Panel Discussion on Issues for Art Collectors and Their AdvisorsFebruary 2015 – Art & Advocacy, Volume 19
On October 28, 2014, Herrick, Feinstein, Tang Art Advisory, and Christie's cosponsored a panel discussion on the practicalities that collectors should consider before entering into an art transaction. The diverse panel consisted of two Herrick attorneys, a senior art advisor from Tang, the head of dispute resolution at Christie's, and the head of estate planning at Citi Private Bank.
The moderator opened the event by briefly introducing the panelists. Each panelist then gave a short talk on areas of interest to art collectors and made important points that collectors and would-be collectors should consider.
Annelien Bruins - Chief Operating Officer and Senior Art Advisor, Tang Art Advisory
In her practice, Annelien has found that the concept of value and valuation of art can cause confusion because the value for one purpose may not be the value for all purposes. She began by noting that there are factors that drive value, and that analogies can be drawn between art as an investment and real estate as an investment. As with real estate, both objective and subjective measures drive the value of art.
The specific characteristics of art obviously affect value. For example, the reputation of the artist involved may be a defining factor. In addition, the subject matter of the work, its size, condition, and medium of execution will all factor into value. More subjective qualities such as fashion and quality also figure largely into the valuation of art. The market in which the art is being offered can also have a significant impact upon its value. Objects in the primary market may have much less to draw upon for determining value and may depend heavily upon how the artist or gallery promotes the art. Thus, marketing or branding can have a significant effect on value as well.
Annelien then spoke about three different types of "values" commonly seen in the art market, what they are, and how they differ: fair market value, sales estimates, and insurance appraisals.
Fair market value is basically an open market value, that is, the price between a willing seller and a willing purchaser both operating with true knowledge of the facts. A fair market value appraisal is what an owner needs for tax and estate purposes. It is not a retail value. Generally speaking, the hammer price from an auction would be considered a fair market value. A sales estimate is not an appraisal at all. As its name indicates, it is merely an estimate and is often stated in terms of a range of values between a high and a low. A sales estimate can be used as a marketing tool because an estimate can have an impact on the bids that might be received for a particular work. Setting an estimate too high, or even too low, may turn off the potential market. Finally, there are insurance appraisal values, which must take into account how much it would take to replace an object. This amount would generally be much higher than other types of valuation.
Sandra L. Cobden - General Counsel, Dispute Resolution and Legal Public Affairs, Christie's
Sandy noted some of the basic issues to consider when working with an auction house. First and foremost, she emphasized the importance of the contract being entered into, and reminded everyone that a proposal is just a proposal and that there is no deal with the auction house until a contract is signed.
Certain types of property presented to auction houses raise red flags and warrant special attention. Artworks with title complications are the first type of property that gives rise to concern. The primary example given was Holocaust-era art, that is, art that was in Europe between 1933 and 1945. Christie's has its guidelines regarding restitution of Holocaust-era art posted on its website and maintains in-house experts and researchers to assist when issues arise. Claimants must submit a formal claim letter, and Christie's will perform its own research as well as evaluate information provided to it. Christie's can help parties come to a resolution, but sometimes that is not possible, and Christie's could, among other things, bring an interpleader action in court to resolve issues as to whom should take possession of a claimed artwork.
Other types of title issues also come up and may be as ordinary as a family dispute as to ownership. The bottom line is that owners and their advisors need to do as much as they can to research and document the history and provenance of any work to be sold.
Antiquities and cultural property are a second type of property that calls for heightened awareness. Christie's gets notices from the Department of Homeland Security and source countries regarding possibly looted items. These items go through a process of research similar to Holocaust-era items, but research is often more difficult because the available information and databases for these items aren't as numerous or complete.
Objects subject to the Convention on International Trade in Endangered Species of Wild Fauna and Flora ("CITES") are a third type of property that is given special attention. A key in this area is getting your permits and licenses ahead of time or your property could be seized. Trade in ivory was used as an example, but Sandy pointed out that the restrictions on ivory are in great transition right now, and we do not yet have final regulations.
The final type of property that raises a red flag is property connected with Iran. The statute prohibiting transactions with Iran is very broad, and you must be certain you fit into an exception before making any deal because the consequences of non-compliance can be severe.
Sandy also briefly touched on the California resale royalties act and the proposed federal art resale royalties act covered by Barry Werbin in the last issue of Art & Advocacy, and explained why Christie's has taken a position against resale royalties.
Stephen D. Brodie - Former Partner, Herrick, Feinstein LLP
Steve spoke about the risks art owners take when consigning works to a gallery for sale, a topic that Steve covered extensively in a prior issue of Art & Advocacy in an article entitled "Time to Take the Risk Out of Consignments." The basic problem is that the owner of an artwork may consign a work to be sold, but the work may wind up being included in the gallery's inventory and subject to the claims of creditors in the event of the gallery's bankruptcy, or other claims by creditors. In that way, true owners may wind up losing their rights in their artwork.
A major obstacle is that art may not even fall under the Uniform Commercial Code ("UCC") definition of a consignment because the definition rules out consumer goods and consignees who are generally known to be engaged in selling the goods of others. Consignments of art to galleries generally may not fit into this definition. Thus, even if a UCC financing statement is filed, it may have no effect. Assuming an art consignment is a UCC consignment, in order to have priority the consignor must not only file a financing statement, but must also give notice to the creditors having an interest in the consignee's inventory before delivering the artwork to the consignee.
Steve noted that he had previously advocated, including in the pages of Art & Advocacy, amending the UCC to provide for an "art consignment" and a special type of financing statement that could be filed by a consignor to put the world on notice of the consignor's ownership interest in works in the possession of the consignee and eliminating those items from the consignee's inventory for the purposes of creditors. Even the best of minds, however, are entitled to change, and after working for some time to effectuate such a change to the UCC, Steve has come to believe that it may not be the best solution because of the numerous parts of the UCC that would be touched upon by the proposed change. A better solution may be to amend New York's Art & Cultural Affairs Law ("ACA") to protect owners of consigned artworks in the same manner that the ACA protects artists from claims by the creditors of consignee-galleries, that is, by deeming all monies owed by the consignee to the consignor as held in trust. Massachusetts has a similar law. This solution would not inform lenders as to what is, and is not, available to secure a loan to a gallery, but would give good protection to consignors.
Adam von Poblitz - Managing Director, Head of Estate Planning & Cross-Border Advisory Services, Citi Private Bank
For high net worth individuals, art as an asset class often surpasses the value of all other assets. The effect of having art as an asset on tax considerations is, and should be, the issue on everyone's mind. Citizens and non-citizens alike can be subject to taxation in the U.S., and U.S citizens can be taxed on property they own anywhere in the world. Importantly, estate taxes are due nine months after death, and having the value of an estate wrapped up in art may pose liquidity problems. Estate planning is crucial.
Adam raised one of the most thought-provoking issues of the day when he described the following scenario: the owner of a valuable art collection may seek to lower his tax liability by transferring various works into a trust for the benefit of children or grandchildren. If, however, the grantor continues to display the art on the walls of his home, he continues to benefit from the art and his estate can still be taxed on it. If the grantor doesn't want to either store the art or put it on the beneficiary's wall, he can continue to display the art at his home if he pays rent to the trust that is the owner. This is commonly done with real estate. The fact that the property involved is art makes the determination of a fair rent more difficult, but guidelines are arising. Overall, the inherent difficulties of valuing art make for a constant source of friction with the IRS, which has attempted to respond to valuation issues by instituting the Art Advisory Panel.
Adam finished his talk with a discussion of the Fifth Circuit Court of Appeals' recent decision in Estate of James A. Elkins, Jr., et al. v. IRS, in which the court upheld the use of a steep discount in valuing a fractional interest in artworks as a result of the unmarketability of only an undivided portion of an artwork.
Darlene Fairman - Counsel, Herrick, Feinstein LLP
While no law can tell you whether or not a work of art is authentic, there are laws that affect the rights and responsibilities of sellers and purchasers of art when it comes to questions of authenticity, beginning with § 2-313 of New York's UCC, which provides that, regardless of the words used, an express warranty is created in the following ways:
- Any affirmation of fact or promise that relates to the goods and becomes part of the bargain creates a warranty that the goods will conform to the affirmation of fact or promise;
- Any description that is made the basis of the bargain creates a warranty that the goods will conform to the description; and
- Any sample or model that is made the basis of the bargain creates a warranty that the goods will conform to the sample or model.
Where the seller is an art merchant and the purchaser is not, New York's ACA §13.01 provides that whenever an art merchant furnishes a certificate of authenticity to a non-merchant purchaser, the authenticity is presumed to be a basis of the bargain and creates an express warranty. The art merchant can temper this warranty by making the attribution clear, or can expressly disclaim it entirely. ACA §13.05 makes §13.01 applicable to sales between art merchants where the sales of multiples are concerned.
Another law that could affect authenticity is the Visual Artists Rights Act ("VARA"). Under VARA an artist can disclaim authorship of an artwork under certain circumstances, such as when a work is intentionally or negligently damaged or modified in a way that is prejudicial to the artist's reputation. In this way, an authentic artwork can become as unsalable as a fake.
Part of my discussion focused on the proposition that courts, at least in the U.S., don't really decide authenticity. This was made clear by a New York Appellate Court in the case of Thome v. Alexander & Louisa Calder Foundation, 70 A.D.3d 88, 890 N.Y.S.2d 16 (1st Dep't 2009) in which the plaintiff had submitted documentation to the Calder Foundation to authenticate an artwork and include it in the Calder catalogue raisonné, but, without explanation, the Foundation declined to do so.
The Thome court concluded that any finding of authenticity on its part would be meaningless in the art market, which would look to art experts' pronouncements on authenticity, rather than a court's. Indeed, as the court in Thome pointed out, that is exactly what happened in Greenberg Gallery, Inc. v. Bauman, 817 F. Supp. 167 (D. D.C. 1996) aff'd, 36 F.3d 127 (D.C. Cir. 1994), in which the court dismissed a case for rescission of a sale, coincidentally, of a Calder sculpture. Relying on the expert testimony presented by the defendant, the court held that the plaintiff did not meet its burden of proving that the art was inauthentic and therefore was not entitled to rescission. The art market, however, set greater store by the expert opinion that the court rejected, and the work has been shunned ever since.
Finally, I discussed artists' authentication committees, the possible chilling effect of their demise on art authenticators, and proposed legislation to shield expert authenticators from frivolous lawsuits, a topic I covered in a prior Art & Advocacy article entitled "The True Cost of Authentication Litigation."
The event wrapped up with a few questions from the audience. Adam's discussion raised concerns about how estates can arrange to pay taxes on illiquid art collections. One member of the audience asked about transactions involving Cuban art. A final question prompted some lively, albeit quick, discussion about title insurance for art.