James L. Tatum III is a 2017 M.P.A. Candidate, Syracuse University Maxwell School of Citizenship and Public Affairs. The author would like to thank Professor Joseph Ohren of Eastern Michigan University for his helpful comments on the article. Additionally, the author would like to thank Nino C. Monea, 2017 J.D. Candidate, Harvard Law School, for his comments.
IN 2009, GENERAL MOTORS CORP. FILED FOR CHAPTER 11 BANKRUPTCY AND SOLD OFF ITS HUMMER, SAAB, AND SATURN DIVISIONS IN ORDER TO REPAY CREDITORS. The city of Detroit filed for Chapter 9 bankruptcy in 2013, and attracted worldwide speculation that it would sell off Matisses, Cezannes, and Rembrandts. In fact, two creditors, Financial Guaranty Insurance Company and Syncora Guarantee, Inc., were persistent in their demand to monetize the city’s art collection held in the Detroit Institute of Arts (DIA).1 Prior to the city’s bankruptcy, few people understood how intertwined the DIA was with the city’s finances.
Founded as the Detroit Museum of Arts in 1885, the museum existed as a private institution until 1919.2 In 1919, after its own financial distress, the museum came under the city’s stewardship. The museum had always relied upon financial support from the then-prosperous city, but under the city’s ownership, annual operations, maintenance, and acquisitions became taxpayers’ responsibility. Then, with the decline of the city, the relationship was amended a second time in 1997. The city transferred operation responsibilities over to the Founders Society, a nonprofit but the city retained ownership over the art collection.
Once Detroit filed for bankruptcy under Chapter 9, the section of the Bankruptcy Code that applies to cities, towns, school districts, etc., attention quickly focused on the museum. Speculators assumed that under financial distress, the city would have to liquidate like an insolvent business and the DIA was the city’s most valuable asset.3 Asset monetization in the context of bankruptcy — the worst case scenario for financially distressed municipalities—is not well understood. But the DIA’s valuation and its treatment under Chapter 9 has answered the controversy over how far a creditor’s reach can extend to recoup investments.
The information in this article is important not only to lawmakers who will oversee cases of financial distress, but also to bondholders. The discussion over how municipal creditors are compensated has mostly dealt with taxation, because taxes are the main source of revenue for municipalities.4 The issue of asset monetization has been relatively absent from the conversation, a conversation that has become more relevant in the aftermath of the Great Recession. Debtors and creditors alike will be left uninformed and unprepared if this conversation does not take place and the issues detailed in this article are left unexplored.