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The Art of the Deal

Detroit’s restructuring proposal.

Apr 21, 2014, Vol. 19, No. 30 • By DAVID SKEEL
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If Detroit wanted to, it probably could simply sell the art to the foundations, without waiting for the judge’s blessing. Because of concerns about interfering with state (and city) sovereignty, municipal bankruptcy laws do not give the judge any say-so on a sale that takes place during the case. But Detroit and the “buyers” do not have the power to unilaterally dictate what happens with the funds from the sale. That must be approved by the judge. A key requirement for approval is that the restructuring cannot “unfairly discriminate” in favor of one group of creditors and against other groups. Giving pension beneficiaries nearly 100 percent of what they are owed, and bondholders less than 20 percent, is obvious discrimination. Proponents may argue that the foundations and the state would not put up these funds unless they were given to pension beneficiaries, but other buyers clearly could be found for the art if the city really intended to sell it. Indeed, a bond insurer has now identified four potential buyers, each of which would pay more than $816 million for some or all of the art.

I do not mean to suggest either that Detroit should be indifferent to the plight of its pensioners or that the DIA’s art should be scattered to the four winds. The unfair discrimination standard has enough flexibility to justify a somewhat higher payout for pension beneficiaries than for bondholders and other creditors. As I have argued in these pages in the past, there are very good reasons for doing this (“More Bankruptcies, Please,” August 5, 2013). And keeping Detroit’s magnificent art collection in Detroit is a piece of any feasible strategy for building a more promising and sustainable future. But these concerns do not justify running roughshod over the rules.

As T. S. Eliot wrote, “The last temptation is the greatest treason: To do the right deed for the wrong reason.” As the Detroit bankruptcy heads into the homestretch, with a hearing on the city’s proposed debt adjustment plan scheduled for this summer, the bankruptcy judge would do well to keep Eliot’s admonition firmly in mind.

David Skeel is the author of Debt’s Dominion: A History of Bankruptcy Law in America. His book True Paradox: How Christianity Makes Sense of Our Complex World is forthcoming from InterVarsity Press in October.

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