Sunday, October 5, 2014

Have the DIA Appraisals Failed?

The court in the City of Detroit bankruptcy trial has heard 17 days of testimony to date and while the matter of the Detroit Art Institute’s art collection has not been settled, this seems like a good time to take a look again at the various appraisals and how they have been used in the case so far.  From my perspective, it would appear that in terms of providing a solid number which the court could use to it make a decision, the appraisers have not succeeded.  I have not attended any of the sessions and have relied upon the Detroit Free Press’s excellent coverage, including a live blog from the courtroom, but from what I can gather, the exact numbers from the four different reports rarely, if ever get mentioned.   There are countless decisions that go through an attorney or a witness’ mind as they stand in court, so I do not presume to know exactly why this is happening, but I do think that on some basic level, it must be because all of the appraisals lack credibility.

As I outlined in my previous post, 4 different entities took a swing at coming up with a value for some or all of the DIA collection.  The City of Detroit (COD) commissioned two of them:  Christie’s, which appraised all works purchased directly with COD money and then Artvest, which incorporated Christie’s values and went on to value the entire collection.  Both Christie’s and Artvest also provided the COD with ideas about how to monetize the collection without selling it.  Then, two of the COD’s bond insurers, creditors who opposed the way in which they are being treated under the bankruptcy plan, Syncora and Financial Guaranty Insurance Company (FGIC) hired Winston Art Group and Victor Wiener Associates (VGA) respectively to provide their own opinions of the value of the collection. 

Over the past month, Syncora dropped its opposition to the bankruptcy plan in exchange for some important concessions from the COD.  Rumors that FGIC would settle as well have persisted, however to date this has not happened.  While there are certainly many other creditors who would insist on the trial continuing, if FGIC were to settle  it seems likely that the bankruptcy plan would move forward in its current form, subject to Judge Steven Rhode’s approval; Judge Rhodes would presumably have some influence over the final plan, but in terms of the DIA collection, the “Grand Bargain” whereby the DIA collection would be placed safely away from the grasp of any COD creditors in exchange for money raised from private and public sources would stay intact.

Two important witnesses have given testimony that deals directly with DIA and the Grand Bargain: Emergency Manager Kevyn Orr and Michael Plummer, the principal at Artvest who authored the extensive appraisal of DIA’s entire collection.  Plummer, to repcap, came up with a number in his report of between $2.7 and $4.6 Billion, which he then proceeded to discount in various different scenarios, estimating that the most the collection could hope to fetch would be $1.8 Billion, and it might even be as low as $800 Million, give or take.  In his direct testimony, Plummer described his methodology in arriving at his figures and as might be expected defended his report, but the discussion didn’t really seem to have focused on his numbers.  Instead, Plummer emphasized how difficult the process of selling DIA’s collection would be.  He notes the legal challenges that DIA would mount at every step, and he indicated that many potential buyers would stay away out of sympathy with the DIA and that the entire matter would end up hurting more than helping, as by the end of it, the Museum would be ‘denuded’, as well as lacking in credibility moving forward.

Emergency Manager Orr, the mastermind of the bankruptcy plan, sounded similar notes in his testimony, which Orr’s was notably lacking in any specifics.  He claimed that the DIA would lose funding, that donors would no longer give art to the museum and that its standing with other museums  would be diminished if the collection were sold.  Instead of going down that road, Orr feels the Grand Bargain is a better alternative.  Orr considered “what was reasonable in terms of preserving a City asset” and concluded that the amount of money proffered was just that. 

Judge Rhodes at various points seemed to be very receptive to the idea that the DIA provides a place where the Detroit community can thrive.  His questioning of a DIA trustee focused on the school groups who visit the museum.  Orr and Plummer made similar points and Roger Penske, a billionaire philanthropist who has taken an active role in trying to assist the city as it tries to recover claimed that the economic benefit of having a world-class collection of fine art in Detroit was incalculable.  “You can’t put a price tag on that.”

Indeed.  I find it amazing that nobody is really hanging their hat on a particular number and then stating that the Grand Bargain is a fair price.  Surely if there was consensus about the number, then another number could be calculated that was reasonable.  A striking exchange between Ed Soto, the lawyer for FGIC and Orr sums it up.  Pointing out that the idea of the Grand Bargain began before the entire collection was appraised:

Soto:  “You agreed to the Grand Bargain without knowing
                     the value of the entire collection?”

Orr:  “Correct.”

At another juncture, Orr admitted that he never took action to explore alternatives to selling art proposed by Christie’s.  This is astounding.  The COD expended resources commissioning Christie’s to help it think of ways to get some money in the pot without selling the art and then ignored them.

The bankruptcy has many moving parts and the DIA collection is merely one of a number of things that need to be sorted out before the COD can put this tragedy in the rear-view mirror.  As such, it does make sense to look at the various matters broadly; other parts of the trial seem to get very bogged down in the minutia.  Nonetheless, I am surprised at how wishy-washy the discussion about DIA has been to date.  Attorney Nicholas O’Donnell, upon whom I lean on heavily in this blog, is of the opinion that Orr is a magician.  In his view, selling the DIA collection was never going to happen and the fact that $800 million appeared via the Grand Bargain is essentially found money.  This might explain the vagueness of Orr’s testimony.  Why bother being specific about how the number was arrived at when it’s all a big bluff?  Such specificity would not serve Orr’s purpose here.  Perhaps all he wants to do is appear to be considering selling.

Another striking point all of the DIA-related witnesses made is how nasty DIA would be regarding any sales.  Annemarie Erickson, the Vice-President of DIA promised Judge Rhodes that the DIA would litigate, adding that it was the museum’s ‘obligation’ to protect the collection.  Plummer made this point in his report, and Orr said on the stand that the Grand Bargain averted a very costly legal fight.  This argument holds a lot of water—the Museum probably would be relentless in seeking judicial relief if the COD decided to sell off the collection.  However, the COD would be doing so to provide basic services to its citizens and to meet the obligations it had made to its former employees as well as to its many other creditors.  The DIA could easily be accused of elitism, trying to retain assets that appeal to the few in the face of true hardship.  Thus, if Orr was bluffing about his desire to sell, perhaps the DIA was bluffing too.  After all, it is easier to threaten to sue in the abstract than to actually do so.  So here again, it may be that many of the players have no interest in actually discussing the appraised values put forward by four highly qualified firms. 

The prominent appraiser Beverly Schreiber Jacoby , in a recent op-ed piece in the Detroit Free Press provides another astute take on the situation.  While many observers, me included, have looked intensely at the appraisers and marveled at the disparity between their reports, Jacoby bravely points a finger at DIA, noting that they share the blame for the opacity of the value of the works within their collection. She points out that the DIA staff, like most  American museums “do not routinely prepare baseline financial statements of the total value of the permanent collection”.   While this may shock some people, it actually makes sense.  The art that they hold cannot ethically be sold for operating expenses, so why waste time figuring out its value for the annual report?  When works are lent or moved, they would of course be given insurance values, but in general there would be no need to have an up to date insurance appraisal for every object in a museum.  If the whole place were to go up in flames, whatever the maximum number is on the insurance policy would be claimed and it would be a fraction of their true monetary value.  So again, why expend the time and money appraising things that are probably worth more than they can afford to insure in the first place?

However understandable this might be, it has added confusion in this case. Jacoby further says that the culture of the museum world renders the idea of valuation taboo.  The scholars who work at museums are in many cases constrained by their institutions from discussing how much things might sell for and the entire idea of assigning a number value to a cultural object is anathema to the museum world in every instance.  It is important to note here that Victor Wiener, in his deposition before the trial made it clear that the information he received from DIA in preparing his report was woefully inadequate for his purpose.  Jacoby’s conclusion is that “…the cloistered ideals represented by museum culture have a price of their own" because such willful ignorance of the market value of the works in their care has made it difficult for all the participants in the bankruptcy process to make informed decisions.  

It is quite brave of her to make this observation.  The DIA is often seen as a blameless victim in this process and I doubt her views will be welcomed by many in the art world.  But the point that Jacoby is making is not that they should encourage the sale of their art, but that a more open, collaborative approach to the idea of placing a number on the art would have resulted in a less painful process.  After all, what the Court needs to know, really, is what number is fair?  That would result in all sides being able to agree on the Grand Bargain number and the collection could thus be protected with the chance that many stakeholders would feel that the outcome was just.

This is not to say that Jacoby holds the appraisers blameless.  DIA’s deliberate lack of interest in valuations, along with an adversarial stance towards the entire matter of deaccessioning means that the insurance values that both Artvest and Victor Wiener Associates (the only two appraisers who took a crack at putting a number on the whole collection) relied upon were faulty and thus suspect and they should have known it.  Their reliance on these values means that their reports are unreliable.  She also goes on to cast aspersions on the VWA report, without naming it, objecting to the idea that a DIA sale would be “the sale of the century”, and coming down clearly on the side of Artvest, agreeing that such deaccessioning would be at bankruptcy liquidation prices. 

Jacoby also makes the point that “a valuation… is a hypothetical and written on behalf of the intended user”, by which she means that it is a bit simplistic to use any of the appraisals as a concrete fact upon which a fair and just decision could be based.  This is a corollary to the point I made in my earlier post, that all of the Detroit appraisals take into account the viewpoint of their client.  Jacoby notes that nobody should have assumed that the appraisers would come up with anything close to a consensus, given the varying methodologies used and that conflict was inevitable.  In her view, the fact that the appraisers could not get together and agree on a set of assumptions and methods beforehand has led to the confusion and wildly different results.

I agree with Jacoby in that the appraisers did indeed use different methods on behalf of different intended users and she is absolutely correct that this is a problem.  However, it is not fair to blame them, as she seems to imply.  After all, earlier this year the Court itself rejected the creditor’s motion to create a panel of independent appraisers, forcing the two major creditors to hire their own experts who could rebut the COD’s reports which arguably favor a low number for the Grand Bargain.  It would have been nice if everyone had banded together and played nice, but the adversarial nature of a bankruptcy proceeding is unlikely to produce such cooperation.   I also question her assertion that the works would be sold at liquidation value.  Again, the potential buyers of any of the DIA art would be able to make the argument that they are paying money into a fund to benefit people who worked hard and deserve to be paid what was promised to them.  Nonetheless, I do admire her willingness to take a side in the discussion.

Another point Jacoby makes here is pertinent.  She notes the appraisers all had “exceptionally limited research time,” with an inordinate “size, scope and scale.”  She notes that this led them to rely unduly on auction results that can be accessed on the internet, eschewing the more time consuming process of checking with dealers and trying to verify private sales.   I have to split hairs with her here.  All of the appraisers involved have extensive innate knowledge of the private markets in which they are experts—this is one reason they are in fact experts.  They of course attend art fairs, gallery shows and stay on top of the markets they appraise in.  So even in a short amount of time, they can bring that knowledge to bear upon the problems they are solving and not rely solely on whatever the internet spits out.  But the appraisers themselves uniformly noted that they were operating under severely tight time constraints and it is in fact a considerable limiting condition to try and appraise a collection of 60,000 objects in 2 weeks, or even two months. 

All of this has caused me to change my mind about the appraisal of the DIA collection.  I had thought that perhaps one of the appraisers had got it right.  But based on the fact that we are deep into the trial and not one of the reports seems to have even seen the light of day signals to me that they are not credible.  Certainly Plummer’s ideas on discounting the possible value of the art based on the threat of litigation, the aversion many potential buyers would have to making a bid for any of the objects and the generally difficulty in disposing of much of the collection in a manner which would achieve a premium have seemingly taken hold in the discussion.  But his actual numbers and the startling ways in which he dealt with huge swathes of the works haven’t warranted as much as a tweet. 

I had hoped that our profession could, as Victor Wiener stated, serve the public interest and provide independent, useful information in a process that is incredibly painful.  [Wiener may well take the stand before all of this is over and if he does it will be newsworthy.  Wiener (who I have noted before has been an instructor of mine at NYU)  is a seasoned courtroom player and the excahanges between him and the COD lawyers is bound to be contentious].   

But reading Schreiber and discussing this matter with other appraisers has made me think that I was a bit na├»ve.  Gayle Skluzacek, one of the top appraisers in the US (and an instructor of mine at NYU), in a private conversation, questions whether a credible appraisal could have been prepared under the assignment conditions.  It may be a case where the appraiser would need to withdraw from the assignment according to the USPAP Scope of Work Rule.  As Jacoby puts it, the case is a missed opportunity for the appraisal profession to have fostered trust by airing the issue of conflicting agendas rather than each report resolutely hewing to their client's own requirements.  In my opinion, it might be that rather than helping, the various reports have unintentionally made the situation worse and allowed the perception to be reinforced that the appraisal process is capricious and thus unreliable.  

Please note that the archive of the Detroit Free Press' blog is not always entirely accessible.  I have tried to provide links in my post wherever possible, but some of my quotes are taken from notes I made while reading the blog live and that content does not appear to be accessible at the moment.  Despite the glitches with the live blog, the Free Press has been providing an invaluable public service in their coverage of the case, and you may visit their website and search around to find a great deal of information about the goings on in the courtroom.  Reporter Nathan Bomley's Twitter feed is also a great resource.