Jevic Holding Corp.: Is The Supreme Court Now Ready To Strike Down Structured Dismissals?

Supreme Court Bankruptcy Structured DismissalsIn a prior post, we discussed the Third Circuit Court of Appeals’ decision in Jevic Holding Corp., where the court upheld the use of so-called “structured dismissals” in bankruptcy cases, and the Supreme Court’s grant of certiorari. On December 7th, the Supreme Court heard oral argument in Jevic.  The Court’s ultimate ruling will likely have a significant impact upon bankruptcy practice.

Under the Jevic structured dismissal, unsecured creditors received a distribution from a settlement reached between the official committee of unsecured creditors and secured lenders.  Wage priority claimants received nothing from the settlement, notwithstanding their senior position under the Bankruptcy Code.  The bankruptcy court approved the structured dismissal, and by extension the distribution provided for in the settlement, and the district court affirmed on appeal.  The Third Circuit also upheld the structured dismissal, holding that the bankruptcy court has discretion to approve structured dismissals except if there is a showing “that the structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion process.”

Jevic put front and center two competing concerns in bankruptcy.  On its face, the Jevic structured dismissal appears to conflict with the priority rules set forth in section 507 of the Bankruptcy Code, since junior creditors were paid while certain senior creditors were not.  However, the structured dismissal approved in Jevic also arguably maximized creditor recoveries, albeit in a way that skipped over certain senior creditors. The estate was administratively insolvent and without the structured dismissal, the case would have been converted to Chapter 7 and distributions would have been significantly reduced.

The questions posed yesterday to counsel for Petitioners and counsel for Respondents, as well as to government counsel as amicus curiae, were wide-ranging and pointed.  Justice Breyer questioned the statutory basis for the structured dismissal, noting that while no Code provision forbid it, no specific Code provision permitted it either.  Justice Kennedy looked for guidance on the “for cause” standard under section 349(b), which permits bankruptcy courts to modify the effect of dismissal orders.  Justice Sotomayor expressed concern that there was collusion in Jevic among senior and junior creditors to the detriment of other creditors.  Several Justices expressed concern with Respondents’ position that section 363(b) afforded sufficient discretion to the bankruptcy court to approve a distribution that was at odds with the Code’s priority scheme.  According to Respondents, Jevic presented the extraordinary circumstances required by section 363(b) to deviate from the absolute priority rule since no plan was possible and conversion to Chapter 7 would lead to little, if any, distribution.  Justice Sotomayor questioned Respondents’ position that Jevic was a rare case, and Justice Kennedy took a similar position, noting that it is not rare for there to be no prospect of a confirmable plan, a fact cited by Respondents in support of the Jevic structured dismissal.

Predicting the outcome of cases simply from oral argument is imperfect and notoriously dangerous.  Nonetheless, some commentators have opined that a sufficient number of Justices appear to be sufficiently concerned with the Jevic structured dismissal that the Third Circuit’s opinion is in peril.  If the Court reverses the Third Circuit, the question becomes how sweeping the Court’s opinion will be.

A reversal may well imperil so-called “gift plans”, where a secured creditor makes a payment to junior creditor (the “gift”) in order to obtain support for plan confirmation.  The gift allows the junior creditor to obtain a recovery at odds with the Bankruptcy Code’s priority scheme.  If the Court holds that the priority scheme governs all estate distributions, depending upon the scope of the Supreme Court’s opinion, gift plans may not be permitted.

In addition, if the Court rules that the section 507 priority scheme applies to the entirety of a bankruptcy case, such a holding would conceivably threaten the viability of orders that even Petitioners concede are customary in commercial reorganizations, such as wage payment orders and critical vendor orders.  Those represent instances where estate property is distributed in violation of the Code’s priority scheme, but in reliance on the so-called “Doctrine of Necessity,” where payments serve the overall goal of maximizing the debtor’s going concern value to create the possibility of greater distribution to creditors than does liquidation.

In fact, the Court seemed to struggle with how far its ruling should go, asking the parties what was the scope of the holding they wanted the Court to enter.  Counsel for Petitioners was careful to limit the scope of the holding so as to carve out common Chapter 11 practices, such as wage payment and critical vendor orders.  This was in contrast to counsel for the government who said that it was the government’s view that pre-plan distributions in Chapter 11 that violate the priority scheme “are not permissible under any circumstances unless there is consent of the impaired priority claimholder.”  Depending upon the scope of the Court’s opinion, regular and customary Chapter 11 practices, such as critical vendor motions and pre-petition wage motions, may no longer be permitted.

© Copyright 2016 Squire Patton Boggs (US) LLP

Collections in Connecticut Part 1: Pre and Post-Judgement Collection Specifics

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Collections in Connecticut – how to get paid if you are owed money? Collecting money owed to you or your company can be frustrating.  You or your company are owed money and have not been paid.  What are your legal options?  The following video is the first in a series of three discussing collection law in Connecticut, pre and post-judgment collection specifics and enforcing foreign judgments.

http://www.murthalaw.com/site/video-player/player.swf

Click here for Part 2 – Prejudgment Remedy – Collections in Connecticut

Click here for Part 3 – Steps in the Connecticut Collection Process

© Copyright 2016 Murtha Cullina

Attorneys Facing An Uphill Battle In Litigation Should Consider Option Value When Arguing Valuation

Let me tell you a sad story; Joe owned a marketing company and earned a prosperous living for several years. Joe’s business was growing rapidly and all seemed right with the world. Then a trusted employee left Joe’s firm, taking with him half of Joe’s customers in violation of his non-compete agreement. Joe’s business slowly suffered and lost customers until eventually his firm declared bankruptcy.

Joe sued his former employee and asked for damages related to the value of his firm. Joe’s attorney argued to the court for compensation based on the value of Joe’s firm that was destroyed by the employee. Yet the attorney left out one critical question when arguing the case; how should the law account for the fact that Joe’s business was growing rapidly until the employee left?

Perhaps Joe had several big accounts that he might have been able to sign had the employee not engaged in unfair trade practices. Without taking these factors into account, Joe’s attorney is under-representing the value of Joe’s claim and leaving compensation on the table for no reason.

In finance, this idea of the possibilities that could plausibly occur in the future is called an embedded option or a real option and it is extremely useful in a variety of cases from divorce proceedings and business bankruptcies to merger disputes and matters of economic harm. In the scenario above, Joe’s firm had the ability to potentially continue to grow and become even more successful than it was at the time before Joe’s employee left. Hence the damage done to Joe is greater than simply the lost historical value of the firm. He has also lost the possibility of much more value in the future.

The crux of modern asset valuation is based on a concept called the time value of money. Essentially the idea is that because money received in the future is worth less than money received today, we can value assets or a business based on their associated cash flows and an appropriate discount rate. This approach forms the basis of everything from stock valuation on Wall Street to proper methods for computing interest rates in bankruptcy. This facet of valuation is well understood. But what about the future opportunities or chances of cash flows that are uncertain?  That’s what embedded options address.

The concept of embedded options might seem abstract or even too nebulous for many judges to buy into in a court case, but the reality is that real options have significant value and are often a subject of serious financial negotiations. Particularly for small firms, real options are often important and serve as the basis for various types of convertible debt and warrant grants.

As a finance professor and frequent consultant to companies on matters of asset valuation and financial forecasting, I have long taken it for granted that the techniques used in the finance profession were well understood and universally applied across many other industries including the law. I was very surprised to learn when I started doing expert consulting work, this is not the case. Lawyers often neglect to ask for damages based on real options in their cases. This leaves an important tool out of the litigation toolbox.

In discussing real options thus far, it might seem like they are primarily useful for parties alleging damages, yet they can also be useful for defendants as well. In particular, defendants need to understand how real options are valued and also understand the four appropriate metrics for calculating economic harm as it relates to options (compensating variation, equivalent variation, Paasche indices, and Laspeyres indices). I’ll talk more about these in a future column though.

When valuing real options, there are various statistical techniques that can be used. The math is not necessarily important here, but the concepts are. Essentially, real options increase in value in situations where there is greater uncertainty, and when interest rates in the broader economy rise. Those conditions make real options an exciting tool in today’s courts. With the Fed finally starting to raise interest rates, real options should become marginally more valuable. More importantly, situations with significant amounts of uncertainty lead to greater volatility in intrinsic asset prices.

These volatile situations are often the very situations that lead to court cases for attorneys – a business deal that went wrong leads to a bankruptcy but could have led to a hugely successful company, a merger agreement could result in substantial cost savings for both firms or substantial value destruction for investors and is being challenged by shareholders, a wrongful death case for an individual in the prime of their lives leaves so many possible futures unexplored. Thanks to new statistical techniques and greater computing power, these situations and others can be effectively modeled through computer simulations and valued by economists in ways that would have been unimaginable a decade ago.

Representing clients fairly and to the best of one’s ability in court is the foremost duty of an attorney. To do that, attorneys need to understand the tools of business and the cutting-edge techniques being used in asset valuation. Failing to use these tools is not only a disservice to clients, but a severe hindrance to the attorney as well. In a competitive legal market, the Joes of the world will flock to those attorneys that free themselves to position their clients for maximum success in court.

Article By Dr. Michael McDonald of Fairfield University Dolan School of Business

© Fairfield University Dolan School of Business

Want to learn more about bankruptcy litigation? Join the Federal Bar Association on June 24th for their Fundamentals seminar!

Bank CLE Ad (2)

This seminar will consist of three 90 minute sessions, and address numerous issues facing the bankruptcy practitioner, including jurisdiction, venue, local rules, motion practice, trial trips, appellate practice, and practical do’s and don’ts.

Register today.

This program is suitable for both newly-admitted and experienced attorneys.

Presenters include:
Judge Laura Taylor Swain, Southern District of New York; Judge Martin Glenn, Southern District of New York Bankruptcy Court; and Judge Alan Trust, Eastern District of New York Chapter Bankruptcy Court.

The program will be followed by a cocktail reception.

Attend the 2nd Annual Bank and Capital Markets Tax Institute West – December 2-3 in San Francisco

The National Law Review is please to give you information on the 2nd Annual Bank and Capital Markets Tax Institute WestBank and Captial Markets Tax Institute Dec 2-3 San Francisco, CA - Register Now!

Register today!

WHEN

December 2-3, 2-14

WHERE

San Francisco, CA

Due to the success of last year’s first ever west coast Bank and Capital Markets Tax Institute (BTI), we are proud to announce that BTI West will be coming back for a second year! For 48 years the annual BTI East in Orlando has provided bank and tax professionals from financial institutions and accounting firms in-depth analysis and practical solutions to the most pressing issues facing the industry, and from now on professionals on the west coast can expect the same benefits on a regular basis

The tax landscape is continually changing; you need to know how these changes affect your organization and identify the most efficient and effective plan of action. At BTI West you will have access to the same exceptional content, networking opportunities and educational value that have made the annual BTI East the benchmark event for this industry.

In an industry that thrives on both coasts, we will continue to offer exceptional educational and networking opportunities to ALL of the hard-working banking and tax professionals across the country. Join us at the 2nd Annual Bank and Capital Markets Tax Institute WEST, where essential updates will be provided on key industry topics such as General Banking, Community Banking, GAAP, Tax and Regulatory Reporting, and much more.

The Meridian Sunrise Village Opinion Redux Re: Bankruptcy and Distressed Debt Investors

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In my last post I discussed the Meridian Sunrise Village v. NB Distressed Debt Investment Fund Ltd. opinion handed down by the United States District Court for the Western District of Washington in March of this year.  The prior blog post focused on the Court’s holding that distressed loan investors are not “financial institutions” and therefore, cannot exercise rights and remedies under a loan agreement as permitted assignees. The Court didn’t stop there, however.  Within the opinion, the Court also signed off on the debtor’s gerrymandering of votes in respect of its plan of reorganization.  Today’s blog post discusses this second significant ruling.

Magnifying Glass on Money

As previously reported,Meridian Sunrise Village (“Meridian“) borrowed approximately $75 million from U.S. Bank for the construction of a shopping center.  Shortly after closing, U.S. Bank sold off pieces of the loan to other institutional lenders, including Bank of America.

Following a series of defaults under the loan agreement, Meridian filed for chapter 11 in early 2013.  During the course of the bankruptcy case, Bank of America sold its piece of the loan (“Ratable Loan“) to NB Distressed Debt Fund Limited (“NB“), which subsequently assigned one half of its interest to two other distressed debt investors (together with NB, the “Funds“).

Meridian, in an attempt to undermine the Funds’ position in its bankruptcy case, sought an injunction from the bankruptcy court limiting the Funds’ voting rights in respect of Meridian’s plan of reorganization.  Meridian’s argument focused on the fact that, immediately prior to the bankruptcy petition date, Bank of America was the sole owner of the Ratable Loan.  Therefore, notwithstanding the fact that each of the three Funds held a piece of the Ratable Loan at the date on which voting was to occur, Meridian asserted that the Funds should only have one vote (and not the normal three votes). Unfortunately for the Funds, the bankruptcy court concurred with Meridian and granted the injunction.

Notwithstanding the Funds’ attempt at an interlocutory appeal, voting on Meridian’s plan commenced to the exclusion of NB and its assignees.  The plan, which was supported by Meridian’s other lenders, was confirmed by the bankruptcy court in September 2013.  The Funds then appealed both the confirmation order and the bankruptcy court’s preliminary injunction to the District Court.

The Implications of the Court’s Ruling

After tackling the meaning of the phrase “financial institution,” the District Court considered the issue of allocation and counting of votes in favor of a plan of reorganization.  Under the Bankruptcy Code, a class of creditors is only deemed to accept a plan if more than 50% of the class members and 2/3 of the claimed dollar amount of the class vote in favor of the plan.

As discussed above, Meridian had allocated one vote to Bank of America as the prepetition holder of the Ratable Loan.  Notwithstanding Bank of America’s sale of the loan to NB and NB’s subsequent assignment to the Funds, the District Court held that that the Funds were only entitled to one vote (assuming they were entitled to vote at all), as per Meridian’s classification.  In relevant part, the District Court stated:

“A creditor does not have the right to split up a claim in such a way that artificially creates voting rights that the original assignor never had . . . . If the Funds received the number of votes it [sic] desired by simple assignment, any creditor could assign its interest to multiple parties to increase its voting power. [Another creditor] is correct that ‘the numerosity requirement cannot be so easily manipulated.’”

This is another controversial ruling with perhaps even more far ranging impact than the financial institution ruling discussed in my last post.  The district court effectively gave the debtor the ability to gerrymander voting on a plan of reorganization, at least in terms of satisfying the numerosity requirement.

While it remains to be seen whether this holding will be widely adopted and how it will affect plan classification and voting, we can concede that the district court added a new tool to a debtor’s arsenal vis-à-vis its lenders, particularly lenders who acquire loans post-petition.  In light of the Meridianopinion, lenders should take care when drafting loan agreements to include language addressing a lender’s ability to assign its loan and related rights (including the right to vote on a plan of reorganization) to multiple parties following a borrower’s bankruptcy filing.

The case is Meridian Sunrise Village, LLC v. NB Distressed Debt Investment Fund Ltd., 2014 WL 909219 (W.D. Wash. Mar. 7, 2014).  The Funds have appealed the decision to the United States Court of Appeals for the Ninth Circuit.

Article By:

Of:

Drinker Biddle & Reath LLP

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Quiznos, the toasted sandwich chain based out of Denver, CO, filed for prepackaged bankruptcy protection within days of Sbarro. The company foresees this restructuring cutting $400 million of debt.  In its bankruptcy protection the company listed liabilities between $500 million and $1 billion.

In recent years, Quiznos has faced stiff competition from long-time rivals such as Subway as well as from new entrants to the market like Potbelly Corp.  Subway has over 41,000 restaurants in more than 100 countries, while Quiznos has only 2,100 locations.  All but seven of these restaurants are owned by franchisees.  There are over a dozen locations in New Jersey.  Similar to Sbarro’s bankruptcy, Quiznos franchise locations should not be directly affected by the bankruptcy.

Quiznos’ senior lenders have committed $15 million in debtor-in-possession financing to support ongoing operations during the bankruptcy.

The company plans to implement a franchisee rebate program as part of its restructuring. This program will include investments in advertising, new technology at the restaurants and new incentives for prospective franchisees.  The company has requested that the locations honor all outstanding gift cards.

Though the bankruptcy may not directly impact Quiznos’ franchisees, this is a sign of things to come.  Landlords and franchisees alike should brace themselves for a bumpy road if Quiznos cannot turn operations around.

The case is In re: The Quiznos Global LLC, U.S. Bankruptcy Court, District of Delaware No. 14-10557.

Article by:

Donald F. Campbell Jr.

Of:

Giordano, Halleran & Ciesla, P.C.

Eastern District of North Carolina (E.D.N.C.) Bankruptcy Court Rules that Borrower Can Raise Unfair and Deceptive Trade Practices Claims Against Lender Based on Refusal to Modify Loan

Poyner Spruill

 

Does a lender have a duty to act in good faith when negotiating with a  borrower during a commercial loan modification?  In an order issued recently by the United States Bankruptcy Court for the Eastern District of North Carolina, in In re: Burcam Capital II, LLC, the court denied a lender’s motion to dismiss a borrower’s claims against the lender.  The Borrower alleged that the lender’s failure to modify the terms of the loan constituted a breach of the lender’s obligation to deal with the borrower in good faith, as well as an unfair or deceptive trade practice.  This was because the borrower alleged that the servicer, as agent of the lender, wanted the loan to go into default as a means of acquiring the real property collateral.  While the court acknowledged that the lender had no obligation to modify the terms of the loan, the court still reasoned that the failure to modify the loan under the particular circumstances of this case could constitute a breach of the lender’s obligations to proceed in good faith, and could constitute an unfair and deceptive trade practice under North Carolina law.

Burcam Capital II, LLC (Burcam Capital) is the owner of commercial real property containing retail and office units in Raleigh, NC.  The real property serves as collateral for two separate loans, with both loans administered by CWCapital Asset Management, LLC (CWCapital) as special servicer.  Burcam Capital defaulted on its note payments in 2011, and CWCapital initiated foreclosure as a result of this default.  On June 28, 2012, Burcam Capital filed for relief under Chapter 11 of the United States Bankruptcy Code to stay the foreclosure.

In the course of the bankruptcy proceedings, Burcam Capital filed a complaint against CWCapital alleging that after Burcam Capital’s default, CWCapital acted outside of its narrow role as special servicer of the debt.  In particular, Burcam Capital alleged that CWCapital concocted a scheme whereby CWCapital would position itself to either buy the debt from the lender whose loans it was servicing at an artificially low price, or would buy the real property collateral at the foreclosure sale for below market value in order to benefit itself at the expense of both Burcam Capital and the lender whose loans CWCapital was servicing.  Burcam Capital alleged that in furtherance of this scheme, CWCapital obtained a severely below market appraisal for the real property collateral and refused to deal with Burcam Capital in any meaningful way regarding any modification or work-out.

CWCapital moved to dismiss the complaint on the basis that neither the lender nor CWCapital breached the loan contract, and that absent a breach of contract or allegations of deceit, there could be no liability for CWCapital under North Carolina Law.  CWCapital argued that because under the existing loan contract neither CWCapital nor the lender had any obligation to modify the existing loan, the complaint against CWCapital and the lender should be dismissed.

While the court acknowledged that a lender does not have to reach an agreement with its borrower to modify its loan, and it does not act improperly when enforcing its rights, such as initiating foreclosure when the loan goes into default, the court refused to dismiss the complaint against CWCapital and the lender.  The court reasoned that Burcam Capital’s complaint alleged facts that could constitute a breach of the implied covenant of good faith and fair dealing which is applicable to contracts in North Carolina, together with facts that could constitute deceptive trade practices.  Unfortunately, the court did not explain its reasoning in great detail.  In particular, the court did not specifically address CWCapital’s argument that CWCapital cannot be liable for failing to act in good faith if there was never any breach by CWCapital of the existing loan contract.  Nevertheless, the court agreed with Burcam Capital’s allegations that CWCapital’s negotiations were a sham and its appraisal of the property constituted a ruse that could rise to the level of a breach of the lender’s obligations to deal in good faith as well as a false and deceptive trade practice.

One of the primary lessons for lenders in this case is that when the lender agrees to entertain discussions regarding potential loan modifications it should take steps to ensure that it will be seen by any future court or jury as having considered a borrower’s loan modification proposals in good faith.  Burcam Capital’s complaint placed great emphasis on CWCapital’s refusal to provide any reasoning behind its rejection of Burcam Capital’s modification proposals, CWCapital’s representative in the negotiations having no actual authority to agree to the terms of any settlement or work-out agreement, and CWCapital never informing Burcam Capital of what types of offers it would agree to regarding any future modification or work-out of the existing loan.  Once negotiations with a borrower begin, the lender should take steps to ensure that its negotiations are conducted in good faith.  If there are credible allegations that the lender refused to negotiate in good faith, such allegations may be used to prevent an early dismissal of a borrower’s counter-claims against a lender.

One means of preventing such allegations may be for the lender to require that the borrower agree to a pre-negotiation agreement prior to entering into loan modification discussions with the lender.  A well drafted pre-negotiation agreement can help reduce misunderstandings and later claims by a borrower against a lender.  The pre-negotiation agreement can help establish the ground rules of the discussion, and should include, among other things, agreements that: (a) no oral or written statements made during the negotiation may be used against the other side (to encourage open discussion); (b) any statements made prior to or during the negotiations are not admissible in court for any reason; and (c) confirm the validity of the existing loan documents.  While lenders may encounter some resistance from borrowers in using such an agreement, if a borrower does agrees to its terms, a lender may negotiate more freely because the risk of any liability to the lender as a result of such negotiations is minimized.

In this case, the court did not agree that Burcam Capital’s claims against CWCapital should be dismissed, so not all is lost for CWCapital.  While Burcam Capital survives in its battle against CWCapital, it must now prove its allegations against CWCapital in court, which is a much higher hurdle than simply arguing that its claims have some legal merit and should not be dismissed.  CWCapital recently amended its answer to Burcam Capital’s complaint in light of the court’s refusal to dismiss CWCapital’s claims, and Burcam Capital will now bear the burden of proving that the actions alleged in its complaints are true and that those actions constituted a breach of CWCapital’s obligation to deal in good faith and an unfair and deceptive trade practice.

Article by:

Of:

Poyner Spruill LLP

The Financial Crisis and A New Round of Deaccessioning Debates

Sheppard Mullin 2012

When public institutions are suffering from financial deficits, one question is usually raised: can they sell art to survive? In the museum world it is generally understood that you are to deaccession art only if the work is duplicative of another work in the collection, or for similar collections-related reasons, and the sale proceeds are used exclusively for collections activities. Therefore, for example, you cannot seek to sell art to obtain sufficient liquidity to meet any financial obligation, or make debt service payments. There is little government regulation on deaccessioning (for example, the NY Board of Regents has the power to provide limitations on deaccessioning on New York museums chartered after 1890). However, private institutions such as the American Alliance of Museums (“AAM”) and the Association of Art Museum Directors (“AAMD”) have adopted for their members certain policy guidelines on deaccessioning. Their members are subject to sanctions such as censure, suspension and/or expulsion in the event they do not follow these guidelines.

This is the debate currently happening in the city of Detroit, which has recently filed for bankruptcy, and countries in Europe such as Spain, where steep cuts in its budget have affected state-sponsored museums such as the Prado museum.

As for Detroit’s bankruptcy, some have argued whether the Detroit Institute of Arts (“DIA”) should sell its artwork, yielding an estimate of $2 billion (the city of Detroit has a $20 billion debt). The DIA has 600,000 annual visitors and a collection of approximately 65,000 artworks. Michigan’s attorney general, Bill Schuette, has stated that DIA’s artworks were ‘held in trust for the public’ and could only be sold for the purpose of acquiring new art. Others have claimed that the collection should be sold to refrain Detroit’s retired employees from losing part of their pensions.

From a bankruptcy law perspective, municipalities, unlike businesses, cannot be forced to liquidate their municipal assets (the concept which provides that if a debtor wishes to reorganize it must provide creditors with at least as much as they would get in liquidation does not apply to municipalities). A municipal restructuring plan cannot be approved unless it complies with state law, and as mentioned above, Michigan’s attorney general issued a non-binding opinion stating that the artworks were held in trust for the citizens of Michigan, and thus cannot be sold.

As for Spain, the Spanish Official Gazette has published the annual statements of the Prado museum and one thing is clear: art is not immune to Spain’s recession. Patronage from the Spanish government had a 28% drop (from approximately €6.6 million to €4.8 million) in the last 2 years. However, rather than deaccessioning, this drop has been set off by increasing its international loans. Therefore, the museum authorities allocated these foreign loans receipts as deemed patronage, and this has allowed the museum to stabilize its balance sheet. The annual statements report that the main private sponsors for temporary exhibitions were Axa, Telefónica, BBVA and La Caixa, who contributed a total aggregate amount of €625,000. However, the statements do not specify how much the museums actually invested in setting up such temporary exhibitions. The Contemporary Art Institute (Instituto de Arte Contemporáneo) has been criticizing the lack of transparency in museums and art galleries that receive sponsorship or other type of financial assistance from the state. This Institute has created standards of best practices for contemporary art museums (the “Standards”), which attempt to follow the path of the AAM’s National Standards and Best Practices for U.S. Museums (see http://www.aam-us.org/resources/ethics-standards-and-best-practices/standards and http://www.iac.org.es/seguimiento-del-documento-de-buenas-practicas/documento-de-buenas-practicas-en-museos-y-centros-de-arte).

Spain’s Ministry of Culture was actively involved in drafting these Standards, which were revised and signed in 2007 by the Ministry of Culture, the Contemporary Art Institute, and other prestigious institutions, such as ADACE (Association of Directors of Contemporary Art in Spain), CG (the Consortium of Contemporary Art Galleries), UAAV (the Association of Visual Artists), CCAV (the Board of Critics of Visual Arts), and UAGAE (the Association of Art Galleries of Spain). As in the United States, the Standards are voluntary. The pressure by funders, regulators, the press and the public may be considerable, but museums still choose to follow, or not, the Standards. As of this date, of all 50 museums ranked by the Contemporary Art Institute, only two museums comply with the Standards’ minimum requirements: the Museo Nacional Centro de Arte Reina Sofía and the Artium.

Spain is also trying to overcome the steep cuts in state subsidies and public grants for art institutions by enacting a bill that will heavily increase tax benefits for museum’s private donors (mirroring the French system) through the Patronage Act (Ley de Mecenazgo). If this bill is passed, tax deductions will increase from 25% to 70% for natural persons, and from 35% to 65% for legal persons. Moreover, small donations of less than €150 will be fully deductible. The aim is to achieve France’s success, where revenues increased from €150 million to € 683 million in a seven-year period (2004 to 2011).

In conclusion, the vast majority of museums are nonprofit and ask for public support in return for providing some kind of public good. Thus, it is essential that museums are broadly accountable for their conduct, in particular in times of recession.

Should they sell part of their collection, or should they choose Spain’s path? i.e. advocate for a subset of artworks in the collection to be sent on a 10-year tour (or less) to museums around the world, receiving a revenue stream while having part of its collection available for the public as a representative and emissary of the city of Detroit? Or is there another path?

 of

The Financial Crises in Detroit and Spain and a New Round of Deaccessioning Debates

Sheppard Mullin 2012

When public institutions are suffering from financial deficits, one question is usually raised: can they sell art to survive? In the museum world it is generally understood that you are to deaccession art only if the work is duplicative of another work in the collection, or for similar collections-related reasons, and the sale proceeds are used exclusively for collections activities. Therefore, for example, you cannot seek to sell art to obtain sufficient liquidity to meet any financial obligation, or make debt service payments. There is little government regulation on deaccessioning (for example, the NY Board of Regents has the power to provide limitations on deaccessioning on New York museums chartered after 1890). However, private institutions such as the American Alliance of Museums (“AAM”) and the Association of Art Museum Directors (“AAMD”) have adopted for their members certain policy guidelines on deaccessioning. Their members are subject to sanctions such as censure, suspension and/or expulsion in the event they do not follow these guidelines.

This is the debate currently happening in the city of Detroit, which has recently filed for bankruptcy, and countries in Europe such as Spain, where steep cuts in its budget have affected state-sponsored museums such as the Prado museum.

As for Detroit’s bankruptcy, some have argued whether the Detroit Institute of Arts (“DIA”) should sell its artwork, yielding an estimate of $2 billion (the city of Detroit has a $20 billion debt). The DIA has 600,000 annual visitors and a collection of approximately 65,000 artworks. Michigan’s attorney general, Bill Schuette, has stated that DIA’s artworks were ‘held in trust for the public’ and could only be sold for the purpose of acquiring new art. Others have claimed that the collection should be sold to refrain Detroit’s retired employees from losing part of their pensions.

From a bankruptcy law perspective, municipalities, unlike businesses, cannot be forced to liquidate their municipal assets (the concept which provides that if a debtor wishes to reorganize it must provide creditors with at least as much as they would get in liquidation does not apply to municipalities). A municipal restructuring plan cannot be approved unless it complies with state law, and as mentioned above, Michigan’s attorney general issued a non-binding opinion stating that the artworks were held in trust for the citizens of Michigan, and thus cannot be sold.

As for Spain, the Spanish Official Gazette has published the annual statements of the Prado museum and one thing is clear: art is not immune to Spain’s recession. Patronage from the Spanish government had a 28% drop (from approximately €6.6 million to €4.8 million) in the last 2 years. However, rather than deaccessioning, this drop has been set off by increasing its international loans. Therefore, the museum authorities allocated these foreign loans receipts as deemed patronage, and this has allowed the museum to stabilize its balance sheet. The annual statements report that the main private sponsors for temporary exhibitions were Axa, Telefónica, BBVA and La Caixa, who contributed a total aggregate amount of €625,000. However, the statements do not specify how much the museums actually invested in setting up such temporary exhibitions. The Contemporary Art Institute (Instituto de Arte Contemporáneo) has been criticizing the lack of transparency in museums and art galleries that receive sponsorship or other type of financial assistance from the state. This Institute has created standards of best practices for contemporary art museums (the “Standards”), which attempt to follow the path of the AAM’s National Standards and Best Practices for U.S. Museums (see http://www.aam-us.org/resources/ethics-standards-and-best-practices/standards and http://www.iac.org.es/seguimiento-del-documento-de-buenas-practicas/documento-de-buenas-practicas-en-museos-y-centros-de-arte).

Spain’s Ministry of Culture was actively involved in drafting these Standards, which were revised and signed in 2007 by the Ministry of Culture, the Contemporary Art Institute, and other prestigious institutions, such as ADACE (Association of Directors of Contemporary Art in Spain), CG (the Consortium of Contemporary Art Galleries), UAAV (the Association of Visual Artists), CCAV (the Board of Critics of Visual Arts), and UAGAE (the Association of Art Galleries of Spain). As in the United States, the Standards are voluntary. The pressure by funders, regulators, the press and the public may be considerable, but museums still choose to follow, or not, the Standards. As of this date, of all 50 museums ranked by the Contemporary Art Institute, only two museums comply with the Standards’ minimum requirements: the Museo Nacional Centro de Arte Reina Sofía and the Artium.

Spain is also trying to overcome the steep cuts in state subsidies and public grants for art institutions by enacting a bill that will heavily increase tax benefits for museum’s private donors (mirroring the French system) through the Patronage Act (Ley de Mecenazgo). If this bill is passed, tax deductions will increase from 25% to 70% for natural persons, and from 35% to 65% for legal persons. Moreover, small donations of less than €150 will be fully deductible. The aim is to achieve France’s success, where revenues increased from €150 million to € 683 million in a seven-year period (2004 to 2011).

In conclusion, the vast majority of museums are nonprofit and ask for public support in return for providing some kind of public good. Thus, it is essential that museums are broadly accountable for their conduct, in particular in times of recession.

Should they sell part of their collection, or should they choose Spain’s path? i.e. advocate for a subset of artworks in the collection to be sent on a 10-year tour (or less) to museums around the world, receiving a revenue stream while having part of its collection available for the public as a representative and emissary of the city of Detroit? Or is there another path?

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