CHICAGO — The Detroit Institute of Arts, which has found itself at the center of the city's high-profile bankruptcy, warned that any attempt by creditors to cash in on the city owned museum's art would spark expensive litigation and undermine Detroit's post-Chapter 9 recovery.

"The museum is as important to Detroit's future as it has been to its past," the DIA argued in a legal brief filed with the bankruptcy court Tuesday. "The creditors never had any rights to the museum art collection or any expectation that such charitable property would be available to satisfy their debts. This is the 'grubby' reality to which the financial creditors must yield."

The city-owned DIA is one of Detroit's most valuable assets. Creditors, including bond insurers Syncora Guarantee Inc. and Financial Guaranty Insurance Corp., and holders of $1.4 billion of pension certificates, argue that the city should be forced to monetize it in some way to boost creditor recoveries.

Detroit emergency manager Kevyn Orr has refused to liquidate the collection, but has leveraged it to generate the bankruptcy's most important agreement, dubbed the "grand bargain."

The deal calls for an influx of funds from a group of private foundations, the state of Michigan, and the DIA itself. The money would be directed solely to the city's pension debt, in exchange for shifting the museum into an independent nonprofit organization that would protect the collection. The DIA's filing asks U.S. Bankruptcy Judge Steven Rhodes to approve the settlement, arguing that it is better than any alternative.

As it has before, the DIA argued in its latest court filing that any sale of the art would be illegal because the collection is held in a charitable trust, and is protected by state law as well as the deeds to many of the pieces, which restrict sale. Any attempt by the city to sell the collection would be "dishonest, immoral, and indecent," the DIA argues.

"More compelling than any formal trust agreement, the museum itself is the evidence of the DIA charitable trust," the museum's attorneys, from Honigman Miller Schwartz And Cohen LLP and Cravath, Swaine & Moore LLP, argue in the 158-page filing. "It has served for more than a century as a vessel into which thousands of donors, both public and private, have poured their goods and goodwill to advance the 'knowledge and enjoyment of art.' To borrow a maxim usually employed in tort law, 'the thing speaks for itself.'"

Any move by the city to sell or otherwise monetize the collection would spark a major lawsuit, the attorneys warned.

"If the city attempts to transfer its interest in the museum art collection to satisfy creditors, the DIA Corp. (and likely the [state] Attorney General) would institute proceedings to prevent the city from doing so," the filing says. "Based on the fact-intensive nature of the dispute and the need to address more than a century of information regarding the museum, the litigation would likely take years to resolve."

The museum also challenges bond insurers' arguments that the city has deliberately undervalued the collection. The $466 million that is part of the grand bargain is "well within the range of values that properly reflect the risk of litigation and difficulty of collection," the DIA argues.

In "most if not all cases," donors gave their pieces to the museum with the "express or implied" restriction that they would be used solely to benefit the DIA and the public, the museum argues.

The museum brings money and stability to the city and will promote its recovery from Chapter 9, the DIA argues. The museum brings in an estimated $32 million a year in direct economic impact.

"The museum is a core feature of the city's future," the filing says, calling it a cultural cornerstone of midtown Detroit. "The museum's closure would have a significant adverse impact on the welfare of the city and its citizenry, especially on the newly vibrant and growing midtown area and the arts community that the museum anchors, impairing the city's revitalization and the plan's feasibility."

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.