Monday, February 29, 2016

Art & the "Public Trust" in Municipal Bankruptcy

This Friday, March 4, I will be participating in the University of Detroit Mercy School of Law Centennial Conference on the past, present, and future of the City of Detroit. The lineup looks really great, including among others Andrea Boyack from Washburn University School of Law. I will be participating in a panel on the Detroit bankruptcy and the "grand bargain" surrounding the Detroit Institute of Arts collection. It's a little daunting, not only because I am not a bankruptcy law scholar, but also because my co-panelists are The Honorable Gerald E. Rosen, Former Chief Judge of the US District Court for Eastern District of Michigan, and the architect of the "grand bargain," and Eugene A. Gargaro, Chair of the Board of Directors of the Detroit Institute of Arts.

Making matters worse, while I am personally very pleased by the outcome and the preservation of the DIA collection, I expect to be somewhat critical of the bankruptcy court's opinion, which held (without explanation or authority) that Detroit probably could not have sold the DIA collection. According to the bankruptcy court, the collection was protected by both the "public trust" doctrine and specific transfer restrictions. However, neither of those conclusions are supported by the evidence. Few (if any) of the works in the collection were protected by specific transfer restrictions. And the "public trust" doctrine simply doesn't apply to art museums, in the absence of state laws specifically imposing restrictions on the sale of artworks by charitable museums.

On this front, I found Allison Anna Tait's article Publicity Rules for Public Trusts very helpful. Here is the abstract:

That museums are public trusts is a truism in academic discourse and industry discussion. What various commentators mean when they speak about museums as public trusts, however, is less clear. This Article untangles and analyzes the various meanings of “public trust” and how these meanings translate into regulatory systems. I propose that two predominant meanings - the public resource and trust law meanings - jointly constitute the definition of a public trust, and that each meaning has a consequent regulatory framework. These definitional and regulatory frameworks coexist without conflict in most contexts. In the context of deaccessioning, however, they collide.

Deaccessioning - the practice of a museum selling art from its collection - is highly contested because it is perceived to be a significant violation of the public trust, in all meanings of the term. Nonetheless, public resource and trust law rules treat deaccessioning quite differently. Public resource rules, exemplified by industry standards and state statutes, strictly prohibit the use of deaccessioning funds for any purposes other than to purchase new art. Trust law rules, on the other hand, work primarily to ensure that the terms of organizational charters, trust instruments, and gift agreements are met. One goal of this Article is to identify and describe the public resource and trust law frameworks. A second goal is to leverage the debate surrounding deaccessioning as a means for discussing how the two frameworks compete and why the trust law framework, enhanced by the addition of corporate governance principles and grounded in “publicity” values, is preferable.

I would go further. The "public trust" doctrine simply shouldn't apply to museums. By way of explanation, the Association of Art Museum Directors (AAMD) and the American Alliance of Museums (AAM), the primary professional organizations governing art museums, have adopted rules governing the sale or "deaccessioning" of works owned by museums. Essentially, those rules provide that works can be sold in order to purchase new works, but cannot be sold for any other purpose, including to cover operational costs. The supposed rationale for this rule is that the works are held in the "public trust" by the museum. But as Donn Zaretsky has observed over and over, this is nonsense on stilts. Normally, if property is held in the "public trust," it cannot be sold for any reason. But somehow, the museum version of the "public trust" doctrine provides that artworks protected by the public trust cannot be sold unless it is convenient. It is telling that the legal scholars who have considered this argument have been ... unsympathetic. And that proponent of the "public trust" argument tend to respond to criticism by raising their voices.

However, public choice theory provides a plausible explanation for the museum version of the "public trust" doctrine. Art museums typically obtain the overwhelming majority of their works via gift or bequest. Under the current deaccessioning rules promulgated by the AAMD and the AAM, once a work is donated to an art museum, it is off the market forever, unless it sold to purchase another work. Moreover, most of the works owned by art museums simply sit in storage. For example, the Metropolitan Museum of Art currently owns more than 2 million objects, but exhibits only about 20,000. In other words, the deaccessioning rules effectively promote scarcity and increase the price of works not owned by museums. So, the deaccessioning rules effectively ensure that private owners of artworks get to claim any capital gains, rather than museums.  While I doubt than many (any?) museums or museum directors have considered the issue on those terms, I suspect a version of "agency capture" encourages them to rationalize self-imposed rules that make no sense. And occasionally lead to the dissolution of museums that own many valuable works, but cannot monetize them to cover operational costs.

For one thing, the AAMD & AAM rules conflict with the duty of a charitable organization to increase public welfare. It makes no sense for an art museum to close, rather than sell one artwork. Especially when the (implicit) purpose of preventing the sale of artworks is to increase the value of works owned by private parties. One wonders how the AAMD and AAM would fare in an antitrust action.

Brian L. Frye

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