David Skeel
David Skeel, a professor of bankruptcy law at the University of Pennsylvania Law School, writes that Detroit's $816 million art-for-pensions deal in bankruptcy court that preserves the Detroit Institute of Arts collection is "fascinating, imaginative and clever, but it’s almost certainly illegal."
In a column in the Washington Post, Skeel writes.
Out of nowhere came the art-for-pensions scheme. The deal calls for Detroit to “sell” its art to a newly created trust that is required to keep the art in the city, using roughly $370 million raised from the Ford, Kresge, Knight and other foundations, $350 million from the state of Michigan (if the Republican legislature agrees) and the institute’s own funds. Not only would the new entity keep the art in Detroit but also the entire $816 million would be used to pay Detroit’s pensioners. The art world and Detroit’s pensioners both win. It’s almost like the deus ex machina solution to a Greek play.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.
