Funding Public Art with Brick and Mortar: The Success and Failure of “Percent for Art” Laws

Jorge Luis Rodriguez, Growth (1985)

Jorge Luis Rodriguez, Growth (1985)

By Emma Kleiner*

Although the thought of East Harlem in 1985 may not immediately spark considerations of aesthetics and community, that was the location and date of the first Percent for Art Project in New York City. In that year, Jorge Luis Rodriguez’s Growth was unveiled there in the East Harlem Artpark, a sculpture dedicated to the intersection of nature and man. Funding for public art works historically came from various sources, including private donors and nonprofit organizations. However, since 1982, New York City’s Percent for Art (PFA) law mandates that one percent of the budget for certain building projects be set aside for public art. Former New York City Mayor Ed Koch, who initiated the law, stated: “For generations to come, it’s a wonderful thing, and I’m very proud of that.” This type of public art law has been mirrored across the nation by many cities and states, and this article analyzes the structure of what makes a successful Percent for Art law. 

New York City’s Percent for Art Program remains one of the strongest in the nation as it strives to bring public art to all corners of the city. Other states, counties, and municipalities around the nation with similar laws include: Chapel Hill, North Carolina; New Haven, Connecticut; Pittsburgh, Pennsylvania; Philadelphia, Pennsylvania; Oro Valley, Arizona. The laws in these cities follow the PFA theme but vary in terms how each program and disbursement is structured and carried out. For example, in some cases, as with the law in New York City, only municipal or City-funded construction projects are mandated to abide by the PFA law, but in other cases, as with the law in Oro Valley, Arizona, public art is compulsory for “all new non-residential and public development projects.” While some public art laws have flourished, like the one in New York City, others have floundered and never gained a strong foothold in the community, like the one in Pittsburgh.

One main feature of a PFA law that affects its ability to succeed is whether the law creates an automatic set-aside for public art or whether the funding must be actively requested. The divide between these types of PFA laws has become particularly apparent in Pittsburgh. The Pittsburgh ordinance, passed in 1977, ceased being enforced about twenty-five years ago, when the city “began including a public-art line item, of about $50,000, in its annual budgets.” Pittsburgh’s PFA law, which requires publicly funded construction projects to set aside 1% of the cost for public art, has gone unenforced for years, and the public started to petition for the law’s enfoncement. One of the main critiques of Pittsburgh’s law is that it became essentially unenforceable because, as reported by the Pittsburgh City Paper in August 2014, the law “requires the department head overseeing a given construction project to actively request artwork for that project — seldom a priority, especially in cash-strapped times.” A possible solution is to make the arts funding automatic, instead of asking for an artwork-funding request that is unlikely to appear in economically difficult times. As a result of Pittsburgh’s PFA law, the community at large has suffered from a deficit of public art and “lost out on thousands, perhaps millions of dollars [worth of art].” The systemic failure of PFA law in Pittsburgh has deprived a city of many public arts projects, and created a situation in which a complete overhaul of the PFA ordinance is necessary in order to enforce any percent for art projects.

In contrast to the situation in Pittsburgh, Oro Valley in Arizona has developed a robust public art law that does not allow developers to shirk the public art requirement. In Oro Valley, the public art law, which has been on the books since 1997, states, “[p]ublic art is a required element for all new non-residential and public development projects.” To aid developers in finding artists and commissioning artwork, Oro Valley’s website contains a public art inventory, which includes the budget for various public art project and the artists’ contact information. The centralization of data has helped Oro Valley’s PFA law to succeed. While making the public art set-aside mandatory in Pittsburgh’s PFA law would be a big step towards enforceability of the law, it would also be necessary to create a database of information about public art in the city. Many developers may have never interacted with public art in the past and may find it daunting to discover and hire an artist. By creating a centralized database with that information, however, developers may be more encouraged in approaching the public art component of their development.

James Turrell, The Color Inside, 84th Skyspace (2008)

James Turrell, The Color Inside, 84th skyspace (2008)

In considering the success and failure of PFA laws, it is critical to be mindful of the many communities that may be impacted by these laws. For example, many Texas universities, including University of Houston, Texas Tech University Systems, University of North Texas, and University of Texas at Austin, have instituted percent for art policies to invigorate the public arts community and cultural landscape on campus. As state legislatures across the country have slashed funding for public universities, oftentimes aimed at cutting the arts and humanities, PFA laws remain a viable way for a public university to inject its campus with an aesthetic component. The strong PFA laws in Texas are stunning examples of how PFA laws can be important for securing public art. The state’s public universities have become some of the most vocal and visual supporters of the law. Several prominent artists have been funded through this program to contribute to the aesthetic landscape of public universities in Texas. James Turrell, who skyrocketed into the public eye over the last few years due to three major retrospective exhibits, recently installed a skyspace at University of Texas at Austin. The universities’ adoption of PFA laws suggest that a strong statewide PFA law that applied to public institutions, including universities, which are chronically underfunded in the arts, could generate the opportunity to for public institutions to grow art collections.

As states, counties, and municipalities struggle to establish strong PFA laws, lawmakers must consider the ultimate enforceability of such laws. The shortcomings of Pittsburgh’s law are good examples of how a PFA law ought to be structured in an enforceable way or risk reaching a tipping point where it is habitually ignored by developers. In contrast, the example provided by Texas demonstrates how the success of a PFA law can bring together different segments of the community to appreciate artwork to which they might not otherwise have access. 

Select Sources:

About the author: Emma Kleiner is a second-year student at Stanford Law School.

Disclaimer: This and all articles are intended as general information, not legal advice, and offer no substitute for seeking representation.

Case Review: Red Rothko Suit, a.k.a. Hoffman v. L&M Arts (TX)

Mark Rothko, Untitled (1961)

Mark Rothko, Untitled (1961). Source: http://www.wikiart.org.

By Chris Michaels, Esq.*

A private art sale involving a Rothko painting is the subject of a bitter lawsuit in the Northern District of Texas. Inadvertently, the dispute sheds light on the often hidden intricacies and nuance of confidential deals. Hoffman v. L&M Arts, et al, deals with an alleged breach of contract relating to a confidentiality provision of a Letter Agreement that provided for a private sale of artwork. The lessons to be learned from this controversy may protect future sellers and buyers who may wish to enter into private sale agreements.

The painting at the heart of the sale is a 1961 Mark Rothko oil, Untitled, executed in bold red and orange (hereinafter the “Red Rothko”), which was owned by the Plaintiff, Marguerite Hoffman, a prominent art collector from Dallas. Plaintiff and her late husband pledged to donate their collection to the Dallas Museum of Art upon their death, although they retained the option to sell paintings during the lifetime. The Red Rothko was on loan to the Dallas Museum of Art, of which Ms. Hoffman is a trustee, prior to the sale, and Hoffman made a conscious decision to use a private sale option to safeguard from the public her decision to dispose of the work instead of donating it to the museum. In April of 2007, Hoffman sold the painting under the terms of a Letter Agreement, which served as an agreement between the Greenberg Van Doren Gallery acting for Hoffman and L&M Arts, a California gallery that has since closed, acting on behalf of the buyer. Principals for the Van Doren Gallery and L&M Arts signed the letter, which contained the following confidentiality provision: “[a]ll parties agree to make maximum effort to keep all aspects of this transaction confidential indefinitely. In addition, the buyer agrees not to hang or display the work for six months following receipt of the painting.” Contractual agreements between Hoffman and Van Doren Gallery and between L&M Arts and the buyer, David Martinez are still confidential. But for the resulting controversy, the terms of the sale as well as the sale itself would have remained hidden from the public.

According to the complaint filed by Hoffman in May of 2010, the private April 2007 sale was finalized for a total price of $17.6 million. Subsequently, L&M invoiced David Martinez and Studio Capital, Inc. (also defendants in this case) for the painting. Studio Capital thereafter took possession of the painting and put it in storage. Three years later, the painting was consigned to Sotheby’s for sale, and on 12 May 2010, the painting was sold at auction with great publicity for $31,442,500. The Hammer price exceeded Hoffman’s earnings from the private sale by $13,842,500. As a result of the sale at auction, Hoffman brought suit against L&M, Martinez, Studio Capital, and others, alleging, among other things, that the defendants breached the confidentiality clause of the Letter Agreement and that subsequently Hoffman suffered damages because, “when she sold the Rothko painting privately, she did so at a substantial discount in exchange for the promise of strict confidentiality, forfeiting the additional millions of dollars the painting would have brought if sold at public auction.” The great chagrin and displeasure of Hoffman is easy to understand but whether her position has legal basis was left to the courts to decide.

In the December 2013 trial that followed, the jury found that the defendants did, in fact, breach the contract and awarded damages of $1.2 million to Hoffman. (The damages award itself presents a thorny procedural issue that will not be explored here). After the award was entered on behalf of Hoffman, all defendants moved for judgment as a matter of law, meaning that defendants were of the opinion that no reasonable jury could have found for the Plaintiff based on the available evidence. Of particular note for the purposes of this article, Martinez and Studio Capital, the buyers in the private sale, moved for judgment on the ground that a reasonable jury could not have found that L&M was either acting as their agent or that they were bound by the Letter Agreement. Essentially, Martinez and Studio Capital argued that they could not breach the confidentiality provision of the Letter Agreement because they were not bound by the Agreement in the first place, or were even aware of its existence.

In reviewing the Martinez and Studio Capital motions, the U.S. District Court for the Northern District of Texas, Dallas Division was faced with two issues: 1) whether there was legally sufficient evidence for a reasonable jury to have found that Martinez and Studio Capital conferred actual authority on L&M to enter into the Letter Agreement on their behalf; and 2) whether there was legally sufficient evidence for a reasonable jury to have found that L&M had apparent authority to enter into the Letter Agreement on behalf of Martinez and Studio Capital.

The Court, analyzing Texas law on actual authority, noted that “[a]n agent’s authority to act on behalf of a principal depends on some communication by the principal either to the agent (actual or express authority) or to the third party (apparent or implied authority).” (Emphasis added). With respect to apparent authority, the Court noted that “one seeking to charge the principal through apparent authority of an agent must establish conduct by the principal that would lead a reasonably prudent person to believe that the agent has the authority that he purports to exercise.” (Emphasis added).

Martinez and Studio Capital argued that L&M had neither actual nor apparent authority to enter into the Letter Agreement on their behalf. Regarding actual authority, the defendants maintained that L&M acted merely as an intermediary in purchasing the painting. Testimony by Martinez and the Principals of L&M backed up the argument that L&M was never authorized to sign the Letter Agreement on behalf of Martinez or Studio Capital. Hoffman presented several arguments in favor of finding that L&M had actual authority to act as the agent of Martinez and Studio Capital, including that the Letter Agreement itself stated that L&M was acting “on behalf of the buyer.”

On the issue of actual authority, the Court found in favor of Martinez and Studio Capital. Simply put, the Court reasoned that there was no evidence that Martinez or Studio Capital directly communicated to L&M that it had authority to enter into an agreement with Hoffman that would be binding on either Martinez or Studio Capital. Additionally, the Court agreed with testimony of one of the Principals of L&M, who maintained that for private sales such as these, there are typically two transactions taking place; one between the seller and the intermediary and one between the intermediary and the buyer. The Court held that a reasonable jury could not find that either Martinez or Studio Capital communicated to L&M or otherwise implied through its conduct that L&M was authorized to enter into a contract with Hoffman that would be binding on the defendants in perpetuity and impose limits on their rights to alienate their property.

On the issue of apparent authority, the Court ruled that, in order to be liable, Martinez and Studio Capital must have engaged in conduct that reasonably led Hoffman to believe that L&M had this authority. The Court further noted that because neither Martinez nor Studio Capital had any direct interaction with Hoffman or her agent, among other reasons, the evidence did not permit the jury to have found that the defendants held L&M out as their agent. As such, the Court granted the motions of Studio Capital and Martinez and dismissed Hoffman’s claims against them with prejudice.

As of 2 February 2015, the case is still active given that Attorneys for Hoffman appealed the latest ruling dismissing Hoffman’s claims against the purchasers of the Red Rothko. There are, however, already a few important takeaways of which buyers, sellers, and dealers should be aware. One is that sophisticated buyers should be very clear with their dealers and intermediaries who purchase artwork as part of a private sale. An agreement in writing with respect to what the dealer is authorized to do, or not do on behalf of the buyer would, in light of the above case, be prudent. Additionally, buyers should be considerate of what they communicate or promise to a seller in private sales.

Hoffman is represented by Willkie Farr & Gallagher LLP, L&M Arts is represented by Susman Godfrey LLP, and Studio Capital is represented by Cleary Gottlieb Steen & Hamilton LLP.

Sources:

About: Chris Michaels is a litigation attorney in the Philadelphia office of the Atlanta, GA-based law firm, Cruser & Mitchell, LLP, where he actively pursues his interest in the field of art law. He may be reached at (518) 421-7238, chriswmichaels@gmail.com, or on Twitter @CMichaelsartlaw.

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

Rockwell-not Case Review: Knispel v. Gallery 63 Antiques

By Chris Michaels*
Screen shot 2015-01-13 at 1.53.22 PM

Yelpers report… Gallery 63 Antiques is no more.

How much would you pay for a piece of classic Americana? According to a complaint filed on 23 December 2014, twenty years earlier, in 1994 Barry and Isabel Knispel were willing to pay $347,437 for an original Norman Rockwell oil painting titled “Mending His Ways.” In early 2013, however, the Knispels learned that the oil they purchased and thought was by Rockwell was, in fact, painted by Harold Anderson, an American painter and illustrator, known for his Christian-themed images.

Pursuant to the complaint, in 1994 the Knispels, New Jersey-based art collectors, were solicited by a New York City art gallery, Gallery 63, to purchase several paintings, one of which was represented to be an original Norman Rockwell painting. The Knispels paid the purchase price of $347,437 and, at the time of sale, Gallery 63 arranged to have the painting appraised by Casper Fine Arts & Appraisals to authenticate and value the painting. Laurence Casper, now deceased, provided a written appraisal of the painting, which confirmed its authenticity as an original Rockwell, although it noted that the painting had not previously been recorded as a Rockwell.

The Knispels, relying on Casper’s appraisal and Gallery 63’s guarantee that the painting was an original Rockwell, completed their purchase. Ever since the purchase, the Knispels have displayed the painting in their home and have maintained insurance coverage for the retail replacement of the painting, which was valued at $1,750,000.

CM jan2015

Harold Anderson’s “Patching Pants” as displayed in a 1940 MobilOil advertisement.

In 2013, insurance company which provided the insurance policy for the Knispels’ painting, required that paintings in the collection be examined to ensure authenticity and value. It was not indicated in the Complaint why an appraisal was needed at this time or why one was not conducted earlier. The New York Fine Art Appraisers examined the painting and determined that it was an illustration by Harold Anderson for a MobilOil advertisement, titled “Patching Pants.” With the new attribution, and to the understandable dismay of the Knispels, the painting was thus valued at only $20,000.

The complaint filed by the Knispels avers that the defendants should have discovered that the painting was not an original Rockwell because the forgery was “open and obvious” and that the defendants breached their obligations under the sale contract by failing to deliver an original Rockwell. The complaint also alleges that the defendants knowingly and deliberately provided the Knispels with false information or were grossly negligent in their appraisal abilities.

In this case, Plaintiffs potentially face a statute of limitations defense based on the fact that approximately 20 years have passed between purchase and identification of the misattribution, as well as claims of forgery. The complaint notes that the forged signature was “open and obvious” to appraisers, so this raises the question of why the forgery went unnoticed for so long. As an aside, this issue should be viewed as a warning to collectors who have not had their collections appraised recently. Not only will retail replacement values likely change over the course of 20 years, getting an independent appraisal of a collection allows sophisticated collectors the chance to pro-actively address any issues that may arise.

Plaintiffs are represented by Donald A. Ottanuick, Esq., of Cole, Schotz, Meisel, Forman & Leonard, P.A. of Hackensack, New Jersey. Defendants may still be looking for council. It appears that they being named as a defendant previously, also in a case dealing with a break of warranty and misattribution.

Sources:

  • Complaint, in Knispel v. Gallery 63 Antiques, et al, Sup. Ct. N.J., (Filed on Dec. 23, 2014).
  • Levin v. Gallery 63 Antiques Corp., No. 04-cv-1504 (KMK) (S.D.N.Y., Sept. 26, 2006).

About the Author: Chris Michaels is a litigation attorney in the Philadelphia office of the Atlanta, GA-based law firm, Cruser & Mitchell, LLP, where he actively pursues his interest in the field of art law. He may be reached at (518) 421-7238, chriswmichaels@gmail.com, or on Twitter @CMichaelsartlaw.

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

Case Review: David Toren v. Federal Republic of Germany and Free State of Bavaria – Task Force Confirms Origin of Liebermann Painting

By Larissa Neumayer *

 

On 5 March 2014 David Toren, descendent and heir of David Friedmann (who died in 1942) filed a complaint in Washington DC against the Federal Republic of Germany and the Free State of Bavaria seeking the return of a Max Lieberman painting, “Two Riders on the Beach”. Toren is the first claimant to initiate restitution proceedings for looted art following the discovery of the Munich Art Trove (ItsArtLaw.com), in the home of Cornelius Gurlitt (28 December 1932 – 6 May 2014), son of Hildebrand Gurlitt, one of the prominent art dealers who was working with the Nazis during World War II. Yet, it seems Toren and any other potential claimants are put on hold until other parties involved agree on the next steps. These parties are the German Federal Government, the Munich Task Force, and the prospective heir to Cornelius Gurlitt, Bern Art Museum in Switzerland.

Before evaluating Toren’s case and recent developments in more detail, this article will first outline the work of the task force “Schwabinger Kunstfund” (a.k.a. Munich Art Trove).

 

Almost two years after the discovery of the trove, in November 2013 the Federal Government of Germany and the Free State of Bavaria set up a Task Force, headed by the lawyer Ingeborg Berggreen-Merkel, to establish the origin and ownership of art works in the Munich Art Trove. The Task Force is based in Berlin and consists of about 20 national and international experts, including members of the Jewish Claims Conference and the Holocaust Era Asset Restitution Task Force.

 

In an interview given to the German newspaper Tagesspiegel last December, Berggreen-Merkel described how the Task Force would conduct the provenance research to determine whether due to persecution, some paintings might have been sold at less than a fair value or handed over under duress (“verfolgungsbedingt entzogen”). Over the following months, it has been reported that the team of experts has been working with the public prosecutor’s office of Augsburg. Information about hundreds of the works found in Gurlitt’s possession but not the entire collection was published on the online platform Lostart.de. In general Task Force’s progress is hard to evaluate as its work is conducted in strict confidentiality.

 

The Task Force has been criticized for not acting quickly enough (especially right after some looted works were identified) as well as for not providing a sufficient degree of transparency. As journalist Ulrike Knöfel points out, the Task Force does have access to Hildebrand Gurlitt’s accounting records and it should therefore be possible to establish the paintings’ origins easily (Spiegel Online, 03/11/2014). The legal team hired by Gurlitt before his death and attorneys in charge of Gurlitt’s estate have maintained that most of the works in the Gurlitt collection were rightfully owned by their client (see Irina Tarsis’s article Whois Gurlitt.info?). The last will and testament left by Cornelius Gurlitt has been reported as naming a museum in Switzerland (Kunstmuseum Bern) as the heir to the collection.

So far neither the Task Force nor the public prosecutor’s office has revealed any information contained in the Gurlitt family records. Moreover, in March 2014, the Bavarian Higher Administrative Court ruled (Az. 7 CE 14.253) that reporters were not entitled to demand the disclosure of a complete list of Gurlitt’s trove (see Steffanie E. Keim’s article Gurlitt Saga Continues: U-Turn or Rotary?). Nevertheless, if the Gurlitt business records were to be made public, it would not be the first time that accounting records appeared on lostart.de. For example, journalist Julia Voss writing for FAZ online (Frankfurter Allgemeine Zeitung, 04/13/2013) examines the story of a Munich auction house Auktionshaus Neumeister and its handling of the 1936-1945 historical business records. The previous owner of the auction house, Adolf Weinmüller, sold thousands of Nazi-looted objects between 1936 and 1945. In 2008, Katrin Stoll, current owner of the auction house, began making these auction catalogues public – including Weinmüller’s personal comments ­– in order to trace the rightful owners.

 

Thus, the question arises about whether to prevent the disclosure of Gurlitt’s existing accounting records – decision to do so has precedent and is justifiable. As Voss describes in her article, there is a fine line between discretion and dishonesty. The issues of discretion and transparency will have to be addressed in order to avoid further criticism.

 

Initially, the commission has been given a time frame of one year to complete the evaluation of the trove. So far the Task Force has only identified two of those paintings as being Nazi-looted art. The first object in question is the painting “Seated Woman” by Henri Matisse, most likely stemming from art dealer Paul Rosenberg’s collection (see The Art Law Report, 07/12/2014). The second painting verified as confiscated by the Nazis is Liebermann’s “Two Riders on the Beach”. It belonged to David Friedmann, David Toren’s great-uncle. Friedmann was a successful industrialist and businessman who lived in Breslau (Wrocław in Poland) and owned an extensive art collection that included works by Courbet, Pissarro, Rousseau and Liebermann.

 

Toren, now almost ninety, recounts his story in the Complaint. In 1939, at fourteen he left Germany on a train (organized by Kinder Transport) to Sweden, leaving his entire family behind. His parents died in Auschwitz four years later.

 

“Toren has no heirlooms other than a single photograph of his family to remind him of his parents, and nothing that belonged to his family that he can pass on to his son and grandchildren.” (Complaint, par. 5)

 

Toren’s claim includes letters that give evidence that the Nazis seized Friedmann’s collection and that Hildebrand Gurlitt subsequently acquired the Liebermann painting.

 

“Gurlitt worked closely with the Gestapo to steal art from Jews. Sometimes he collected and curated art that had been seized by the Gestapo, and other times the actually directed the Gestapo to loot Jewish homes to seize certain valuable collections.” (par. 36)

 

Apart from the recovery of the Liebermann painting, Toren seeks an order requiring the defendants to publish a complete list of the art found in Cornelius Gurlitt’s possession and provide all available information about the provenance of the entire trove. This would include the aforementioned accounting records.

 

Regarding the grounds of his claim, Toren, who is represented by attorney August J. Matteis (Weisbrod Matteis & Copley PLLC, Washington, DC), bases his arguments mainly on wrongful possession and bailment. In his article, Nicholas O’Donnell (Art Law Report, 03/06/2014) discusses especially the second ground, bailment, and its “creative” nature in more detail. The defendant’s motion to dismiss the case was submitted on 9 October 2014 by Jeffrey Harris (Rubin, Winston, Diercks, Harris & Cooke, LLP, Washington, DC). It is based on a lack of subject matter jurisdiction (due to immunity, 28 U.S.C. § 1602, et. seq., Foreign Sovereign Immunities Act). On October 22, David Toren filed an amended complaint in response to the motion to dismiss for lack of jurisdiction. In par. 20 and 21 he argues:

 

“Pursuant to the FSIA, “A foreign state shall not be immune from the jurisdiction of courts of the United States . . . in any case in which the action is based . . . upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.” 28 U.S.C. § 1605(a)(2). Defendants’ acts took place outside the territory of the United States because Defendants seized “Two Riders” and other works of art from the Friedmann Collection from Cornelius Gurlitt in Munich, Germany, in or around February, 2012. Defendants then entered into a bailment contract with Toren when they indicated their intention to store the seized artworks until they could determine the artworks’ ownership, and Toren submitted documents to Defendants pursuant to that bailment contract.“

 

According to Toren, Germany entered into a bailment contract when seizing the painting in Munich hence engaging in “commercial activity“. Furthermore, Germany’s continuing refusal to return the painting causes a “direct effect“ in the United States. The case has been assigned to Judge Amy Berman Jackson. It remains to be seen if the lawsuit in Washington will be successful. Toren’s attorney confirmed that they would proceed until the painting is returned.

 

While in an August Press Release(08/18/2014) the Task Force explicitly identified David Friedmann’s heirs as rightful owners of the painting, nonagenarian Toren is still waiting for this piece of his family history to be returned; recent developments – death of Gurlitt, his last will regarding the disposition of the collection, the pace of the Task Force investigation ­– seem to slow down the process even more.

 

In his will, Cornelius Gurlitt bequeathed his entire collection to the Kunstmuseum Bern in Switzerland. According to German law (German Civil Code, Section 1944 par. 3) the museum has to decide within six months after being notified of the intended gift whether or not to accept the inheritance. (Even though no official statement has been made to date, it has been reported that the museum intends to accept the testamentary gift in November 2014.) Furthermore, in February 2014 more than 200 paintings were found in Gurlitt’s house in Salzburg (Aigen), Austria. The Austrian “subsidiary” of the trove exceeds the estimated market value of the Munich collection considerably, despite the fact that the collection is small in volume. It includes paintings by Claude Monet, Édouard Manet, a bronze sculpture by Auguste Rodin, and drawings by Cézanne, Picasso and Gauguin. The artworks located in Salzburg would also be covered by Gurlitt’s testament and could therefore be part of the Swiss museum’s inheritance. In case the Swiss museum will indeed accept the gift, Austria’s State Historic Preservation Office (“Bundesdenkmalamt”) would have to authorize export of the Salzburg fragment. In the meantime, other potential heirs to Cornelius Gurlitt (such as a relative domiciled in Spain) already announced intentions to contest the validity of Gurlitt’s testament.

 

Another important factor that has to be taken into account is that before his death, Gurlitt declared that he was willing to comply with the Washington Conference Principles on Nazi-confiscated Art (1998), which were endorsed by 44 countries, including Germany. These eleven non-binding principles aim at ensuring due care when identifying and handling Nazi-looted art.

 

Although the Washington Principles would usually not apply to individuals, Gurlitt’s declaration (see Joint press release of the Bavarian State Ministry of Justice and the Federal Government Commissioner for Culture and the Media, Press Release 04/07/2014) constitutes a contract between him and the Federal Republic of Germany and the Free State of Bavaria. According to the Washington principles (par. 8) a “just and fair” measure should be taken in case an artwork is identified as being looted. Even though the wording of the Washington principles is not overly precise, Gurlitt explicitly agreed to return a painting once its provenance points at the rightful owner. Gurlitt’s heir, the Kunstmuseum Bern, would be legally bound by this contract.

 

While the discovery of the Gurlitt trove infused optimism that art works lost during the Nazi regime survived and returned to the public eye, many grave questions were triggered. Were 21st century government agencies able to move fairly and swiftly to resolve the historical injustice? What are the reasons for the slow response and lengthy evaluation before necessary steps are eventually taken? Should public museums, such as the Kunstmuseum Bern, accept such a controversial inheritance, and how should the material be treated before and after its accessioning? Toren’s case is pending a hearing but to date none of the paintings from the Munich or the Salzburg troves have been returned to their rightful owners and hundreds of artworks still remain unpublished and inaccessible to private research.

 

 

 

Sources: (last accessed 10/05/2014)

About the Author: Mag. iur. Larissa Neumayer, LL.M. (LSE) is a contributing writer with Center for Art Law; she is interested in art/cultural heritage law and litigation and may be reached at larissa [dot] neumayer [at] gmail [dot] com.

Rauschenberg Estate Saga of Trust and Fees Explained

BY Jessica Curley*

Screen shot 2014-10-29 at 12.34.30 PMPrior to his death, Robert Rauschenberg (1925 – 2008) established a revocable trust, which is a type of estate planning tool that allowed him to change or even revoke the trust during his lifetime. The primary purpose of the trust was to benefit the Rauschenberg Foundation (“Foundation”), a non-profit organization, which supports artists and art related issues. The Foundation’s Board of Directors includes Christopher Rauschenberg, the artist’s son, along with several other members of the art and business communities. Named as Rauschenberg estate trustees were three of the artist’s long time friends and associates, including Darryl Pottorf, Ruaschenberg’s business partner and companion of over twenty-five years; Bill Goldston, a trusted business associate; and Bennet Gruntman, the artist’s accountant for over eighteen years. Shortly after Rauschenberg’s death, the three trustees and the Foundation became entangled in estate litigation after the trustees demanded $60 million in fees for administering the $600 million trust, an amount that the Foundation called “unconscionable.” On 1 August 2014, a Florida Circuit Court awarding the trustees’ fees in the amount of $24.6 million, to be split evenly among the three.

State law primarily governs the field of trusts and estates and under the Florida Trust Code trustees are entitled to “reasonable compensation” where fee terms have not been clearly articulated in a trust document. According to case law and common practice, the compensation may be [%] of the total value of the estate. Michael Gay, Partner at Foley & Lardner LLP in Orlando Florida, and lawyer for the trustees, claimed that the multi-million dollar compensation sought in this case was reasonable because the work required of the Trustees was extraordinary in nature and included having to handle copyright and tax issues. Gay also claimed that his clients created and executed a unique plan to prevent a decline in trust assets which involved minimizing the potential flood of art into the market, and managing several exhibitions and memorials to maintain and promote interest in the artist’s work. As evidence of their extraordinary management of the trust, appraisals were introduced to the court, which placed the value of the trust assets at $2.2 billion, up from $600 million just four years prior.

Christopher Rauschenberg, the artist’s son and Chairman of the Rauschenberg Foundation, who challenged the original invoice, claimed that reasonable compensation was closer to $375,000, to be split among the trustees. In an affidavit presented to the court, Laird Lile, a solo practitioner specializing in trust and estate law, and attorney for the Foundation estimated that the trustees were essentially demanding a rate of $40,000 per hour, having requested a total of $60 million in compensation for a maximum of 1500 hours of work. Estimates of the hours worked were provided because the trustees failed to keep accurate records of their time. Robert W. Goldman, attorney at Goldman Felcoski & Stone P.A. law firm, representing the Foundation, released a statement saying that a $60 million fee is a “monstrous affront to Bob’s testamentary intent.”

In reaching its decision, the Circuit Court for Lee County, Florida, applied the following set of factors regarding reasonable compensation, as set forth in West Coast Hospital Association v. Fla. National Bank of Jacksonville, 100 So. 2d 807, 811 (Fla. 1958).

  1. The amount of the capital and income received and disbursed by the trustee;
  2. The wages or salary customarily granted to agents or servants for performing like work in the community;
  3. The success or failure of the administration of the trustee;
  4. Any unusual skill or experience which the trustee in question may have brought to his work;
  5. The fidelity or disloyalty displayed by the trustee;
  6. The amount of risk and responsibility assumed;
  7. The time consumed in carrying out the trust;
  8. The custom in the community as to allowances to trustees by settlors or courts and as to charges exacted by trust companies and banks;
  9. The character of the work done in the course of administration, whether routine or involving skill and judgment;
  10. Any estimate which the trustee has given of the value of his own services; and
  11. Payments made by the trust beneficiaries (cestuis) to the trustee and intended to be applied toward his compensation.

In its analysis, the court concluded that factors two, seven, eight and ten, were fairly neutral under these circumstances, and factors one, three, four, five, six and nine came out in favor of the trustees. Regarding factors one and three, the court noted that the Trustees were successful in managing the assets, which increased three-fold under their administration, although it acknowledged that the talent of the artist and favorable market conditions were contributing factors. The court points out that under factor four the Trustees possessed unusual skill and experience and were the “best possible Trustees for the estate” due to their familiarity with the artist and his business affairs. Furthermore, under factors five, six and nine, the court reasoned that the Trustees were loyal to the estate and assumed risk to their reputation in taking on the trusteeships, and that the character of their work was “exemplary.”

Christopher Rauschenberg was outspoken in his disappointment of Circuit Judge Jay B. Rosman’s decision and believes the award was excessive. On 13 August 2014, the Directors of the Foundation filed a notice to appeal, citing “serious concerns” about the court’s ruling. Christopher Rauschenberg has stated that his goal is to ensure that the trust benefits the Foundation, and not the Trustees.

During his lifetime, Rauschenberg was an avid philanthropist, and actively supported a variety of causes including AIDS research, environmental summits, and domestic violence, in addition to his more well-known art related initiatives. He established the Robert Rauschenberg Foundation for the purpose of continuing his philanthropic efforts after his death, a goal which his son is determined to see met.

 

Sources:

 

About the Author: Jessica M. Curley is a recent graduate of the Benjamin N. Cardozo School of Law, and is pursuing her interest in art law and financial regulation in New York. She may be reached at jessicamcurley@gmail.com.

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

SPOTLIGHT: ARIS Title Insurance Corporation

By Jill A. Ellman*

Screen Shot 2014-10-28 at 11.31.36 AMAn average person’s encounter with title insurance is likely as a contract guaranteeing clear title of real property in connection with a real estate transaction.  A purchaser of real estate property today would not fathom completing the transaction unless the property in question has clear title.  Yet, the purchase of art title insurance is a comparatively new notion in the art world where multi-million dollar sales are a common occurrence.  Currently, ARIS is the leading seller of fine art title insurance.  ARIS is the creation of attorney Lawrence M. Shindell and former insurance executive Judith L. Pearson.  Both had a mutual client that needed a unique insurance policy to cover a specific World War II-related risk.  The research process that ensued led to the inception of ARIS, which obtained New York State regulatory approval to sell insurance in 2006.  In November 2010, the insurer Argo Group, which underwrites specialty insurance and reinsurance products, purchased the company, allowing for the expansion of ARIS’s insurance practice.   Arguably, the ability to insure title to art is a better alternative to litigation over title disputes and authenticity.  This article explores what ARIS covers, examines some of the issues ARIS faces underwriting art risk, and discusses solutions that may assist in minimizing such risk.

The ARIS Policy

ARIS insures museums, private collectors, banks accepting art as collateral, dealers, and galleries.  Its Art Title Protection Insurance (“ATPI®”) policy (the “ARIS Policy”) is based off of the American Land Title Association (ALTA) real estate title insurance form and is designed to insure art owners against defective title risks.  The ARIS Policy in and of itself covers defective title claims, from artwork with unverified provenance (in the case of theft or illegal import of objects) to liens or lack of authorization to sell artwork.  Provenance, or an artwork’s ownership history, is most often an issue with respect to looted and/or stolen art, such as art looted during World War II.  According to ARIS’s promotional material, art theft encompasses 25% of art title risk; whereas traditional liens and encumbrances account for 75%.  Currently, ARIS’s most common claims include those surrounding estates and a seller’s lack of authority to sell an artwork.  For example, familial or divorce-related claims may arise in the event a part-owner of an artwork is kept out of a sales transaction.

Many insurance policies provide coverage for loss under a certain policy period, whether it is occurrence or claims-made coverage.  However, coverage under the ARIS Policy may continue as long as the policyholder retains an insurable interest in the fine art or is liable to a third-party claimant under certain instances.  Typically, a policyholder will purchase the ARIS Policy at the time of a transfer of title, including in the case of consignment or purchase from an auction.  There is a one-time premium paid by the purchaser, whose artwork is covered for the face value of the ARIS Policy plus costs to defend a claim.  Coverage may be excluded for intellectual property rights related to the artwork, claims related to authenticity, issues arising out of bankruptcy, and government seizure of art.  And of course, there is no coverage for any misstatements or omissions by the insured in the application process.

With respect to individual investors of art, ARIS represents that the ARIS Policy affords greater protection than other types of insurance.  Homeowner’s insurance policies with art riders, for instance, do not include coverage for title-related claims.  An ARIS Policy may protect the art object in the event of consignment and is transferable to a policyholder’s heirs.  Museums may also benefit from holding art title insurance as D&O insurance policies will only protect a museum’s management from claims brought against them for their conduct in the course of business; standard D&O policies do not apply to art title claims and may specifically exclude such claims. 

Nonetheless, art title insurance is not a panacea for eliminating all risks associated with an art object.  Whereas ARIS provides coverage for defects in title occurring in the past, buyers will still need to purchase insurance that will safeguard them against future loss and theft, which are covered in fine art property insurance policies.  Further, ARIS is not an expert in authenticating art; nor does it insure authenticity. 

Underwriting Art Risk

Dealers and auction houses have caught on to the trend of encouraging buyers to purchase art title insurance for the assurance that their artwork has clear title.  As artwork sometimes contains incomplete provenance, especially art possibly looted during World War II, a buyer is held to a higher duty to investigate before purchasing and may not exclusively rely on the due diligence of dealers or auction houses.  In certain circumstances, sellers will purchase title insurance to provide the buyer or dealer assurances of clear title, such as when a dealer sells a consigned artwork.  Sometimes auction houses will encourage sellers to purchase art title insurance, as in the case where Christie’s sold artwork from the Salander-O’Reilly Galleries in June 2010. See Title Insurance Concept Spreads Into Art Sales.  One explanation for art title insurance gaining traction is the simple reason that art, like real estate, has increasingly become another way to diversify a financial portfolio, particularly for high net worth individuals.  In fact, ARIS has seen a shift in its representative insureds, from those purchasing art title insurance because of doubts concerning the provenance of their artwork, to those seeking to protect their investment.  Such a need for art title insurance is consistent with the trend of art becoming a new asset class.  According to Deloitte Luxembourg’s 2014 Art & Finance Report, buyers seeking to purchase art as an investment rose from 53% in 2012 to 76% in 2014. See Deloitte Luxembourg & ArtTactic, Art & Finance Report 2014 Whitepaper.   

As part of the underwriting process, ARIS reviews the authenticity of fine art.  For objects with an ownership history, research methods and art experts may assist in affirming an artwork’s unverified provenance.  When underwriting contemporary artwork, however, ARIS must develop a view on that artwork’s authenticity.  One need to look no further than the recent Knoedler Gallery scandal, in which fake paintings were sold to an unassuming public, to understand the potential risk of insuring a piece of art, later found to be a fake.  As insurance is a moral hazard, ARIS recognizes that due diligence and research cannot completely absolve risk and claims do arise. 

New Technology

In order to confront and preempt future title issues, ARIS invested in a center at the State University of New York at Albany that will use technology to mark art objects.  This initiative aims to devise an authenticity standard on which property insurers, museums, foundations and artists rely.  ARIS anticipates that placing a mark on a fine art object will mitigate risk for insurers, thereby potentially lowering premium costs for insureds.  Using modern methods from DNA markings to nano-technology, a team of scientists, art historians and legal experts will work collaboratively to develop a standard of authenticity for fine art, which will bear markings, in the form of a synthetic DNA liquid, identifying their unique characteristics.   ARIS will not own the mark, as third-party entrepreneurs will create and sell them, but it is advocating for establishing an authentication standard because it recognizes the benefit of clarifying an artist’s legacy.  The anticipated launch date for this initiative is pending.

The idea of applying science to mitigate art disputes is not a new concept.  For instance, radiocarbon dating assists archaeologists with the chronology of material objects.  Art historians also use scientific methods as a means to identify and pinpoint art belonging to an artist’s particular time period.  Pigment analysis, thermoluminescence dating, ultraviolet light and X-rays are just a few of the many methods used as a means of authenticating artwork. See Forensic Science for Antiques. The marking initiative is particularly useful for art in the primary art market, or art that has never been challenged or contested; for example, art that is sold directly from an artist’s studio, contemporary estates , or foundations.  However, art already in the secondary art market, or art that has a sale history, will be more of a challenge to authenticate.  Art on the secondary market that is contested, such as a disputed Jackson Pollack work, requires more attention. 

If the marking technology gains traction among collectors and dealers, appraisers and art historians need not fear for their job security as insurers will still need to rely on their expertise along with other scholarly evidence found in art databases and catalogue raisonnés.  This especially holds true for art in the secondary market.  Ideally this new technology will ease the burden for appraisers, some of whom are faced with liability for rendering their opinion, to the extent that they are retained to endorse artwork for valuation purposes (for more discussion of the Bill before the New York State Assembly to amend New York’s Art and Cultural Affairs Law and the challenges that art authenticators face See The Shifting Sands of Art Authentication).  The new scientific methodology may work in tandem with appraiser’s expertise as a means of providing a more reliable evaluation of fine art and perhaps reduce the frequency of costly art authentication legal disputes.

On its own, this new standard may still not be enough to achieve complete assurance of authenticity.  Reliability may also be an issue as any technology, especially new technology, may still be prone to error until it is perfected over time.  And forgers, who are already skilled in replicating materials, may also find ways of duplicating an object’s unique DNA code or mark.  This type of technology, arguably, is initially ideally suited for contemporary art that directly emanates from a known source, such as an artist’s studio.  Given the difficulty of authenticating art removed from an artist’s studio or foundation, the technology is likely to be more effective as a supplement, and not a replacement, to the expertise of scholars and appraisers. 

One thing seems to be clear, the demand for art title insurance continues to increase.  As the first mover in the industry, ARIS is well positioned to service this market niche.

*The author would like to thank Sherri North Cohen of ARIS for her assistance in providing information for this article.

Sources

About the Author: Jill A. Ellman is an attorney at Tressler LLP. She is interested in the intersection between business and art law.

Case Review: Crile v. Commission of Internal Revenue

By Chris Michaels, Esq.*

“All children are artists. The problem is how to remain an artist once he grows up.” – Pablo Picasso

For many artists, the financial instability that accompanies an artistic profession forces the artist to seek employment with a more consistent paycheck. A “day job” often provides the income for rent and bills while the artist continues to pursue their artistic endeavors. In this situation, tax deductions for expenses related to creating art may help the artist stay afloat financially. It seems like a fairly straightforward situation until April 15 rolls around and it is time to pay taxes. In a ruling filed by the United States Tax Court on October 2, 2014, the Court resolved a question of whether individuals who pursue their art while otherwise employed can deduct art-related expenses. The decision the Court reached helps artists to remain artists, even if they are not making a profit from their work.

Susan Crile Website

Susan Crile Website

The petitioner in this case, Susan Crile, has worked as an artist for over four decades. She has created more than 2,000 works using oil, acrylic, charcoal, pastels, and many other mediums. Her art is in the permanent collections of several museums including the Metropolitan Museum of Art, the Guggenheim Museum, the Brooklyn Museum of Art, the Phillips Collection, and several colleges and universities. In addition, her work has been purchased by corporations including Bank of America, General Mills, Charles Schwab, and several major New York City law firms. She has been represented by at least five New York City art galleries, most recently in 2009 by the Michael Steinberg Fine Art gallery. She has received awards from the National Endowment for the Arts and her works have been reviewed in almost every major art publication. Crile is also a full-time tenured professor of studio art at Hunter College in New York City, where she has worked in some capacity since 1983.

The respondent in this case, the Commissioner of Internal Revenue, determined that Crile had deficiencies in her Federal income tax returns for the years 2004, 2005 and 2007–2009. Specifically, respondent argued, among other things, that Crile was not entitled to claim deductions for expenses related to her artwork because she did not intend to profit from her art. The Court, therefore, was faced with determining the issue of whether Crile was engaged in a trade or business with the intent of making a profit from her activity as an artist. Crile’s artwork during the tax years in dispute included a series of works based on the life of Saint Francis in the Basilica di San Francesco in Assisi, Italy, works based on the events at the Abu Ghraib prison in Iraq, silkscreen printings, a series of small abstract paintings, and a project based on the prisoners in Guantanamo Bay.

Since her art career began in 1971, Ms. Crile sold over 300 works with gross proceeds of $1,197,150 and an earned income of $667,902. From 1971 to 2013, however, she never reported a net profit from her art business due, in large part, to the deductions she took for expenses relating to the sale of her art.

To determine whether Crile was entitled to the deductions she had taken, the Court considered two sections of the Internal Revenue Code, sections 162(a) and 183(b). Under section 162(a), deductions are allowed for “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.” To be entitled to deductions under section 162(a), the taxpayer must show that he or she engaged in the activity with the intent of making a profit. Further, under section 183(b), if the activity is not engaged in for profit, deductions are not allowed except to the extent of gross income derived therefrom. Essentially, in order to take the deductions, Crile had to prove that she was in the art business to make a profit.

A threshold issue that had to be decided before the Court reached the issue of Crile’s intent to earn a profit concerned the scope of her activity as an artist. Under section 183(b), the activity to be considered can either be a “single undertaking” or “multiple undertakings.” The Commissioner argued that Crile’s art activity was not separate from her activity as an art professor and was thus a “single activity.” As a single activity, the Commissioner posited that Crile had to claim her art-related expenses as unreimbursed employee business expenses and not as deductible business expenses. The Court ultimately reasoned, however, that she had practiced as an artist for a decade before she had started teaching and that many activities she undertook as an artist were unrelated to her teaching career. As such, the Court held that Crile’s artist activities and professor activities were multiple undertakings that had to be analyzed separately under section 183(b).

The bulk of the Opinion handed down by the Court dealt with whether the artist conducted her art activity with an intent to earn a profit such that she could take deductions for expenses attributable to that activity. The Court analyzed the following nine factors and used a balancing test to determine whether Crile engaged in the activity for profit:

  1. The manner in which the taxpayer conducts the activity;
  2. The expertise of the taxpayer or her advisers;
  3. The time and effort spent by the taxpayer in carrying on the activity;
  4. The expectation of the taxpayer that assets used in the activity may appreciate in value;
  5. The success of the taxpayer in carrying on other similar or dissimilar activities;
  6. The taxpayer’s history of income or losses with respect to the activity;
  7. The amount of occasional profits, if any;
  8. The financial status of the taxpayer; and
  9. Elements of personal pleasure or recreation.

An analysis by the Court concluded that factors number one through five and nine were in favor of Crile and factors six and seven were in favor of the Commissioner. Factor number eight was neutral. As such, the Court held that Crile acted with the requisite intent to make a profit and, therefore, could take deductions for “ordinary and necessary expenses.” The Court reserved deciding on whether the deductions that Crile took were actually “ordinary and necessary.”

The Court’s decision in this case is a win for struggling artists everywhere. In finding that Crile engaged in her art activity as a distinct activity from her employment as a professor, the Court gave artists the opportunity to take deductions for expenses relating to their artwork as long as they are engaged in that activity for profit. While it certainly is not a windfall for anyone, the Court’s decision makes it a little easier for grown ups to remain artists.

Petitioner, Susan Crile, was represented by Robert H. Baron, Micaela McMurrough, and Megan Y. Lew, all of Cravath Swaine & Moore LLP. Respondent, Commissioner of Internal Revenue, was represented by Jane J. Kim and Michael J. De Matos of the Internal Revenue Service.

Sources:

About: Chris Michaels is a litigation attorney in the Philadelphia office of the Atlanta, GA-based law firm, Cruser & Mitchell, LLP, where he actively pursues his interest in the field of art law. He may be reached at (518) 421-7238, chriswmichaels@gmail.com, or on Twitter @CMichaelsartlaw.

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

Alternative Alternatives: ALT2 Conference Review

By Jessica M. Curley

On 29 September 2014, Bonhams auction house, together with BigelowSands LLC, hosted the fourth ALT2 Conference at its Madison Avenue location in New York City, where about 100 attendees from a multitude of industries including banking, marketing, commodity trading, and law gathered to hear world leading experts in these fields discuss investments in “alternative alternative assets.” The three panels were dedicated to rare gems and diamonds, healthcare and entertainment royalty rights, and vintage cars. Some of the speakers included Susan Abeles, Director of US Jewelry, Roger Miller, CEO of Alchemy Copyrights and CIO the Bicycle Music Company, and Bruce Wennerstrom, Founder, Chairman and CEO of the Greenwich Concours d’Elegance. The half-day conference was followed by a wine tasting event lead by Jennifer Williams-Bulkeley, Managing Partner of AOC Investment Advisors.

An “alternative asset” is a newer type of asset that traditionally had not been included in a standard investment portfolio. Some “alternative assets” include hedge funds, venture capital, real property, and commodities. A distinguished class of alternative assets, so-called “alternative alternative assets,” has begun to increase in popularity and includes diamonds, fine art, stringed instruments, vintage cars, healthcare and entertainment royalty rights, wine and vintage watches.

At ALT2 event experts discussed how these alternative alternative assets have gained in popularity and are becoming increasingly accepted as a way to further diversify investment portfolios. For example, panelist Alan Landau, CEO and co-founding Partner of Novel Asset Management, attorney by training and graduate of Benjamin N. Cardozo School of Law, advised that the diamond industry is not highly regulated in general, and that because diamonds are not classified as a financial product, they are not regulated by securities laws despite their being utilized for investment purposes. Mahyar Makzani, Co-Founder & Joint Managing Director of Sciens Colour Diamonds Fund, who moderated the panel on diamonds, noted that his fund voluntarily provides clients with “comfort points” to fill the gap created by the lack of regulatory oversight of this specific asset class.

Experts on the music, healthcare and film royalty rights panel advised that these less institutionalized assets are governed by traditional US intellectual property law. Dempsey Gable, Managing Director & Founding Fund Manager of the Opportunity Fund within Alternative Investments of APG Asset Management, explained that under US copyright law, films and television shows can be licensed to provide low yield low risk investment opportunities for investors. Panelist Tadd Wessel, Managing Director of OrbiMed, advised on the complexities of the healthcare system, and spoke to ways in which US patent law affects investment decisions regarding healthcare royalties.

The final panel, dedicated to vintage cars, discussed the steadily increasing valuation of classic cars, and the asset class’ low volatility and low correlation to other alternative alternative asset classes. Panelist Eric Minoff, a Specialist in the Motoring Department at Bonhams, advised the audience on the rapid growth of motorcar sales at auction, noting the increasing investor interest in this type of asset. Bonhams recently auctioned a 1962 Ferrari 250 GTO Berlinetta, which went for $38 million, making it the most valuable car to ever be sold at auction.

The panels seemed to strike a chord with attendees whose questions largely pertained to the regulation of certain asset classes, liquidity issues, and yield to risk ratios. The panel dedicated to royalty rights was most informative on the issue of regulation, and was of significant interest to attorneys, as this asset class is strictly governed and regulated by US intellectual property law. Regulation of diamonds and vintage cars is much less extensive, but both respective panels noted that increased investor interest could create a demand for heightened oversight. Liquidity potential also varied greatly among the various alternative alternative assets, as discussed by each panel. For example, whereas the ability to easily sell diamonds on the market make them highly liquid, copyright licenses, however, involve complex ownership and usage issues that prevent the asset from being easily alienable, and therefore have low liquidity. Yield to risk ratios also varied across the asset classes with film and TV shows providing a low risk low yield investment opportunity, while other tangible assets had a higher risk due the potential for physical damage or loss.

The ALT2 Conferences are by invitation only.

About the Author: Jessica M. Curley is a post-graduate fellow from the Benjamin N. Cardozo School of Law. She is pursuing her interest in art law and financial regulation in New York, and may be reached at jessicamcurleyATgmailDOTcom.

Viability and Feasibility: How much is an Art Museum Worth?

By Elizabeth Lash, Esq.

Who can say how much a piece of artwork is worth?  Who owns public art?  In one particular case, that of the Detroit Institute of Art (the “DIA”), these questions were not merely academic or philosophical.

Over the past year or so, the possible answers to these questions were argued in countless appraisal reports, legal briefs, journalistic commentary, and, since this past September, hearings presided over by a bankruptcy judge.  At the heart of this debate lay the fate of the art museum in question–the DIA and its collection of more than 60,000 works, consisting of pieces from almost every continent and time period, from antiquity through today.

As one of the top six museums in the country, with an annual operating budget of about $32 million, situated in one of the most financially challenged municipalities in the country, the DIA looked like the answer to everyone’s prayers since the City of Detroit (the “City”) went into bankruptcy last year.  Primarily, most parties involved wished to sell or collateralize the DIA’s collection to repay debts–either that of private creditors, or for City retiree pensions and capital projects.  The City stood alone in attempting to use the value (without a sale) of the DIA as part of its proposed “grand bargain” to exit bankruptcy.

Specifically, the City faced off against, among others, major bond insurers, Syncora Guarantee, Inc. (“Syncora”) and Financial Guaranty Insurance Co. (“FGIC”), City retirees, and hedge funds, in its plan to transfer the ownership of the DIA back to its original owner, the DIA Corp., a nonprofit charitable corporation, in exchange for $816 million in funding from the State of Michigan (the “State”) and other private donors, for the City to use to offset City retiree pension reductions.

While much of the contentiousness in this dispute has been ameliorated since Syncora, the largest and most vociferous objector to the “grand bargain,” along with City retirees, reached potential settlements with the City, not every issue is quite settled yet.  The remaining bond insurer, FGIC, and some hedge funds continued to fight the City on its plan until recently (although FGIC is now in closed door talks with the City), so if the deal falls through, the issues raised could still pose barriers to an approval of the City’s proposed plan by the presiding Judge Rhodes.    

To understand whether and how the DIA was proposed to be utilized, it is helpful to understand how municipal bankruptcy works (as opposed to corporate bankruptcy).  An ordinary corporate debtor can be forced to sell its assets to satisfy its creditors under the “absolute priority rule”.  (So, as in this instance, a corporate debtor could ordinarily have been forced to liquidate the DIA’s collection to repay its bondholders first.)  Municipalities, however, cannot be so forced, because such a decision by a branch of the federal government could otherwise infringe upon the Tenth Amendment, i.e., upon a state’s ability to govern its internal affairs.  Instead, a bankruptcy judge is limited to deciding whether a municipality is eligible to declare bankruptcy and whether its plan of debt adjustment is fair and equitable, as well as feasible. (The judge also oversees implementation of the plan.)

For Judge Rhodes to confirm the City’s plan, he must determine that the proposed plan is fair, equitable, in the best interests of creditors, and feasible.  Whether a plan is in the best interests of creditors could be met by a showing that the amount to be received by creditors under the plan is all they could reasonably expect given the City’s circumstances, including its ability to impose additional taxes or cut services (although some courts simply require a municipality’s plan to be better than the alternative–i.e., if bankruptcy were to be dismissed and creditors were not repaid at all).  And in this case, the alternatives are quite limited as far as raising taxes–the City has testified that it only collects 50% of its property taxes, and dares not raise its taxes any more.

As to whether a plan is feasible?  That would be a plan that would allow a debtor to repay its pre-petition debt while continuing to provide essential government services.  Some observers have commented that Judge Rhodes laid the groundwork throughout September’s hearings to demonstrate that selling off the DIA and its collection would undercut the potential viability of the City in exiting bankruptcy–which may indicate which way he would veer when deciding to approve the City’s plan.   

But regardless of whether the artwork should be sold to repay the City’s debts–could it have been sold?  The ownership history of the DIA is a bit tortured when you begin reviewing the facts.  The DIA began its life via legislative fiat as a “public art institute,” known as the Detroit Museum of Art (“DMA”), to be managed by a nonprofit charitable corporation (the “DIA Corp.”), who could not sell or dispose of the DMA’s collection.  For some time, the City funded the DMA with taxpayer monies, but this was not looked upon favorably by the state’s highest court (and, one assumes, the taxpayers).  To resolve this issue, the state legislature had to pass another law to permit the DMA to transfer some of its collection to the City, and the City in turn had to create a municipal agency (the Arts Commission) to operate the DMA –and, of course, to receive taxpayer money.

When public funding dried up (read: i.e., the City and the State ran into some small financial issues), the DMA (now known as the Founders’ Society), was asked to come riding to the DIA’s rescue.  This was accomplished via an operating agreement, executed by the Founders’ Society and the City, on behalf of the Arts Commission.  The deal was that new pieces acquired by the DMA would be owned by the DIA (i.e., the City), while pieces currently owned by the DMA would continue to be owned by the DMA.  (The Founders’ Society still owned some of the artwork at the DIA, since not all pieces had been transferred to the City–not confusing in the least!)  The DMA agreed to run the operations and pay for the costs of the DIA.  Further, the legislature, in 2012, passed a law permitting the levying of property taxes to fund the DIA, and some counties agreed to use their property taxes to do just that.

There was, however, one issue which was not addressed by the operating agreement, which was what would occur in bankruptcy?  (One could argue that such a circumstance could reasonably have been foreseen, considering the purpose for the operating agreement, but we won’t quibble over that one.)

The Michigan Attorney General came out with an opinion, just prior to the entry by the City into bankruptcy, that the DIA’s collection could not be sold to satisfy the debts of the City, deeming the DIA and its works to be held in charitable trust for the people of the state of Michigan. (Even if it was nowhere stated that this was so.)  Such an opinion was key to avoiding a sale, as property held in trust is not considered an asset of a bankruptcy estate.

However, despite the issuance of the legal opinion, considering the history of this institution, the issue may not have been so clearcut.  Syncora, in fact, attempted to subpoena the Attorney General for documents related to the issuance of this opinion, and it was likely that this issue would have been further litigated, had Syncora not decided recently to settle with the City.

Besides the question of ownership, the question that simultaneously had to be answered was how would the art be valued, and by whom?  If the art could be sold in bankruptcy, then who would buy it, and for how much?  Would selling it in liquidation devalue the work, or would the collection still attract top dollar?  And if the art could not be sold, because the City owned the collection, but would only be used by the City to satisfy other obligations, how much should the collection be valued at then?    

Valuations of the art varied wildly, depending on who was valuing it and for what purpose.  For instance, Christie’s Inc., the auction house, valued the DIA’s collection between $454 million and $867 million, a figure which some claimed was artificially low merely to support the City’s proposed plan. A city-commissioned report valued the collection much higher ($2.8 to $4.6 billion), but estimated that in liquidation, the collection would only fetch between $850 million and $1.8 billion.  Some appraised the entire collection at close to $2 billion, and at least one prospective investor was prepared to bid $1 billion or more just for key pieces in the collection.   Finally, another report, commissioned by the bondholder FGI, estimated the value of the collection at $8 billion.

While this may no longer matter, since many of the parties have already agreed to the City’s plan (which does not count the DIA as an asset in bankruptcy), nonetheless, one can be sure that FGIC used this as a bargaining chip to get more from the City, since a showing of an artificially low valuation could have upended the City’s proposed plan.   

As we watch the hearing move forward with the remaining players (FGIC and others), the lens through which to read the news about the proposed settlement(s), whether they relate to the DIA or not, are what is considered fair, equitable, in the best interests of the creditors, and feasible.  In California, the decision was made to put pensions ahead of bondholders, with the result that the cities can no longer borrow; in Rhode Island, the pensions had to take steep cuts along with bondholders, and the city was able to keep borrowing, but at a steep price to its retired police and firefighters.  In this case, one would hope that it would be fair and equitable for the DIA to remain as is, safe from the reaches of the bankruptcy court, and it is likely so–but we shall see.   

Sources:

About the Author: Elizabeth R. Lash, Esq., is with Kroll Associates, Inc. (formerly of Lash & Associates, LLC, where she worked as a consultant on commodities consulting and regulatory issues).  She currently drafts, reviews, and negotiates agreements relating to cyber security and data breach notification.

DISCLAIMER: This article was prepared by Ms. Lash in her personal capacity; the opinions are the author’s own, and do not reflect the view of Kroll Associates, Inc. or of its affiliates.