Attorney: Art appraisal 'just part of the process'

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By Steve Thorpe

Legal News

Much media attention and public reaction resulted when Detroit Emergency Manager Kevyn Orr announced last week that he had retained Christie's Appraisals, a New York auction house, to appraise the value of part of the city-owned collection at the Detroit Institute of Arts.

Prominent attorney and expert on municipal bankruptcy Douglas C. Bernstein wasn't among the excited.

"I've been asked a number of times in the last few days how significant it is that Christie's is coming in to do the appraisal and my answer is, 'not very significant, in my view.' It's just part of the process."

Bernstein is the managing partner of Plunkett Cooney's Banking, Bankruptcy and Creditors' Rights Practice Group. He's an expert on municipal bankruptcy and has assisted the state of Michigan in training potential emergency managers and emergency financial managers. Before joining Plunkett Cooney he was an attorney for several major banks for more than 20 years.

In a statement last week, Orr tried to reassure those who are worried that the move is the first step in liquidating the assets of the museum to satisfy creditors.

"There has never been, nor is there now, any plan to sell art," Orr said. "This valuation, as well as the valuation of other City assets, is an integral part of the restructuring process. It is a step the City must take to reach resolutions with its creditors and secure a viable, strong future for Detroit and its residents."

Bernstein agrees that Orr sees selling DIA assets as an unfavorable course of action to be taken as a last resort.

"If you're in (Orr's) situation you have to keep an open mind and you have to be creative," he said. "Creditors are looking for money from whatever source possible. But he has to balance that factor against the reality that, at some point, you have to attract people to come here as new residents or tourists. The only way that will happen is if you have attractions such as the DIA."

So, was Bernstein surprised to see the hiring of Christie's for the appraisal?

"No, not in the least," he said. "If you treat it like any other bankruptcy, you have to have a liquidation analysis. So if you'redoing it in the context of a Chapter 11 you have to demonstrate to creditors that the proposed plan is the best they could hope for. In a straight liquidation, this is what the value of the assets may be."

And the hefty $200,000 fee Christie's will be paid doesn't surprise Bernstein either.

"Professionals don't come cheaply and there's truth in the adage that you get what you pay for," he said. "The attorneys aren't cheap. The consultants involved in this process don't come cheaply. You're going to want to get the best in the business to do the appraising because there aren't a whole lot of people qualified to do that for a world-class art museum. So the choice and fees don't surprise me."

One thing that has surprised Bernstein is the aggressive timetable that the bankruptcy court is pursuing.

"(U.S. Bankruptcy Judge Steven Rhodes) has set a scheduling order where the plan has to be filed by March 1, 2014. That, in and of itself, is really ambitious," says Bernstein. "No other municipal bankruptcy, especially where eligibility has been contested, has gotten through the process that quickly. The eligibility fight alone has taken up to a year in Jefferson County, Alabama, and in Stockton, California. He wants to have the eligibility issue done by the second week of November and, assuming the city is eligible for bankruptcy relief, you go right into plan presentment and confirmation, with potentially another battle there."

Rhodes has set a scheduling order where the plan has to be filed by March 1, 2014. That, in and of itself, is ambitious. No other municipal bankruptcy, especially where eligibility has been contested, has gotten through the process that quickly. The eligibility fight alone has taken up to a year in Jefferson County, Alabama, and in Stockton, California.

"He wants to have the eligibility issue done by the second week of November and, assuming the city is eligible for bankruptcy relief, you go right into plan presentment and confirmation, with potentially another battle there," Bernstein says.

Bernstein believes there will be no shortage of drama for law watchers as the process unfolds.

"There's plenty of bankruptcy law that's gone to the Supreme Court, but little to none in the Chapter 9 context, especially concerning the issues we're facing," he says.

"For example, nobody has yet challenged the ability to wipe out a pension plan that's protected under a state constitution. That specific issue hasn't come up. It certainly hasn't come up in the context of, 'Does the state constitution take precedence over bankruptcy law?' The supremacy clause specifically states that where there's a conflict between federal law and state law, federal law wins. But there's another provision within Chapter 9 that says that when you're confirming a plan, you can't run afoul of state law. That's not come up before either, at least in this context. So we'll have to see how it plays out."

And what part of the process will Bernstein watch with the most interest?

"All of it! Chapter 9 is so foreign to all of us, even those who've been practicing for decades. I'm in my 32nd year and I never read Chapter 9 until 2011, when I took part in a training panel for emergency managers. There was no reason to."

Published: Mon, Aug 19, 2013

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