On July 18, the city of Detroit, Michigan filed for bankruptcy.  Since the mid-1950s, only about 60 municipalities have filed under Chapter 9, the bankruptcy proceeding used by municipalities—and of those, Detroit’s is by far the largest municipal bankruptcy filing (in terms of debt) in American history.  The exact amount the city owes is unclear, but estimates range from $18 billion to $20 billion.  The bankruptcy process will be rife with complex issues, including whether the city is truly eligible for bankruptcy, whether public employees and retirees will need to accept a reduction in their expected employment and retirement benefits, and how best to move Detroit forward in a way that will stimulate growth and long-term stability. The bankruptcy will have weighty implications for the future of the city and its residents—but also for the future of the city-owned Detroit Institute of Arts, one of the country’s largest fine art museums, with a diverse collection—much of it built during the city’s heyday as the center of the automobile industry—ranging from a van Gogh self-portrait to a fresco by Mexican artist Diego Rivera.

This spring, Kevyn D. Orr, a bankruptcy lawyer, was appointed by Michigan governor Rick Snyder to serve as the emergency manager of the troubled city.  In connection with his review of Detroit’s assets, Orr has reportedly been considering the possibility of selling some of the art holdings from the DIA to pay the city’s creditors.  The suggestion has sparked debate; many feel that the Institute’s art is there for the benefit of the public and should not be liquidated, while others argue that it is unconscionable to prioritize art preservation over of the needs of city workers and retirees.  In June, the Michigan Senate passed a draft bill meant to discourage the sale of art from the Institute’s collection by placing restrictions on how the proceeds could be used, but the bill is pending.

With the debate heating up, the DIA’s chief operating officer has warned that sales of its collection could jeopardize the very existence of the institution by causing the museum to lose funding and visitors, ultimately leading to “the closure of the museum, maybe not tomorrow, but eventually.”  The DIA, while owned by the city, is run by a nonprofit group, and its operating costs are partially funded through a real-estate tax on residents of Detroit and its suburbs; the DIA fears that art sales could lead to revocation of the tax.

In early August, the stakes were raised even higher when news broke that auction house Christie’s had been hired to appraise the museum’s holdings.  According to the Wall Street Journal, the city will pay Christie’s $200,000 to spend about three months assessing the museum’s collection.  A DIA executive expressed disappointment with the development, but said that the museum will cooperate with the appraisal process.  A spokesperson for emergency manager Kevyn Orr said the move is simply part of the city’s “due diligence.”  Orr also has stated that there is no plan to sell art, but indicated that Christie’s has been brought in at the request of the city’s creditors.  A Christie’s representative has explained that, rather than advocating outright liquidation of the works, Christie’s will aim to help the city formulate a variety of financial alternatives, such as obtaining loans based on the value of the collection, renting works to other museums, or asking the museum to pay the city to “lease back” the collection.

Overall, the DIA’s predicament poses not only strategic, but legal questions.  The bankruptcy court may need to weigh an argument that art sales would be short-sighted because keeping the DIA intact might ensure the future of an attraction that could ultimately help boost the city’s tax base and its overall recovery.  The museum is also expected to take the legal position (supported by state’s attorney general) that the art cannot be legally sold because it is held in a charitable trust for the people of Michigan.  Moreover, the sale of certain individual artworks may be restricted or barred by the terms of contracts with their donors; for example, one late art collector donated hundreds of objects to the DIA, but stipulated in his will that if the DIA sold even one piece, then the entire collection must be offered to another museum.  The bankruptcy court may need to grapple with terms of such contracts before a sale can take place.  There is also the question of whether the sales would really generate the needed funds; some in the art community have suggested that collectors would be loath to take advantage of what might be seen as a “tainted” sale of works by the distressed city.  Likewise, there are other alternative ways to use the collection to generate income for the city (including loans backed by the value of the collection, “leasing back” the collection to the DIA for a fee, or renting works to other institutions)—but those options will pose unique legal challenges of their own.

The Detroit bankruptcy poses unprecedented legal and economic challenges, and will be anxiously watched by everyone from labor unions to stakeholders in the municipal bond market.  But as the DIA’s fate hangs in the balance, the art world will be watching too.