After months of bitter fighting over the so-called Grand Bargain to infuse the Detroit bankruptcy with hundreds of millions of dollars from (among others) the State of Michigan, the Community Foundation for Southeast Michigan, the Kresge Foundation, the Ford Foundation, the John S. and James L. Knight Foundation, the William Davidson Foundation, the Fred A. and Barbara M. Erb Family Foundation, the Hudson-Webber Foundation, the McGregor Fund, and the Charles Stewart Mott Foundation to keep the collection of the Detroit Institute of Arts out of discussion for any sale or use as collateral, the Grand Bargain’s fiercest opponent has announced an agreement with the city and the withdrawal of its opposition to the plan of adjustment. This does not completely put an end to discussion about the role of the DIA collection, but for all intents and purposes it will likely be the last of any proposal to collateralize or sell the artwork. The episode also provides a lesson to practitioners about the cost of overzealousness.
Of the many creditors in the Detroit bankruptcy, Syncora Capital is among the largest. Syncora guaranteed payment of some of the city’s pension obligations to other banks, and is thus facing a large reckoning if and when those pensions are not paid in full (as they won’t be, since the bankruptcy is necessarily going to pay less than 100 cents on the dollar on the city’s debts). Along with the Financial Guaranty Insurance Co., Syncora has been a vocal opponent of the Grand Bargain specifically, and of the idea generally that the DIA collection (which is largely owned by the city) should be left out of the bankruptcy discussion. Syncora has disputed—accurately—the idea that a generalized “public trust” actually prohibits such a sale for the benefit of the city’s debts, and has countered the city and DIA at every turn as best it can. When the city had the collection appraised by Christie’s, Syncora drove a competing appraisal. When the city and DIA claimed the art couldn’t be sold, Syncora argued that even if the city believed it shouldn’t, it actually could.
All of this was in service of a relatively straightforward argument: even if the city could not be compelled to sell any artwork, once it brought DIA into the discussion for the benefit of the bankruptcy, it had had fiduciary obligation to maximize the return. Thus, Syncora argued, the city’s “undervaluing” of the collection led to an underperforming return in the Grand Bargain, i.e., even without selling the art outright, it could and should have gotten more. Also, it argued, the Grand Bargain treated some creditors preferentially over others, a bankruptcy no-no.
These were and are arguments to be taken seriously. No one really believed Syncora or anyone else would be repaid in full, but this was about pressuring Detroit to come up with a plan that maximized Syncora’s recovery. The problem for Syncora is that it badly overplayed its hand in the end. While making its serious arguments about whether the city had done enough, it also made accusations of bias and favoritism against mediators Gerald Rosen (chief judge of the U.S. District Court for the Eastern District of Michigan) and Eugene Driker, based on former family connections to DIA.
Suffice it to say, that was a serious tactical error. It is one thing—indeed a mandatory thing within the duties of advocacy—to make a recusal request if a lawyer thinks that a tribunal or judge is or might appear to be biased. But once that is made, the parties are in for the ride, with the issue preserved for appeal in the event of an adverse result. Syncora could—and should—have argued to Judge Rhodes presiding over the bankruptcy trial that the mediators should have recused themselves, and that the mediation was thus doomed from the start when they did not (we have no view of whether that was indeed the case, of course). They should also have left it at that. But they went the extra step to actually accuse the mediators explicitly of partiality. Judge Rhode was furious, and separately issued a “show cause” order, putting the burden of proof back on Syncora to show why its accusation did not merit litigation sanctions.
Today’s deal was accompanied by a public apology, and Judge Rhodes has apparently accepted it and withdrawn the show cause order. Did the sanctions drive the settlement deal? Probably not entirely, but it cannot have been irrelevant. Among the many lessons this case will teach, it is that no matter how strong or weak your legal position, one has to resist the urge to take up the rhetoric. It is almost always of no use, and quite often counterproductive.
