Here’s an important rule for mediators:
- When the parties try to present you with a binary equation—“either this or that”—reject it; instead
- Get the parties involved in the process with you—try to help think your way out of the binary box they are trying to put you in.
–From Judge Gerald E. Rosen [fn. 1] in a May 2021 interview on mediation in the City of Detroit bankruptcy [fn. 2].
And here’s an illustration of how Judge Rosen faced a binary equation of huge proportions in the City of Detroit bankruptcy—from that interview.
The City of Detroit bankruptcy faced two bookends.
The first bookend is the claims of pensioners for their (i) pensions, and (ii) retiree health benefits:
- The pensions were underfunded by more than $3.5 billion;
- The retiree health benefits claims totaled at least $6 billion; and
- The combined retiree claims were the largest single creditor block.
The opposing bookend is this: the City of Detroit had only one asset, an art collection in a museum.
The Art Museum
The City of Detroit owned an art museum—the Detroit Institute of Arts—one of the leading museums of the world. The art had been donated to the City when the City was flush at the turn of the 20th century. Estimates of the value of the art were anywhere from $1 billion to $8 billion for 66,000 pieces.
And the City owned it all, right? Wrong:
- Ownership of the art wasn’t always clear, because much of the art had been donated with restraints on it . . . and restrictions and restrictive covenants; and
- Whether the creditors could actually impair the art and liquidate it was also unclear.
So, ownership of the art became a big issue.
Importance of the Art
The media discussed the City’s art collection . . . a lot! The art had been a matter of civic pride for Detroit, because people come from all over the world to see it.
Whether the City was going to liquidate the art to pay creditors became a big question discussed among the art community and the legal community, around the world.
And there was a false and unfortunate narrative developing because, (i) the pensioners were largely African-American, and (ii) the art was being falsely portrayed as an exclusive province of the suburbs, the wealthy white community, and the larger metropolitan community.
The Binary Equation: Liquidate Art vs. Large Losses for Retirees
So, the binary equation being presented became this: either,
- liquidate the art, and everybody goes away happy (particularly the retirees); or
- if the art isn’t liquidated, retirees probably take a 30% or 40% cut to their pensions (which aren’t plush to begin with—e.g., $19,000 for the non-uniforms, like clerks and garbage handlers; and $32,000 for the uniforms, who don’t get social security).
So, a very robust narrative began developing around the binary equation: art vs. pensions. And all questions in the case came down to this: What about the art?
Value of the Art
The City’s Emergency Manager, appointed by the Governor to basically take over the City, hired Christie’s Auction House to appraise the art.
So the City was very focused on the value of the art, as they should be: the City is in a bankruptcy, after all.
Seeking a Prompt Solution
“So the more I thought about it and the more I kind of obsessed over it,” says Judge Rosen, “about being bookended by the art and pensions,” it became obvious that we needed to “find some way out of this trap, this binary equation that I was being presented with.”
“I remember thinking, one morning when I got up,” Judge Rosen adds, “What the hell have a gotten myself into”:
- “My legacy is going to be the guy who helped sell off one of the world’s great art collections to sheiks in Dubai and oligarchs in Russia”; and
- “That was certainly something I didn’t want.”
“I also thought it [liquidating the art] was a very bad idea for the City.” Judge Rosen explains:
- “I saw that about 550,000 to 600,000 people were coming into Detroit to visit the museum”;
- the museum was in midtown, “which was about the only area of the City that was beginning to have some decent growth”; and
- “if you liquidate the art, it will be like dropping a hydrogen bomb into the middle of the City—it will suck the life out.”
Moreover, the museum’s Trustees were “putting together a war chest for litigation to oppose the liquidation of the art”:
- litigation “would extend the fight, maybe for years, because there were many, many legal questions—and that wasn’t good”; and
- “time was Detroit’s enemy—the longer legal disputes stretched out, the longer the City is in bankruptcy, the more vulnerable it was to the same kinds of service deficiencies and population loss.”
Detroit had lost about 60% of its population since the mid 1950’s: (i) population at the time of the bankruptcy filing was about 700,000 people, but (ii) it had been close to 2 million.
So, the bankruptcy needed to be resolved quickly—or Detroit would continue to circle the drain, headed toward oblivion: “no question about it.”
The binary equation of art v. pensioners, described above, threatened to destroy the City of Detroit bankruptcy reorganization.
Finding a way to reject that equation and finding a way out of that binary box is the great achievement of the City of Detroit bankruptcy.
Footnote 1. Hon. Gerald E. Rosen (Ret.) serves as mediator, arbitrator and neutral evaluator in high-level business cases for the JAMS office in Detroit. While serving as Chief Judge of the U.S. District Court for the Eastern District of Michigan, he was appointed Chief Judicial Mediator in the City of Detroit bankruptcy. Judge Rosen is recognized as the person who “masterminded an $820-million deal that rescued Detroit” out of bankruptcy and as “the Judge who helped save Detroit.”
Footnote 2. Immediately below is a link to a YouTube video of the interview with Judge Rosen from which the information herein is taken (beginning at the 00:13 time mark).
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