just as I posted this, Christie's send me an e-mail saying that its appraisal for Detroit does not "take into consideration any financial agreement between the buyer, seller and/or venue that would affect the final price realized." But since all sales in "the relevant marketplace" would include commission fees, it's hard to understand why those aren't included in an appraisal of "the price at which a work of art would change hands."]

Christie’s above definition of “fair market value” omits an important part of the standard IRS definition:

The price that would be agreed on between a willing buyer and a willing seller, with neither being required to act [emphasis added] and both having reasonable knowledge of the relevant facts.

A DIA disposal, by contrast, would be a forced distress sale. What’s more, the universe of possible buyers would likely be sharply curtailed by the artworld’s general revulsion against the pillage of a museum’s treasured collection. Was that figured into the assessment of “fair market value”?

During the Q&A portion of the recent New York symposium on DIA’s situation, organized by the International Foundation for Art Research, veteran dealer Richard Feigen stated flatly that “nobody would touch these things and any auction house that did would be boycotted. Nobody would participate.”

However, David Nash, a New York dealer who counts a number of international megabucks buyers among his clientele, stated, “I would like to think that Richard Feigen is correct about the morality of American buyers. But there are very rich people outside this country who wouldn’t give a damn. I think there’s definitely is a market.”

Also in the audience was Walter Liedtke, the Metropolitan Museum’s European paintings curator, who strongly asserted, “The curators in my department would resign if the Metropolitan Museum placed a single bid [for any of the DIA's works]. There is no institutional market for those works of art!”

As to whether Christie’s would handle such a sale, if asked, this is all that its spokesperson, Erin McAndrew, would tell me:

The City has indicated publicly that there is no plan to sell at present. [Emergency Manager Orr has said, however, that he wants to find some way to "monetize" DIA's art, to the tune of about $500 million.] So it would not be appropriate to speculate on sale-related questions. As noted in the [Christie's] letter, with the delivery in mid-December of the final valuation report and alternatives to sale, Christie’s will have completed its work with the City.

This seems to suggest that Christie’s may now be washing its hands of the matter. I got no direct answer from Christie’s to my question to as to whether that inference is correct. You can read Christie’s five proposals for monetizing but not selling the collection (most of which had already been considered and dismissed by the museum) in the auction house’s above-linked preliminary report (pp. 3-5).

How is this fraught drama likely to play out?

During the IFAR symposium, Richard Levin, the New York-based lawyer who is advising the DIA, stated (at 8:15 in this CultureGrrl Video) that if there is a push to sell the museum’s art to help satisfy creditors, it’s “going to have to be litigated….But whenever there’s litgation, the parties always try to settle. For the most part, these things get settled, and that’s how a company or a city emerge from bankruptcy.”

Judge Rhodes, in the last sentence of today’s 150-page order (linked at the top of this post), echoed the settlement sentiment:

The Court strongly encourages the parties to begin to negotiate, or if they have already begun, to continue to negotiate, with a view toward a consensual plan.

What settlement terms might be acceptable to the DIA? During the IFAR symposium’s Q&A period, I posed that question to Graham Beal, the museum’s embattled, steadfast director. His counselor, Levin, immediately stepped in to say that the museum would not make any premature statements in a public forum about possible settlement terms.

But in this morning’s article on this situation, the indispensable, inexhaustible Mark Stryker of the Detroit Free Press, along with John Gallagher and Nathan Bomey, revealed that a somewhat far-fetched but nevertheless promising compromise plan is now afoot to preserve the DIA’s collection and pry loose, forever, the museum and its holdings from the city’s shaky stewardship. Stryker usually strikes the pose of objective reporter, but you can tell that that he and the other authors of this article are jazzed by this late-breaking development:

Some of the city’s most powerful leaders are working furiously to fashion a grand bargain [emphasis added] in which nonprofit foundations would put up $500 million to spin off the Detroit Institute of Arts from the city, and that money would be used to reduce pension cuts and help rebuild city services. The DIA would be established as a nonprofit, independent of city ownership….

Leading the charge is U.S. Chief District Judge Gerald Rosen, the federal mediator who is pushing some of the country’s largest charitable foundations and their smaller local cousins to pony up the money.

Leaders from at least 10 foundations, which control tens of billions of dollars in assets, remain in ongoing discussions with Rosen. They include giants such as the New York-based Ford Foundation and the Kresge Foundation of Troy, as well as smaller organizations like the McGregor Fund and the Hudson-Webber Foundation, both of Detroit.

The delicate talks are happening in confidential bankruptcy mediation sessions.

DIA officials wouldn’t comment to Stryker about this potential lifeline. They’re probably too busy negotiating for a settlement and romancing megabucks angels.

How fast can a museum struggling for its very survival come up with a philanthropic windfall of $500 million? If you can help, here’s the museum’s contact page! And you need to follow @Mark_Stryker on Twitter for links to late-breaking developments.

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