Monday, June 03, 2013

"It is at least a legitimate view that the tragedy that befalls working people when their pensions are affected by insolvency is at least as great as the tragedy that has befallen, or may now befall, the collection in this case."

An interesting email on the situation in Detroit from my friend Peter Dean, who, as I've mentioned before, was closely involved in the Randolph College deaccessioning controversy:

I have been following the unfolding saga at the Detroit Institute of Arts and the possibility that it may have to sell, or that the City of Detroit may sell, some of its very valuable collection to pay the City’s debts.  I understand that the DIA collection is in fact owned directly by the City of Detroit.
I read your Art Law Blog on this topic and, as always, thought your comments are right on point.  I have also seen the remarks of other commentators who have pointed out the difficulty of resolving the competing claims of those who wish to keep the collection intact and of city employees whose jobs and pensions are at risk.

There is a very interesting English court decision from December 2011 that deals with an analogous situation:  Young v Her Majesty’s Attorney-General, WedgwoodPlan Trustee Limited and The Pension Protection Fund [2011] EWHC 3782The case arose from the collapse and bankruptcy in 2009 of Waterford Wedgwood (I’ll refer to it as the Wedgwood Trading Company), leaving substantial unfunded liabilities in its pension plan.  This company is the successor to the famous Josiah Wedgwood and Sons Ltd. which has a history dating back to the 18th Century.  The question then arose as which assets are available to satisfy those pension liabilities.  This affected The Wedgwood Museum Trust Ltd. (the Museum Company), which is a separate but affiliated company that was organized in 1962 to take ownership from The Wedgwood Trading Company of the valuable and historically important Wedgwood collection of pottery and arrange for its public display.  
The Museum Company had only a few employees and was run separately from the Wedgwood Trading Company, but its employees had previously been employees of the Trading Company and were part of the same pension plan.  The Museum Company thus became subject to English multi-employer pension plan rules.  It did not file for bankruptcy at the same time as the Wedgwood Trading Company, but did so later when it became clear that the Museum Company might be responsible for the unfunded pension liabilities of the Wedgwood Trading Company and any other companies participating in the same plan, under “the last man standing rule”.  This rule is derived from a law enacted in the 1990s following some financial scandals, and was intended to make sure that even if some companies in a multi-employer plan went bust, the surviving companies would be responsible for the unfunded obligations under the plan. 

The administrator of the Museum Company brought an action to determine whether the Wedgwood pottery collection was to be regarded as part of the general assets of the company, and thus could be reached and sold to meet the claims of the Wedgwood pension plan trustee as well as the English equivalent of the Pension Benefit Guaranty Corporation.
The answer to that question was “Yes”.  The court held that the Museum Company’s collection is part of the general assets of the company and is not held under any legally recognized form of trust.  As such, the collection could be reached by the Museum Company’s creditors and is subject to being sold to meet the company’s obligations.  This was a surprise to many who thought that the assets were held in some kind of trust. 

The case contains a fascinating discussion of the ins and outs of corporate governance and family affairs through the middle decades of the 20th century, including donations to the collection by the composer Ralph Vaughan Williams, a Wedgwood relative, and others.  The court held that none of the various donors ever actually imposed conditions on their gifts that rose to the level of creating an express trust in the donated items.  It also held that, despite some rather vague use of the term “trust” in various documents, the transfer from the Wedgwood Trading Company to the Museum Company in 1964 was not carried out in a way that created a legally recognized trust.  As a result the Museum Company is the beneficial owner of the pottery collection which is a general asset reachable by its creditors. 

Despite the fact that the collection was transferred to the Museum Company to protect it from liabilities arising from the Trading Company’s business and to make it available for public display, the court held that no separate charitable trust was created and there was no suggestion that the collection is held in the “public trust” or any similar concept.  The British Government which had intervened in the case to argue that the collection ought to be protected from creditors has declined to appeal the decision.  Efforts are now under way to raise funds to keep the collection intact.
The last words from the court’s opinion are relevant to the DIA situation, and perhaps others.
This is a sad conclusion for those who are concerned to preserve a collection which is, as everyone recognises, part of our cultural heritage and of immense importance, but it is the combined result of the pension protection and insolvency legislation. It is at least a legitimate view that the tragedy that befalls working people when their pensions are affected by insolvency is at least as great as the tragedy that has befallen, or may now befall, the collection in this case.
A separate but related issue is likely to be the accounting treatment of the DIA collection.  Is the collection capitalized, i.e., is the value of the collection shown on a balance sheet of the DIA, or the City of Detroit?  I do not know which accounting rules apply to the City of Detroit, but I would think that the DIA, as a non-profit institution, is probably subject to FASB Rule 116.  That accounting standard gives a non-profit institution a choice as to how it treats its collection from an accounting perspective. 
  • If it adopts an express policy that the proceeds of sales from its collections may only be used to add to the collection (and some closely related purposes) then it does not need to disclose the collection on its balance sheet.
  • If it does not have such a policy it must disclose the value of the collection (presumably at cost) on its balance sheet.
I believe that most, but not all, institutions with collections held for public display adopt a policy restricting the use of sale proceeds, in part because that is what the museum organizations such as AAMD and AAM insist on as a requirement for accreditation as a museum.  Does the DIA have such a policy? 
Even if the DIA has such a policy restricting the use of sale proceeds, I expect that it is unlikely to have much legal effect in the current situation, because the policy can be changed by its board of directors or trustees, rather than being an express and legally recognized trust affecting the collection that cannot be altered without court approval. 

I doubt that any such policy would affect the legal issue of ownership and who has the legal power to sell, or the claims of creditors to reach the collection, but it would be interesting to know.  This is a difficult situation that will shed more light on a number of questions concerning collections held by institutions that come under financial stress.