CHICAGO — As Michigan lawmakers consider a bill aimed at protecting the Detroit Institute of Arts' prized collection from the city's fiscal crisis, bankruptcy attorneys said it would be difficult — but not impossible — for creditors to get their hands on the valuable asset.

Detroit Emergency Manager Kevyn Orr sparked the debate last week when he suggested the DIA's collection could be used to cover the cash-strapped city's debts. Orr also warned that the collection could be vulnerable to creditors in a Chapter 9 scenario. The city owns the museum.

"There's a lot of value in the art, and that's what makes it compelling. It's one of the few assets that could be sold relatively easily if the city really owns them," said Manny Grillo, partner at Goodwin Procter LLP. "It's like a shot of heroin; it can solve a lot of problems in one respect but then maybe create a bunch of others."

One of the state's top lawmakers stepped into the fray Wednesday, introducing a bill aimed at protecting the museum's assets.

Senate Majority Leader Randy Richardville, R-Monroe, crafted Senate Bill 401, which would require the art institute to adhere to a code of ethics published by the American Alliance of Museums. That code prohibits the use of art as collateral.

The legislation is an effort to "offer some layer of protection" for the art collection if the city enters bankruptcy, said a spokesman for Richardville.

The DIA collection spans 60,000 pieces with a value reportedly at more than $1 billion. Works include one of the original casts of Rodin's The Thinker, as well as pieces by Rembrandt, Caravaggio, Picasso, and Van Gogh. It also houses Diego Rivera's mural "Detroit Industry," which the Mexican muralist considered his best work.

The institute is one of Detroit's top tourist draws and its art collection is among the city's strongest assets — if the city can be said to actually own the art.

Museum director Graham Beal said the collection is protected from liquidation or sale because it is held in a public trust. The museum has hired a bankruptcy attorney and scheduled a special board meeting for June 3 to discuss the museum's position, Beal said.

"Our position is that the works of art, however acquired, were acquired in a public trust and that as such cannot be liquidated for any purpose other than buying art," said Beal, who has been the DIA's director for 14 years. "These works of art are to promote public interest in and appreciation for art in Detroit. It's even engraved on front of our building: that this is dedicated to the people of Detroit and their understanding and appreciation of art."

Bankruptcy attorneys say it's a complicated case that could hinge on various factors, including the details of the public trust, the contracts securing the gifts, the ability of the city to establish ownership and the ability of creditors to force a sale outside of a bankruptcy court. Chapter 9 does not allow for the liquidation of assets.

The city has issued general obligation bonds at least twice, in 2001 and 2008, on behalf of the DIA.

Even if the city can prove it owns the asset outside of the public trust, the individual contracts that secure the art as donations would likely be key in any restructuring, sale, or securitization, experts said.

"The real issue there is the bequest," said Karol Denniston, partner at Schiff, Hardin LLP, which represents investors who own a piece of the Detroit pension obligations.

"If the city bought the art in a clean cash transaction that's one thing, but if it's a donation, then it's going to have to go donation by donation, under the written agreements."

Establishing ownership could mean years of poring over each donation contract, Grillo said.

"It could take years of litigation in the first place to find out who exactly has the right to sell them," Grillo said. "Unless somebody has a security interest in it, it's not going to be sold right away."

Beal said the museum has at least one "significant" body of art whose donor stipulated that the art would be offered to another museum if the DIA tries to sell or move it.

"Ironically, when someone gives us something, we want them not to put restrictions on it," he said.

For creditors, even given the city's ownership, it would be difficult to force the sale or some kind of securitization to generate up-front cash, attorneys said.

Because creditors could not force liquidation of the asset in Chapter 9, their recourse could be to argue outside the court that the city was not acting in good faith when it filed its petition because it has assets available that, if liquidated, could be used to pay off debt, said Douglas Bernstein, practice group leader for the banking, finance, and creditors' rights group at the Michigan-based firm Plunkett Cooney.

It's a similar argument that capital market creditors used to try to force Stockton, Calif. to ask for concessions from the California Public Employees' Retirement System.

"The battle would either be at the outset, by saying the city hasn't negotiated in good faith, or when it comes time to propose adjustment, saying that it doesn't meet the good faith test, it's not rich enough," Bernstein said.

Even if they won a judgment outside of court, creditors may shy away from the negative headlines, experts said.

"It depends on the creditors," said Eric Wise, partner with Gibson Dunn's business restructuring and reorganization practice group. "The real creditors here are the insurers who have wrapped the bonds, and their interest in those bonds may be purchased by other financial institutions, such as hedge funds, who may have an indifference to reputational issues," he said. "But it doesn't seem a likely scenario."

The city might see a voluntary liquidation as doing more harm than good in the long run, experts said. But despite the controversy, Orr has to take a look at the asset, the attorneys said.

"At this point Orr is looking at a balance sheet and cash flows that are going to be a real struggle to restructure in a permanent way," Wise said. "It's not surprising he would explore it. There might be a way to monetize it without putting it at risk of being lost to the city."

It's a gem left over from a time when Detroit had 1.8 million people and the highest per-capita income in the world," he said. "If you impair that asset, you impair the future by not being able to attract migrants. One hopes they find a successful strategy that wouldn't jeopardize an asset like that."

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.