Bankruptcy trial: Detroit should sell the art to pay us, says creditor

Sep 3, 2014

Things got heated today at Detroit's bankruptcy trial.

Detroit Institute of Arts
Credit Maia C/Flickr

Syncora, a bond insurer that is arguably one of the city's biggest opponents in this trial, is coming out swinging.

And you're going to hear that name a ton during this trial, so let's recap real fast.

Who is Syncora? 

Syncora is a company. They insure bonds. They decided that they were willing to insure bonds that Detroit sold.

So they have hundreds of millions of dollars to lose here.

Which is why they are going to fight tooth and nail to get the city's "grand bargain" thrown out.

The grand bargain would protect the DIA's collection from being sold to pay the city's debts, and as Syncora and other creditors see it, the DIA is the closest thing to a pot of gold that Detroit has.

And look, the company's attorneys argue, we're not the only ones who would walk away with a lot more money if the city would sell the art.

So would the pensioners.

Because that $800 million pile of money the grand bargain puts together isn't nearly as much as what the DIA could be worth, they argue.

Has Detroit done its homework?

To get this plan thrown out by the judge, Syncora is going to try to prove a few things:

1. That this grand bargain plan is ridiculously unfair to creditors – like Syncora. The company's attorneys say that the bargain is far, far worse for them than it is for pensioners, and that therefore this whole plan is unfair and thus illegal.

Meanwhile, Detroit's lawyers say that there are lots of legal reasons that the pensioners should be treated better than Syncora. Those pensions are protected in the state's constitution, for one thing, and the city has a "covenant" with them that cannot simply be thrown out.

But Syncora points out that federal Judge Stephen Rhodes has set that constitutional protection aside for this bankruptcy, and that hey, bankruptcy hurts. It is the "land of broken promises," says one Syncora attorney, so the city can't act like its promises to the pensioners are any more "sacred" or "mystical" to the promises it made to other creditors.

2. Syncora is also trying to show that Detroit hasn't even done its homework when it comes to considering tough alternatives like raising taxes or selling the art.

The city is required to show that its bankruptcy plans would be a lot better for creditors than if their plan was just thrown out of court.

And Detroit's lawyers say that's pretty darn clear.

If the city raises taxes, they argue, people just won't pay them. What's more, they'll probably move, which means the city will have even less money to pay creditors.

And if the city tried to sell art from the DIA, art donors and the museum would "fight piece by piece" with lots of lawsuits, as the DIA's attorney described it himself.

But, Syncora's attorneys say, how do the city's administrators even know this plan would be better? They haven't run the numbers on raising taxes or selling art, they've just accepted those things as articles of faith.