- Art Valuation: The Detroit Institute of Arts
- December 12, 2014 | Author: Kevin P. Ray
- Law Firm: Greenberg Traurig, LLP - Chicago Office
As the City of Detroit’s (the City) bankruptcy case enters its final phase, and confirmation of its plan of adjustment seems all but certain, the future of the Detroit Institute of Arts (DIA) appears assured. This has not always been the case, since how the DIA’s valuable art collection would be handled was a key point of contention between the City and several of its creditors. In retrospect, the struggle for the future of the DIA is interesting for several reasons. The first of those reasons is now likely to remain an unanswered question: Had the City wished to sell all or part of the DIA’s collection, could it have done so, or was the collection (or certain parts of it) held in charitable trust or otherwise subject to enforceable donor restrictions? It is an important question, not least because the law addressing the question of enforceability of donor restrictions (particularly in bankruptcy) is sparse and inconclusive. The second reason the DIA discussion continues to be interesting is for the light that it sheds on how art is valued. Art appraisals are seldom public documents, and competing appraisals that include critiques of the other’s assumptions, methodologies, and conclusions, are rarer still. The third reason the DIA discussion has been important is for its focus on the role of art (specifically, publicly-available art) in a city’s self-image and life. This part of the discussion has played a small role in the case directly, but has played a much larger role in the public discussion surrounding the DIA.
Almost unique among American art museums, the DIA’s collection is owned directly by the City, and the preliminary question was whether the DIA’s collection could be sold or otherwise monetized to pay down the City’s debts. Three positions emerged - (1) Michigan’s Attorney General stated that the entire DIA collection is held in a public trust and cannot be used to pay the City’s debts; (2) the City stated that only those artworks that were purchased with the City’s own funds may be monetized to pay the City’s debts, which position is embodied in the proposal that has come to be called the "Grand Bargain" and is incorporated into the City’s plan of adjustment; and (3) certain of the City’s creditors insisted that the entire DIA collection must be considered available to be monetized.
Could the City have sold all or part of the DIA collection?
Had the bankruptcy court been required to hear testimony and to rule on whether the DIA collection is protected from sale by a public trust or by donor restrictions, it would have needed to consider a number of issues. For instance, did the museum, which was established as a charitable corporation, hold its collection in a charitable trust? If so, when the city accepted the museum’s collection in 1919, did it also assume the museum’s role as fiduciary of that charitable trust or was that role terminated at the time of the conveyance? If the fiduciary role was not terminated, did it continue only as to the corpus of the museum’s collection or is it a continuing role, attaching to subsequent acquisitions? Are a donor’s restrictions concerning the disposition of artworks binding upon a municipal donee enforceable in bankruptcy? Are a donor’s restrictions on donated funds binding and enforceable? If so, are they also binding and enforceable when they are aggregated among many donors and over perhaps long periods of time, as in an institutional charitable or planned giving program? How definite and specific must a donor’s intent be, and how must it be manifested?
While the questions remain important open legal questions, I have discussed the background of the DIA’s role in the City’s bankruptcy case and the collection’s status in greater detail here - http://www.gtlaw.com/News-Events/Publications/Published-Articles/175611/Whats-Next-For-The-Detroit-Institute-Of-Arts.
How should the DIA collection be valued?
In the art market, high auction prices for individual artworks garner headlines and public attention, but the nuances of valuation remain behind the scenes. Particularly in distressed situations, the valuation of artworks is influenced by the following factors:
(1) sharp disparities between art market sectors, which reflect the uncertainties of trends and changing tastes,
(2) the timing of sales,
(3) the impact on value and salability when a work fails to sell at auction,
(4) the participation of market leaders (private and institutional), and
(5) the risk of litigation clouding title to works.
At the City’s request, the auction house Christie’s issued an appraisal of the COD Works (2,773 objects, roughly 5 percent of the collection), placing the value at between $454 million and $867 million.1
One of the City’s creditors, Syncora Guarantee, Inc., engaged Winston Art Group to provide an appraisal for certain of the DIA’s holdings. The Winston Report2 indicates that Winston examined 582 objects from the DIA collection, to which, in the aggregate, it assigns a fair market value of $1.74 billion.
In response to objections raised by creditors, the City engaged Artvest Partners LLC (Artvest) to appraise the entire DIA collection. On July 8, Artvest delivered its Expert Witness Report,3 which placed the value of the DIA collection within a range, from a low estimate of $2,760,978,432 to a high estimate of $4,607,953,704, with a mid-estimate of $3,684,466,069.4 These figures, the report states, do not include deductions for works that are "ultimately determined not to be subject to sale" or "discount factors related to general market conditions or issues specific to the DIA collection."5
Artvest estimated that, after accounting for such factors, the value of the DIA collection would be between $1.1 billion (in an orderly liquidation after some delay from litigation over sale restrictions) and $1.8 billion (in an orderly sale process without litigation delay).6 It is important to note that even with Artvest’s lowest valuation still assumes that all artworks in the DIA collection are ultimately determined to be available to be sold. The Artvest Report opined that "liquidating the DIA collection in a timely manner is unlikely, given the multiple levels of legal challenges as well as the financial risks and uncertain auction outcomes."7
Following the release of the Artvest Report, one of the objecting creditors, Financial Guaranty Insurance Corporation, engaged (through its counsel) Victor Wiener Associates, LLC to appraise the DIA’s collection.8 The VWA Report valued the DIA collection at not less than $8,149,232.354, nearly double Artvest’s high estimate, and proposed that the collection be used as collateral for a loan to the City.9
The VWA Report is highly critical of the Artvest Report’s methodology and conclusions. In VWA’s view, what Artvest treats as four separate species of discount (immediate liquidation discount, blockage discount, discount for market capacity, and discount for longer-term sale) are all "encompassed by the concept of blockage discount."10 Further, VWA does not believe that a sale of works from the DIA collection would require a blockage discount. VWA also rejects any discount for market backlash, stating that "the collection is highly important and visible, and any potential buyer would know the reason for the sale. . . . In some cases, the provenance of having been part of an important public collection may increase the value."11 Indeed, VWA believes that a sale of works from the DIA collection would generate enormous interest among buyers, in the U.S. and abroad. "The sale of the entire contents of the DIA," VWA states, "would be unprecedented in scope. Given the extremely high quality and curatorial consistency of the DIA collection, even an auction sale of selected masterpieces would perform better than any sale in history, including major sales centuries ago, such as the dispersal of royal treasures of the French Revolution or the Walpole sale to Catherine the Great in the eighteenth century."12
I have discussed the issues and limitations on the valuation of the DIA collection here - http://www.gtlaw.com/News-Events/Publications/Published-Articles/178016/Rare-Window-Onto-Artwork-Valuation-Issues-In-Insolvency.
Although the quarrels over the DIA already seem to be fading into history, the window it has provided onto issues involved in the distress sale of public museum artworks is unique and important, and will remain a valuable resource for some time to come.
1Christie’s Appraisals, Inc. Fair Market Value for Financial Planning, December 17, 2013 (Christie’s Appraisal).
2 Fair Market Value Appraisal, written by the Winston Art Group, dated March 25, 2014 (the Winston Report). See also Videotaped Deposition of Elizabeth von Habsburg, July 31, 2014.
3Expert Witness Report of Michael Plummer, July 8, 2014 (Artvest Report).
4Id. at 19.
6Id. at 48.
8In re City of Detroit, Michigan, Case No. 13-53846 (SWR) - Expert Report, Prepared by Victor Weiner, Director of Victor Weiner Associates, LLC, July 25, 2014, as corrected August 20, 2014 (the VWA Report). See also "Report for Detroit creditor nearly doubles value of DIA collection at $8.5B," The Detroit News, July 27, 2014.
10Review of Expert Witness Report of Michael Plummer, ArtVest Partners LLC, dated july 8, 2014,prepared by Jannette M. Barth, attached as Exhibit C to the VWA Report at 11.
11Id. at 12.
12VWA Report at 28.