Author: Irina Tarsis, Esq.

Why Ronald Lauder Is Right About Nazi-Looted Art in Museums

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*From the Editors: The following article  first appeared on ArtNet. It is a response to two recent articles, an editorial authored by Ronald S. Lauder, a New York businessman and art collector, and a related commentary by Nicholas O’Donnell, Boston-based attorney and editor of Art Law Report. The article is reprinted with the permission of the author, attorney for Leone Meyer.

By Pierre Ciric*

In his article titled “Lauder Editorial on Stolen Art and Museums Fails the Glass House Test,” Nicholas O’Donnell attempts to respond to Ronald S. Lauder’s editorial published in the Wall Street Journal on June 30, 2014, titled “Time to Evict Nazi-Looted Art From Museums.”

O’Donnell attempts to find legal shortcomings in Lauder’s editorial, which simply expresses the need for art museums to act responsibly by returning Nazi-looted artwork instead of raising technical defenses and mere pretexts to deny the rights of the claimants.

In his article, O’Donnell refers to the ongoing case brought by Léone Meyer against the University of Oklahoma, among other defendants, to obtain the restitution of “La bergère rentrant des moutons” (Camille Pissarro, 1886), currently on permanent display at the Fred Jones Jr. Museum of Art in Norman, Oklahoma.

Although O’Donnell—counsel to David Findlay, Jr. Gallery, a defendant no longer involved in the case—recognizes that the recent court decision is limited to whether the Oklahoma defendants could be sued in New York, he repeatedly brings up a 1953 Swiss court decision involving Camille Pissarro’s La Bergère as grounds for why Léone Meyer’s claim should fail, and why Mr. Lauder’s argument is baseless.

O’Donnell’s argument fails the common sense test. First, no one disputes that the Nazis stole La Bergère from Léone Meyer’s family.

Second, the 1953 Swiss court decision was not decided based on a late claim, as O’Donnell argues, but was decided against Léone Meyer’s father because he could not prove the “bad faith” of the art dealer who acquired La Bergère after it crossed the Swiss border from France.

Third, prior Swiss decisions involving looted art have long been held as doubtful or baseless in several U.S. jurisdictions. Even the Swiss government itself recognized in 1998 that the deck was stacked against claimants who wanted to file art restitution claims in Switzerland after World War II. New York courts have found/determined that “Swiss law places significant hurdles to the recovery of stolen art, and almost ‘insurmountable’ obstacles to the recovery of artwork stolen by the Nazis from Jews and others during World War II and the years preceding it.”

Finally, O’Donnell misses the point of Mr. Lauder’s editorial. As French government officials have recently stated in a public forum dedicated to France’s efforts to track and restitute looted art, the time for “clean museums” has come. Hiding behind technicalities and procedural loopholes to delay basic justice, i.e. restitution of looted property, is not morally appropriate, even less so when public institutions are involved.

Ronald Lauder is right. It is time for museums to do the responsible thing. It is time for museums to “clean” their collections of any tainted artwork by returning Nazi-looted artwork.

Sources:

Abut the Author: Pierre Ciric is a New York attorney, the founder of the Ciric Law Firm, PLLC, and a board member of both the French–American Bar Association and the New York Law School Alumni Association.

One Matisse, Two Matisse: The Steal that it is this Summer

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By Irina Tarsis*

Matisse died in 1954; he was 84. The following quote is attributed to Matisse, and as he dreamt of being palatable to a diverse audience, he succeeded in winning over the hearts of many.

What I dream of is an art of balance, of purity and serenity, devoid of troubling or depressing subject-matter, an art which could be for every mental worker, for the businessman as well as the man of letters, for example, a soothing, calming influence on the mind, something like a good armchair which provides relaxation from physical fatigue.

First trained in law and later a student of art, already during his lifetime Matisse proved to be popular in different circles and demographics. His works were sold by Paul Rosenberg and Daniel-Henry Kahnweile, famous Parisian dealers. He enjoyed patronage of the who’s who among the major art collectors of the twentieth century, including Alfred Barnes and Sergei Shchukin. Indeed, he was a prolific artist with a long career, and thus those who wished to have a Matisse — private collectors, institutions, auction houses, hoarders, thief’s and forgers — could enjoy fruits of the new master’s imagination and labor.

I.

Screen Shot 2014-07-08 at 4.53.58 PMOver the last couple of years, Venezuela has been in the news mostly due to political unrest, economic crisis and violence against street protestors. Serving as some positive news for a change, earlier this month numerous media sources  heralded the return of the 1925 Henri Matisse painting “Odalisque in Red Pants” to Venezuela. The painting, first acquired from a New York gallery in 1981 by the Caracas Museum of Contemporary Art in Caracas, disappeared from the museum sometime around 2002. Its loss was discovered only after the original “Odalisque in Red Pants” was offered for sale in Florida, meaning that the one on display in Caracas was a skillful forgery. (The story of the Caracas Matisse has been documented by Marianela Balbi). In 2012, the United States government seized the original painting in a sting operation in Miami. Almost two years later to the day, on 7 July 2014, the painting was finally returned to Venezuela.

According to some news sources, the authenticity of the piece was verified by “officials from the ministries of Foreign Affairs and Culture, the District Attorney, the Institute of Cultural Heritage, National Museums Foundation and the Body of Scientific, Penal and Criminal Investigations.”

II.

Screen Shot 2014-07-10 at 4.27.13 PM
C. Gurlitt/Matisse’s “Seated Woman”

Also in 2012, Bavarian authorities seized an extensive collection of works of art on paper and oil paintings from a private residence in Munich. One of these works that became a poster child for the Schwabing Art Fund, aka the Gurlitt Trove, was Matisse’s 1921 portrait of a seated woman “Femme Assise/Sitzende Frau.” The discovery of the Fund/Trove containing works by famous artists, as well as the glacial pace of investigating the origins of these artworks following the discovery captured the imagination of provenance researchers, art lawyers, potential heirs and others.

We have reported already that the Task Force appointed to investigate the trove has little time to work through hundreds of oils and works of art on paper. However, they already concluded that “Femme Assise” was looted during World War II.

In a Press Release from 11 June 2014, the Head of the Task Force, Dr. Ingeborg Berggreen-Merkel, indicated that while the Task Force could not establish exactly under what circumstances and when the painting came into Gurlitt’s possession. Nevertheless, it was illegally taken from the collection of a Jewish French art dealer Paul Rosenberg. The decision as to whether the painting will be returned to the Rosenberg’s heirs or not by Gurlitt’s appointed heir “unrestricted and unfettered,” the Bern Art Museum in Switzerland has not been announced yet.

III.

In conclusion: before more stolen, forged or other Matisse paintings come to light, mix yourself a Matisse cocktail, courtesy of Drinks Mixer:

  • 2.5 oz Stoli Ohranj vodka
  • some orange juice
  • some Chambord raspberry liqueur
  • 1 twist lime peel

Sources:

About the Author: Irina Tarsis, Esq., specializes in art law, provenance research and cultural heritage law. She may be reached at itsartlaw@gmail.com.

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

 

Case Review: Frank Kolodny v. James Meyer, Fred Dorfman, and Dorfman Projects LLC (May 2014)

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By Jill A. Ellman*

2014-07-07A complaint filed in the Southern District of New York by Frank Kolodny on May 8, 2014, contains allegations for violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) and fraud in connection with the sale of artwork stolen from the studio of artist Jasper Johns, a major twentieth-century painter and sculptor.  As alleged in the complaint, the works were sold by Fred Dorfman and Dorfman Projects LLC; Kolodny purchased one of these sculpture in 2009.

In the past three decades, Johns has achieved great standing in the art marketplace. His work has been sold to private collectors and institutions in the high millions, with private sales valued at over 100 million USD.
The plaintiff, Frank Kolodny brought the lawsuit against defendants James Meyer, the former studio assistant of Jasper Johns, as well as Fred Dorfman, a well-known specialist in twentieth century art, and his gallery, Dorfman Projects LLC (collectively, the “Dorfman Defendants”).  Kolodny claims that the defendants falsely represented to prospective buyers, including Kolodny himself, that Meyer received twenty-two individual pieces created by Jasper Johns as a gift and produced accompanying fraudulent documents.

The complaint alleges that Meyer and the Dorfman Defendants engaged in an enterprise affecting interstate and foreign commerce, thus violating  RICO.  Specifically, from September 2006 to February 2012, the plaintiff contends that the defendants participated in a pattern of racketeering with the common goal to profit from the stolen artwork and used similar methods in order to perpetrate their fraud upon prospective buyers.  If successful with his RICO claim, Kolodny may be awarded  triple damages in the form of civil penalties.

In addition to the RICO and conspiracy to commit RICO violations and common law fraud, Kolodny also asserts causes of action for aiding and abetting fraud (against the Dorfman Defendants),  and breach of warranty concerning title and provenance of the artwork sold by the Dorfman Defendants to Kolodny under N.Y. U.C.C. § 2-313(1) and §13.01 of the New York Arts and Cultural Affairs Law. Kolodny seeks compensatory damages, punitive damages and attorneys’ fees.  By way of background, the complaint describes that from 1985 to 2012, Johns employed Meyer as his assistant to support him in creating his art and aiding Johns with record keeping in his studio.  Meyer had complete access to inventory numbers for each of Johns’ completed works.  In 2012, Johns learned that Meyer was stealing from him and selling incomplete artworks without authorization. (See “James Mayer Arrested and Indicted in Jasper Johns Art Theft.”)  The Dorfman gallery sold the stolen works for $6.5 million, and Meyer collected a commission of $3.4 million.  Meyer was later indicted on criminal charges, including the interstate transportation of stolen goods and wire fraud.  The Dorfman Defendants were not named in the criminal action.  The indictment against Meyer was unsealed to the public in August 2013.

Kolodny asserts that the Dorfman Defendants could not have possibly believed Johns generously gifted artwork valued at $6.5 million.  Thus, he contends that the Dorfman Defendants ignored significant red flags in agreeing to sell Meyer consignments: not only did the artwork lack an exhibition history, but Meyer insisted that the sale of any artwork remain confidential and prohibited the buyer from selling, loaning or exhibiting the artwork for an eight-year period.  Instead of conducting proper due diligence regarding the provenance of the stolen artwork, Kolodny asserts that the Dorfman Defendants  understood the risk they faced and demanded an exorbitant commission in the form of 50% of the sale proceeds, exceeding the standard amount of commission paid to dealers for consigning artwork from private collections.  Moreover, the Dorfman Defendants purportedly assisted in perpetrating the fraud by fabricating documents attesting that the stolen artwork was indeed gifted to Meyer.

Apparently in April 2009, the Dorfman Defendants contacted art dealer Francis M. Naumann to discuss an available Jasper Johns drawing. Naumann on behalf of his client, Kolodny, decided to purchase the drawing for the value of $400,000 after being reassured by the Dorfman Defendants that very few similar works existed and would appear on the market. When Kolodny purchased the drawing, he agreed to keep it in his collection, neither selling nor loaning it for an eight-year period, because Meyer, as an employee of Johns, represented that Johns would be offended if he learned that his employee sold his “gift.”
According to Kolodny, in connection with the sale, the Dorfman Defendants and Meyer sent Kolodny an affidavit attesting to the authenticity of the artwork.  The affidavit also represented that Meyer owned the drawing and had the authority to sell it.  In addition, the Dorfman Defendants represented that the drawing would appear in an upcoming Jasper Johns catalogue raisonné, attesting to the drawing’s authenticity.  As requested by Kolodny, thedefendants forwarded an image purporting to be a page from Johns’ studio ledger indicating that the drawing was in Johns’ archive.  Because the drawing was stolen and will not appear in an upcoming Jasper Johns catalogue raisonné as represented, Kolodny claims that his drawing is unsaleable and valueless.

Kolodny is an unfortunate, potential example of a bona fide purchaser who believes that he has taken the extra-precautionary steps and exercised due diligence in securing an artwork, but who may have been duped in the process regardless of any appropriate safeguards that he took.  By bringing a RICO claim, Kolodny hopes to materially increase his potential damage award.  This case may be compared to lawsuits brought by plaintiffs who were allegedly defrauded in connection with the sale of works sold by the Knoedler Gallery and its agents.  See, e.g.,  De Sole v. Knoedler Gallery, LLC  et al., Case No. 12 cv 2313 (S.D.N.Y. Sept. 30, 2013).  Unlike here, the De Sole plaintiffs were sold a fake, unauthentic work (the De Sole plaintiffs believed they were purchasing a work created by the artist Rothko).  Similar to this case, the De Sole plaintiffs also brought claims under RICO and common law fraud, which were upheld by the Southern District in September 2013.  In particular, the Southern District found that the plaintiffs’ RICO and fraud claims to sell fake artworks were adequately pleaded because the plaintiffs showed evidence that the Knoedler defendants were aware of the misrepresentations regarding the provenance and authenticity of the purchased artworks.

Kolodny’s RICO and fraud claims may likewise survive a motion to dismiss if the Southern District finds that his allegations establish that the Dorfman Defendants engaged in a scheme to defraud potential buyers.  For example, the fact that the Dorfman Defendants went out of their way to represent that the Johns work would appear in an upcoming catalogue raisonné, sought affidavits attesting to the fact that Meyer owned and had the right to sell the work, and produced a page from Johns’ studio ledger indicating that the drawing was in Johns’ archive, may all be indicators that the Dorfman Defendants were aware of their misrepresentations to establish a sufficiently pleaded RICO or fraud claim, rather than mere negligence.

Kolodny is represented by Judd B. Grossman, Esq. of Grossman LLP.  Adam D. Mitzner, Esq. of Pavia & Harcourt LLP has made an appearance on behalf of the Dorfman Defendants.

Sources:

About the Author: Jill A. Ellman, Esq. is an associate at Tressler LLP focusing in the area of professional liability insurance coverage.  She maintains an active interest in art law.

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

Case Review: Schoeps v. Free State of Bavaria (June. 2014)

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By Chris Michaels*

P. Picasso, "Madam Soler" (1903)
P. Picasso, “Madam Soler” (1903)

 

On 27 June 2014, Judge Jed. S. Rakoff of the Southern District of New York issued an order finding that the court did not have subject matter jurisdiction to decide on the merits a Nazi-era looted art case. This case was brought by the heirs of the late Jewish banker, Paul von Mendelssohn-Bartholdy, against the Free State of Bavaria for a Picasso painting titled, Madame Soler.

The plaintiffs in this case, Julius H. Schoeps, Britt-Marie Enhoerning, and Florence von Kesselstatt, argued that Mendelssohn-Bartholdy was forced to part with his artwork in 1934 after two years of Nazi persecution. He transferred possession of Madame Soler to art dealer Justin K. Thannhauser, who remained in possession of the painting for the next 30 years. In 1964, Thannhauser, who at that time had relocated to New York City, met with Halldor Soehner, a Senior Curator of the State Paintings Collections Munich, an entity operating under the Bavarian State Ministry for Education and Cultural Affairs (the “Ministry”). Soehner’s New York trip was pre-approved by the Ministry.

Upon Soehner’s return to Germany in June of 1964, Soehner and Thannhauser began planning their next meeting, which was to take place in Europe. Soehner then sought approval from the Ministry for the meeting with Thannhauser, which occurred in France in August of 1964. The Bavarian Ministry approved Soehner’s trip to France to conduct negotiations and in an August 1964 letter to Soehner, Thannhauser confirmed the purchase of Madame Soler by the Bavarian State Paintings Collections. The purchase was publicized in the museum publications as well as local news outlets. The purchase price of the painting was 1,775,000 Swiss Francs. Additionally, the Letter Agreement between the two was signed in Europe, which the court surmised was an attempt by Thannhauser to avoid U.S. taxes, and the painting was located in Switzerland at the time of the sale. Further, a Lichtenstein entity “EBA, Vaduz,” which was controlled by Thannhauser, transferred the painting to the Bavarian State Paintings Collections and received payment on behalf of Thannhauser.

The issue decided by the instant order was whether jurisdiction over the Free State of Bavaria was appropriate under the Foreign Sovereign Immunities Act (“FSIA”).  Under the Act, jurisdiction over a foreign state is allowed in three circumstances:

  1. where a plaintiff’s claim is “based upon” “a commercial activity carried on in the United States by the foreign state”;
  2. where a plaintiff’s claim is “based upon” “an act performed in the United States in connection with a commercial activity of the foreign state elsewhere”; or
  3. where “an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere causes a direct effect in the United States.”

Here, the Court ruled that the FSIA could be circumvented because the exceptions to allow jurisdiction over a foreign sovereign and its entity did not apply under any of the above circumstances where no agreement between Soehner and Thannhauser for sale of the painting was reached in New York and where Soehner did not take any concrete action toward the purchase of the painting until his return to Germany. With respect to the first prong of jurisdiction under the FSIA, the Court found that the merits of this suit, should they be reached, were not “based upon” Bavaria’s acquisition of the painting, “let alone activity in the United States.” The Court points out that the essence of Plaintiff’s complaint is that the title to the painting never rightfully passed to Thannhauser because the painting was consigned by Mendelssohn-Bartholdy as a forced transaction.

Thus, the Court ruled, the merits of the case would necessarily focus on the circumstances of the forced sale. The Court went on to note that Bavaria would not even be the defendant in the case “but for the fact that Bavaria purchased the painting from Thannhauser in 1964.” The Court held, among other things, that this “but for” reasoning was insufficient to satisfy the FSIA’s “based upon” requirement.

With respect to the second prong, the Court held that it is “generally understood to apply to non-commercial acts in the United States that related to commercial acts abroad.” This prong was deemed inapplicable by the Court, however, because the Plaintiffs’ failed to argue that any non-commercial acts by Bavaria formed the basis of the suit.

Finally, under the third prong, the court noted that two requirements must be satisfied to confer jurisdiction: 1) “there must be an act outside the United States in connection with a commercial activity of [Bavaria] that cause[d] a direct effect in the United States and (2) [plaintiffs’] suit must be based upon that act.” The Court held that the elements of this prong were not satisfied where plaintiffs’ only arguments were that Bavaria’s purchase of the painting would have a negative impact on the New York art market and that Bavaria’s activities furthered a conspiracy to evade United States taxes. The Court, therefore, dismissed the lawsuit for lack of jurisdiction.

Plaintiffs were represented by Thomas J. Hamilton and John J. Byrne, Jr. of Byrne, Goldenberg, and Hamilton, PLLC of Washington D.C., and Defendant was represented by Andreas A. Frischknecht, James M. Hosking, and Andrew L. Poplinger of Chaffetz Lindsey, LLP of New York.

Sources:

  • Opinion and Order, Schoeps v. Free State of Bavaria, Case No. 13 Civ. 2048 (JSR) (S.D.N.Y June 27, 2014).
  • The Foreign Sovereign Immunities Act, 28 U.S.C. § 1605(a)(2).

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 @CMichaels88.

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

Detroit Institute of Arts Fights to Safeguard its Collection (Still)

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By Chris Michaels

On Tuesday, 27 May 2014, the Detroit Institute of Arts responded to the objections made by financial creditors of the City of Detroit (the “City”) to a proposed plan that would protect its collection from sale. The Detroit Institute of Arts’ (“DIA”) collection has been at the center of controversy in Detroit’s Bankruptcy proceedings and whether the collection can be sold to satisfy its financial obligations has been hotly debated.

In the Response, attorneys for the DIA explained why the Museum’s collection should not be the subject of a forced sale to satisfy the City’s financial creditors. The subject of the filing hinges on the issue of whether the City’s Fourth Amended Plan of Adjustment (the “Plan”) should be enforced. Part of this Plan stipulates that outside funders will provide at least $466 million USD to address the City’s obligation to its pensioners. The provision of the funds, however, is contingent upon the City transferring any interest it might have in the Museum’s collection to the DIA, which then must keep the collection in Detroit in perpetuity. Objectors to this plan, including certain bondholders, creditors, and the insurer of City obligations, argued that the DIA collection is a “non-core” asset, which can be sold to satisfy the obligations of the City in its Bankruptcy.

In the Response, the DIA set forth its argument in support of the Plan. At the heart of its argument, the DIA contends that the collection: 1) is not an asset of the City; 2) any attempted sale of the collection would result in protracted litigation; and 3) the proposed Plan is in the best interests of both the City and its creditors.

In support of its claim that the collection is not a City asset that can be sold to satisfy its obligations, the DIA argues that the collection is, in fact, held in a Charitable Trust. As part of this line of reasoning, the DIA claims that under its Articles of Incorporation, as well as the 1885 Act that created the DIA, a Charitable Trust was established for the benefit of the public stipulating the DIA as the trustee. Under the Charitable Trust that was established, the DIA, as trustee, does not have the power to sell the collection to satisfy the debts of the City. Additionally, the DIA noted that under its 1997 Operating Agreement, any proceeds from deaccessions must be used solely to acquire additional artwork. The DIA also argued that the acts of donors confirmed the existence of a Charitable Trust and that through conveyance documents and other records, the intent of the donors was to benefit the Museum and its charitable purpose, not to benefit the municipality.

The DIA also argued that the collection is not an asset of the City because the collection is protected by an Implied Trust. The DIA contends that an Implied Trust was created between the City and the DIA through such actions as the solicitation of charitable donations for the Museum, adopting policies limiting deaccession, and representing to the Public that the City held the collection in trust. The DIA also maintained that the collection was protected by the Public-Trust Doctrine, whereby governmental entities have a duty to protect resources held in trust for the public.

In the second prong of its argument in support of the Plan, the DIA asserted that any attempted sale of the collection would result in protracted litigation. Here, the DIA in essence threatened that if the City tried to transfer its interest in the collection in an attempt to satisfy its creditors, the DIA would file suit to block the sale. Because of the expense associated with the litigation, the DIA argued that enforcing the Plan is a more attractive alternative than further litigation.

Finally, the DIA made the claim that the Plan would be in the best interests of the City and the creditors. This argument is bolstered by the fact that outside funders will provide $466 million to the City to address its obligations and because the alternative to the Plan, namely the attempted sale of the collection, would result in the aforementioned protracted litigation.

The Response in support of the Plan by the DIA ended with an argument that the Museum is more than just a fiscal asset of the City. The filing reads:

The Museum is a core feature of the City’s future. It is the Cultural cornerstone of Midtown Detroit, providing a stable anchor for the cultural district and for the surrounding neighborhoods. The Museum draws economic investment to Midtown Detroit, is a selling point for business attempting to attract and recruit talent to the City, and is an important factor in decisions by businesses that are seeking to locate in the City. 

The fate of the DIA collection is scheduled to be decided by trial on 24 July 2014.

The DIA is represented by Arthur T. O’Reilly, Scott B. Kitei, and Daniel N. Adams from Honigman Miller Schwartz and Cohn LLP, and Richard Levin of Cravath Swain & Moore LLP.

 

Sources:

Response of the Detroit Institute of Arts to Objections to the City’s Amended Plan of Confirmation, In Re: City of Detroit, Michigan, Case No. 13-53846 (Bankr. E.D.M.I. May 27, 2014). 

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 @CMichaels88.

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

Art Law Visiting the Non-profit Side: On Qualifying for 501(c)(3) Status as an Arts Organization

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By Benjamin Takis*

2014-05-25 collage

Background

New non-profit organizations often find that the world is not a hospitable place. While innovation, entrepreneurship, and risk-taking by new for-profit companies are lauded, fledgling non-profits typically struggle to gain the acceptance and support of private foundations, donors and others in the non-profit community. There is, after all, only a limited supply of grants and donations to fund charitable, artistic, and educational endeavors. Furthermore, the administrative burden of forming and administering a non-profit can be staggering. New non-profits are therefore often advised to pair up with an existing organization, use a for-profit structure, or explore other alternatives before forming a new entity and applying to qualify under section 501(c)(3) of the Internal Revenue Code (the “Code”).

Despite these challenges, arts organizations share certain traits that can help them thrive as non-profit 501(c)(3) organizations, with fewer of the hurdles faced by other kinds of non-profits. First, while many organizations rely largely on foundation grants and private donations, arts organizations can raise funds from ticket sales to performances, exhibits, and other events. For many kinds of organizations, these “fee-for-service” revenue sources can trigger “unrelated business income tax” or endanger 501(c)(3) status under the “commerciality doctrine” applied by the Internal Revenue Service (“IRS”) and the courts. However, these revenue sources are generally consistent with the tax-exempt status of arts organizations. Additionally, these types of revenue sources can more easily satisfy the “public support” tests that enable an organization to qualify as a public charity, and thereby avoid classification as a private foundation and the stringent oversight to which private foundations are subjected.

The Benefits and Burdens of 501(c)(3) Status

501(c)(3) is a special tax status under federal law, generally available to organizations formed and operated for a charitable, educational, scientific or religious purpose, and promotion of the arts is recognized as a valid educational purpose. Treas. Reg. § 1.501(c)(3)-1(d)(3)(ii), Example 4 (Educational organizations include “[m]useums, zoos, planetariums, symphony orchestras, and other similar organizations,” provided that the organizations otherwise satisfy the requirements of section 501(c)(3) of the Code). However, before embarking on the 501(c)(3) qualification process, it is important to carefully consider whether the benefits of 501(c)(3) status are worth the burdens.

There are three legal benefits to having 501(c)(3) status: (1) the organization’s net revenue (after expenses) is generally not subject to tax; (2) contributions to the organization are eligible for the charitable deduction; and (3) the organization is eligible for grants from private foundations.

These benefits are not quite as advantageous as they may appear. Most non-profits (including arts organizations) do not have large amounts of excess revenue – most struggle to earn enough revenue to pay their expenses. Therefore, the tax exemption on net revenue may not be crucial. Second, while the charitable deduction is a powerful incentive for individuals inclined to give money to non-profit organizations, it is still a difficult task to convince people to give. The charitable deduction tends to be important only when an organization’s Board of Directors has a strong and committed network of high-wealth individuals. Lastly, it can be difficult to get grants from private foundations. Finding grant opportunities takes significant research, and the grant writing process requires preparation, perseverance, and commitment.

Maintaining 501(c)(3) status can also be quite burdensome. A 501(c)(3) organization must be run by a Board of Directors (generally 3 or more people) in accordance with Articles of Incorporation, Bylaws, and various corporate policies that comply with requirements set forth under federal tax law and state non-profit corporation law. In addition, any compensation to Directors or Officers must be closely scrutinized to ensure that such payments are reasonable. And complex tax filings called the Form 990 (or Form 990-EZ) are generally required for organizations with gross revenue exceeding $50,000 per year, and are open to public inspection. (Organizations whose annual gross receipts are normally $50,000 or less, file a much simpler electronic form called the Form 990-N). These and other administrative difficulties are not typically worth the trouble unless 501(c)(3) status would significantly enhance an organization’s fundraising capabilities, or at least its image in the arts community.

Designing a Program of Activities to Qualify under 501(c)(3)

An arts organization that has thoroughly considered the benefits and burdens of 501(c)(3) status and wishes to move forward with the qualification process will need to design a program of activities consistent with 501(c)(3) status. It is important to be aware of which types of activities are acceptable and which activities raise suspicions at the IRS, and be able to show the IRS several bona fide activities that fit squarely within the traditional notions of a 501(c)(3) arts organization.

The exemption under section 501(c)(3) for arts organizations is based on the statutory exemption for “educational” organizations, so educational activities carry significant weight in the approval of 501(c)(3) status. Examples of educational arts organizations include:

  • An organization formed to promote the advancement of young musical artists by conducting weekly workshops, and sponsoring public concerts by the artists. Rev. Rul. 67-392, 1967-2 C.B. 191.
  • An organization formed to promote public appreciation of group harmony singing by holding frequent meetings of members where they receive training and instruction in vocal harmony and opportunities to practice under trained supervision. Rev. Rul. 66-46, 1966-1 C.B. 133.
  • A dance school with a regular faculty, daily comprehensive curriculum, and a regularly enrolled body of students. Rev. Rul. 65-270, 1965-2 C.B. 160.

Educational activities can also include individual instruction, or the dissemination of instructional materials for free or for a nominal charge. See Rev. Rul. 68-71, 1968-1 C.B. 249 (approving the 501(c)(3) status of an organization that provided career education by distributing educational publications at a nominal charge and providing free vocational counseling services).

Public exhibits or performances are also typically valid 501(c)(3) activities, provided that steps are taken to ensure that the selection of artists is disinterested (i.e. the organization is not merely a vehicle for showing the work of founders, directors or other insiders of the organization), and provided that the artists or works are chosen for their artistic merit rather than their ability to appeal to a mass audience. See Plumstead Theatre Soc’y, Inc. v. Comm’r, 74 T.C. 1324, 1332-1333 (1980), aff’d 675 F.2d 244 (9th Cir. 1982) (contrasting commercial theaters, which “choose plays having the greatest mass audience appeal … run the plays so long as they can attract a crowd …[and] … set ticket prices to pay the total costs of production and to return a profit,” with 501(c)(3) theaters, which “fulfill their artistic and community obligations by focusing on the highest possible standards of performance; by serving the community broadly; by developing new and original works; and by providing educational programs and opportunities for new talent.”). It helps if at least some of these exhibits or performances are open to the public for free.

For example, the IRS has approved the 501(c)(3) status of the following organizations:

  • An organization whose sole activity was sponsoring an annual art exhibit of artists selected by a panel of qualified art experts. Rev. Rul. 66-178, 1966-1 C.B. 138.
  • A filmmaking organization that organized annual festivals to provide unknown independent filmmakers with opportunities to display their films. Rev. Rul. 75-471, 1975-2 C.B. 207.
  • An organization that presented public jazz concerts featuring aspiring jazz composers and high school students performing alongside established jazz musicians. Rev. Rul. 65-271, 1965-2 C.B. 161.
  • A touring repertory theatre company that focused on works that were part of college curricula. Rev. Rul. 64-175, 1964-1 C.B. 185.

Note that the IRS views the exhibition of art much differently than the sale of art, especially with respect to the visual arts. The IRS typically denies 501(c)(3) status to art galleries that engage in the sale of art for a commission. See Rev. Rul. 76-152, 1976-1 CB 151 (rejecting the 501(c)(3) status of a gallery formed to promote modern art trends by exhibiting works of modern artists and selling the works on consignment basis with the artist setting the selling price and the organization keeping a 10% commission, even though this commission was lower than that charged by commercial entities and the gallery planned to supplement its revenue through donations); Rev. Rul. 71-395, 1971-2 CB 228 (rejecting the 501(c)(3) status of a gallery formed and operated by approximately 50 artists for the purpose of exhibiting and selling the work of the founders).

Gallery sales activities are permitted only under very limited circumstances when sales activities are sufficiently minor in comparison to educational and other valid 501(c)(3) activities. Goldsboro Art League, Inc. v. Comm’r, 75 T.C. 337 (1980) (approving the 501(c)(3) status of a gallery that engaged in some sales for commissions in addition to educational activities, based on the following factors: (1) there were no other museums or galleries in the area, thus, the exhibition of art works showed a purpose primarily to educate rather than to sell and the selling activity served merely as an incentive to attract artists to exhibit their work; (2) works were selected by an independent jury for their representation of modern trends rather than salability; (3) the organization demonstrated that educational activities were its priority; (4) the art sales were not conducted at a profit; and (5) of more than 100 works of arts exhibited in the organization’s galleries, only 2 members of the organization had their art exhibited).

Most 501(c)(3) arts organizations focus predominantly on education and/or public exhibits or performances, but other types of activities can be acceptable as well. For example, the awarding of grants to aspiring artists and students is a permissible 501(c)(3) activity, provided that procedures ensuring disinterested selection of winners are developed and scrupulously followed. See Rev. Rul. 66-103, 1966-1 C.B. 134 (approving the 501(c)(3) status of organization formed for the purpose of making grants available to writers, composers, painters, sculptors, and scholars for projects in their respective fields which they would not otherwise be able to undertake or finish due to the lack of funds. In awarding grants, preference was given to persons showing distinction or promise in their respective fields, and the recipients promised to make their work available for the benefit of the public in ways customary and appropriate to the particular work. The organization received no financial benefit from these grants).

The IRS has also approved of activities promoting the appreciation of art by less traditional means, such as the recording and sale of obscure classical music pieces to educational institutions, Rev. Rul. 79-369, 1979-2 C.B. 226, and a museum’s sale of greeting cards displaying printed reproductions of selected works from the museum’s collection and from other art collections. Rev. Rul. 73-104, 1973-1 C.B. 263. However, these types of non-traditional promotional activities should be approached with caution, as they implicate difficult issues that can lead to unpredictable results from the IRS. See e.g. Rev. Rul. 76-206, 1976-1 C.B. 154 (rejecting the 501(c)(3) status of an organization formed to generate community interest in classical music by urging the public to support the classical music program of a for-profit radio station).

In summary, when applying for 501(c)(3) status, an arts organization should be prepared to describe several activities similar to those approved by the IRS. There should be at least some educational component, whether through workshops, classes, online publications or tutorials, or other means. It is helpful to show engagement with the public or local community through free exhibits or performances, and to focus on art that lacks mainstream commercial viability. Lastly, an organization founded or run by artists should make sure to focus on a wide variety of artists rather than just its founders or members.

About the Author: Benjamin Takis is the founder and principal attorney of Tax-Exempt Solutions, PLLC. He may be reached at btakis@taxexemptsolutions.com.

Disclaimer: This publication is provided for educational and informational purposes only and does not contain legal advice. Accordingly, you should not act on any information provided without consulting legal counsel. To comply with U.S. Treasury Regulations, we also inform you that, unless expressly stated otherwise, any tax advice contained in this publication is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code, and such advice cannot be quoted or referenced to promote or market to another party any transaction or matter addressed in this publication.

Case Review: Scher v. Stendhal Gallery, Inc., et al.

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By Chris Michaels, Esq.

Puala Scher, “South America”

A recently decided case out of the New York Supreme Court, Appellate Division, First Department may have some New York galleries re-evaluating the contracts they have with their artists. On 27 March 2014, the court decided whether Paula Scher, an artist, had ownership of 320 unsold fine-art silk-screen prints made from her paintings that the Gallery had printed for approximately $300,000. Based on the agreement between the parties, the court held that the Gallery had left itself exposed upon the agreement’s termination and, even though it had laid out the costs for production, Scher was the sole owner of the prints.

Plaintiff in the case, Paula Scher, a nationally known graphic designer, is also a well-recognized fine art painter. She has a BFA from the Tyler School of Art at Temple University in Philadelphia and has been a principal at Pentagram, one of the world’s largest independent design consultancies, since 1991. As a graphic designer, she has developed branding and marketing for clients including Coca-Cola, Perry Ellis, and Microsoft. Her artwork is in the permanent collections of some of the most distinguished museums in the United States, including the Museum of Modern Art, the Philadelphia Museum of Art, and the Denver Art Museum.

At the heart of the lawsuit Scher brought against the Stendhal Gallery, Inc., a New York art gallery established in 1990, was an agreement both parties entered into in 2005 for the sale of a series of 12 map-based paintings Scher created.  The consignment agreement between Scher and the Gallery indicated that the Gallery would sell the map paintings and any future works Scher might create during the agreement’s term.

Specifically, the agreement noted that, “[t]he Artist [Scher] appoints the Gallery to act as Artist’s exclusive agent in the following geographic area: exclusive worldwide for the exhibition and sales of artworks in the following media: original paintings / Works on Paper / limited edition prints published exclusively by Gallery and Digital / electronic art for computers.” While the written agreement was in effect, Scher and Maya Stendhal, at the time a principal of the Gallery, entered into a separate oral agreement whereby Scher granted the Gallery a license to produce prints based on Scher’s Map paintings. Pursuant to the second agreement, the Gallery would produce the prints at the Gallery’s expense and the proceeds of any prints that sold would be split with 90% going to the Gallery and 10% going to Scher.

After Scher and Stendhal entered into the second agreement, the Gallery then hired a printer to make the prints. The Gallery took possession of the prints from the printer and incurred approximately $300,000 in costs between printing and selling some of the prints. The prints were then advertised for sale for between $3,000 and $15,000. The Gallery generated $1,388,680 from sales of the Map paintings, but paid Scher only $15,000. Pursuant to the oral agreement, she was due $138,868.

In May of 2010, counsel for Scher notified the Gallery that the 2005 written agreement and the oral agreement were terminated and, at the same time, demanded that the Gallery return any unsold paintings and prints. Shortly thereafter, Scher initiated her lawsuit against the Gallery for, among other things, the unsold prints that the Gallery possessed.

In the underlying case, the Supreme Court’s initial judgment granted ownership of the 320 unsold prints to Scher. At the same time, however, the court ruled that the Gallery was entitled to 90% of the proceeds of the re-sale value of the unsold prints. In the ruling, the Court looked to New York Arts and Cultural Affairs Law §12.10, which deals with artist-merchant relationships. The court held that under the law, Scher owned the prints but that it did not defeat the Gallery’s contractual right to 90% of their resale value. In response to the Court’s ruling, Scher moved for re-argument to eliminate the Gallery’s right to a portion of the resale value, among other things.

On re-argument, the Court held that the oral argument between Scher and the Gallery established a split of proceeds only at such time as the prints were sold. In its amended judgment, the Court granted Scher ownership of the 320 prints and held that the Gallery was not entitled to any share of the value of the unsold prints but was, however, entitled to recover the costs incurred in having the prints made. The Gallery appealed this ruling, seeking full ownership of the prints under the Uniform Commercial Code or, in the alternative, a 90% share of the resale value of the unsold prints.

On appeal, the Appellate Division did not look to either the UCC or the New York Arts and Cultural Affairs Law in deciding the case. Instead, it simply relied on the 2005 contract between Scher and the Gallery. The Court noted that the agreement provided that the Gallery would act as Scher’s “exclusive agent” for the exhibition and sales of the prints. Therefore, the Court reasoned, when it hired and paid the printer to make the prints, “it did so as Scher’s agent and, hence, fiduciary.”  The Court further reasoned that as Scher’s fiduciary, the Gallery was obligated to disclose to Scher that it would own the prints after they were made, if that is what the Gallery’s understanding was. The Court noted that if the Gallery wished to own the prints that it financed, it could have sought to reach a separate agreement with Scher regarding ownership. Further, the Court noted that the Gallery, “left itself exposed by going forward with the print deal based on only a vague, unwritten agreement that left nearly all of the terms up in the air . . . .”

Additionally, the Court stated that the Gallery, as a fiduciary, acted carelessly in dealing with its principal. The Court was especially hard-pressed to give any leeway to the Gallery as fiduciary because the 2005 written agreement provided that any modification of its terms must be in writing and signed by both parties.

Ultimately, the Court awarded full ownership of the unsold prints to Scher and held that she had no obligation to reimburse the Gallery for either printing costs or resale value. The Court’s ruling here should act to remind Galleries that under consignment deals such as this, before any substantial amount of money is laid out for the creation of prints, Galleries, as fiduciaries to the artists with whom they contract, should be very clear about their intentions to own unsold prints.

Plaintiff was represented by Judith M. Wallace, Jeffrey L. Loop, and Michael H. Bauscher of Carter Ledyard & Milburn LLP. The Gallery was represented by Michael C. Ledley and Melissa A. Finklestein of Wollmuth Maher & Deutsch, LLP.

Sources: 

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 @CMichaels88.

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

Conserving v. Rebuilding Afghanistan’s Bamiyan Buddhas

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By Lauren Bursey

feet of Bamiyan-Buddhas
Feet of Bamiyan-Buddhas
bamiyan valley
Bamiyan Valley

In March 2001, the Taliban, at the time the government in Afghanistan and later a terrorist group, ordered the destruction of the giant Buddhas, which had been carved into the Bamiyan Cliffs in the6th century. The Buddhas, standing 55m and 38m high, were a monumental expression of western Buddhism. The entire Bamiyan Valley had been an important spot for the Gandhara school of Buddhist art, an area which was a long-revered pilgrimage centre from the 1st to the 13th centuries. The Valley was determined by UNESCO to have “Outstanding Universal Value” and the Buddhas were designated a World Heritage site following a review in 2002. Since their destruction, the site has faced issues of reconstruction, insufficient funds, the need for continuing tourism in the Valley, and religious tension.

After the Buddhas were blown up, UNESCO tasked ICOMOS (International Council on Monuments and Sites) archeologists from Germany with restoring the niches in which the Buddhas had rested, as well as the network of caves in the Bamiyan Valley. To explain, ICOMOS is an entity created by UNESCO in 1964 and only acts in an advisory capacity to the broader UN organization, and thus UNESCO has the authority over ICOMOS to enforce their decision to stabilize the site. UNESCO mandated that the goal of this project was to ensure that the area was safe for visitors (no falling rocks, a railing, etc.), that the niches were not subject to further damage, and that what remained of the artifacts was properly preserved. The Afghan Government made it clear by asking UNESCO for aid that they are in need of funds in order to stabilize their historic sites, and furthermore that they are reliant upon the funding that international organizations such as UNESCO and ICOMOS can provide. It is important to note that in 2011, at the 10th Expert Working Group Meeting for the Safeguarding of the Cultural Landscape and Archaeological Remains of the Bamiyan Valley World Heritage Property, UNESCO decided not to rebuild the statues, arguing that they would be best remembered by their absence. Their decision was made in light of “the available scientific data and estimated financial requirement.” Nevertheless, according to UNESCO, ICOMOS took its mandate too far and started rebuilding the statutes. As a result, when it was discovered that the ICOMOS team had started to rebuild the legs of the Eastern statue, UNESCO furiously shut down the project.

A large part of the issue seems to stem from ICOMOS Germany overstepping its bounds with regards to what UNESCO had mandated. Yet statements by Afghan Government officials give support to ICOMOS’ actions. H. E. Omar Sultan, the Deputy Minister of Information and Culture of Afghanistan, made this remark at the UNESCO Forum, March 2 2011:

“I believe that if we are to undertake any sort of remedial measures to rebuild or

partially rebuild the statues of Bamiyan, it should be for this higher goal of the site of

Bamiyan as a symbol of memory of the tragedy of war and conflict in Afghanistan and

as a statement of peace and hope for a better future.”

For the Afghan administration, rebuilding one of the statues would be a symbolic victory over the militant Taliban. Not rebuilding the statue, the Afghans feel, would be akin to admitting defeat at the hands of the Taliban while depriving future generations of the opportunity to appreciate these monuments first-hand. Afghan monument protection law requires Afghan Government approval for changes made to heritage sites, which ICOMOS acknowledges, but due to funding control, UNESCO is the body with the real authority. Work was halted not because the Afghans had a problem with ICOMOS’ work, and thus ordered it stopped, but because UNESCO felt that ICOMOS was rebuilding rather than only stabilizing the site. The order to halt work was carried out despite the Afghan Ministry of Culture, the Bamiyan Tourism Association, and the Bamiyan deputy governor all being in agreement that at least one Buddha should be rebuilt. Further complicating the situation, UNESCO and the global heritage protection community are worried about offending Afghan Muslims in dealing with the Bamiyan Buddhas. Due to Islam’s ban on religious idolatry and anthropomorphic images, the monumental Buddhas were subjected to frequent harm over the years, so that by 2001, the statues were heavily pockmarked by bullet holes and missing their faces. While UNESCO is extremely sensitive to giving offense, this sensitivity hinders many restoration efforts, as ICOMOS has encountered. Contrary to UNESCO’s approach, current Afghan domestic policy seems intent upon a more progressive stance, which allows for multiple religious symbols to be displayed.

The Afghans and UNESCO can agree on at least one thing: the need for tourism in the Bamiyan Valley. The Valley’s importance to world heritage had made it a site to which tourists flocked, helped by the site’s presence on the World Heritage list, at least until the destruction of the statues. Since then, unsurprisingly, tourist visits have declined significantly, along with the much-needed revenue. UNESCO has plans to reinvigorate the area economically without rebuilding the Buddhas, including the building of a cultural centre and museum, a bazaar, and the restoration of the interconnected caves at the site of the ancient city Shahr-I Ghulghulah. Whether or not these plans have been discussed with the Afghan government and found appropriate by the Afghans has yet to be determined. Abdullah Mahmoodi of the Bamian Tourism Association, for his part, believes that rebuilding at least one of the two statues is the best way to encourage tourism.

The final large issue that UNESCO is struggling with is the ethical dilemma between restoration and reproduction. Perhaps most importantly, UNESCO officials claim that the niche in which ICOMOS was working had not even been stabilized prior to the archaeologists starting to restore the statue’s feet. Both Michael Petzet, leader of the German ICOMOS team and former head of ICOMOS, and Francesco Bandarin, UNESCO’s assistant Director-General for Culture, each report that the Afghan government was in full agreement with the aims and activities undertaken by their respective organizations. ICOMOS Germany’s report on the matter continues to emphasize that their “safeguarding and stabilizing” measures were carried out with the knowledge and consent of Afghan authorities and UNESCO representatives. Whether or not the feet should be restored depends upon the amount of shards which remain after the Buddhas were blown up, a quantity about which once again the two organizations disagree. Regardless of the exact number of shards however, little of the once-monumental statues seems to remain, leaving archaeologists in the precarious position of either leaving the site as-is, which UNESCO would prefer, or attempting to rebuild part or all of a statue, the attempt which led to the controversy.

The Venice Charter of 1964, the same year of ICOMOS’ establishment, outlines that only anastylosis, or “the reassembling of existing but dismembered parts” is permitted on excavation sites, rejecting reconstruction outright. Otherwise, there is the possibility that the ruin will be distorted and its integrity damaged. With a lack of pieces (or shards), there would be little to preserve and thus no way the statues could be rebuilt without starting from scratch. However, the 1970s saw reconstruction of the Buddha’s feet carried out during a restoration campaign by an Indian/Afghan team. According to ICOMOS’ report of July 2013, when the current ICOMOS team arrived on the scene, they determined that the best way to properly stabilize and reinforce the Eastern niche was to create a system whereby the rear wall was coupled with the remains of the statue, necessitating that the feet were rebuilt. In a New York Times article this past March, Petzet references the Roman Forum and numerous French cathedrals as places where renovation work leaned more to reproduction and re-creation than anything else. He believes that there is no reason why a similar approach could not also be employed in Afghanistan. UNESCO, on the other hand, feels that only that which can be preserved with original material should be, and would prefer to uphold the principles of the Venice Charter.

At present, there is only one other site in Afghanistan with World Heritage status, the Minaret and Archaeological Remains of Jam, which is also listed as a cultural site in danger along with the Bamiyan Valley, all at the request of the Afghan government. A site’s status as a property in danger provides it with access to further conservation funds and “encourages corrective action.” The World Heritage List includes 981 properties, a mix of both cultural and natural monuments, across 190 countries. A site can be removed from either or both lists if the characteristics of its original nomination no longer exist. Hopefully the confusion as to the mandate of the UNESCO/ICOMOS project in the Valley is resolved before the collapsing niches and deteriorating shards of the Bamiyan Buddhas permanently debase the historic site.

About the Author: Lauren Bursey is a BA candidate at the Trinity College, University of Toronto; she is working toward a double major in History and Classical Civilizations and Language Citation.

Sources:

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

Art Law – the Corporate Side: Sotheby’s Wins the Battle in the Delaware Chancery Court But Loses the Proxy War

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By Elizabeth Lash, Esq.

Screen shot 2014-05-14 at 7.45.26 AMIt’s a tale as old as time – or at least as old as a 1982 Keith Haring work: a multi-million dollar proxy fight between an incumbent board of directors and activist shareholders, battled through poison letters and poison pills. (Ed. Note: see Sources and Explanations for definitions of various corporate law terms).  In this instance, the tale revolved around Sotheby’s auction house, which, as a publicly held company, will, at the end of the day, have had to expend more than $15 million on this past year’s proxy fight with its activist shareholders.

For those who normally ignore shareholder elections, the fight for control over Sotheby’s was one to which it was worth paying attention.  Beginning in May 2013, several large, activist hedge funds began buying up shares in Sotheby’s: Third Point (run by Daniel Loeb), Marcato Capital Management (run by Richard (“Mick”) McGuire), and Trian Fund Management (run by Nelson Peltz).  Not only did the funds begin requesting private meetings with Sotheby’s management to discuss Sotheby’s future direction, but at least one (Marcato) announced in its 13D filing that it would discuss “various strategic alternatives.”

But then the tone changed dramatically: in October 2013, Daniel Loeb declared open season on the Board by publicly publishing a letter (as part of an amended Schedule 13D) addressed to William Ruprecht, CEO, President, and Chairman of Sotheby’s, in which Loeb listed all of the ways in which Ruprecht and the rest of his Board were overpaid and underperforming.

Not only did Sotheby’s board take umbrage at its publicly-disclosed potential valuation (a bit of irony in its reaction, considering Sotheby’s itself is in the business of valuing prized possessions for investors), but such a declaration spurred Sotheby’s to action in view of a perceived hostile take-over, or at least a bitter proxy fight: not long after the filing of Loeb’s “poison pen” letter, Sotheby’s created a shareholder rights plan that would allow only passive investors to purchase more than 10% in Sotheby’s.  (13G filers could purchase up to 20% of Sotheby’s shares, but 13D filers could not.)

A shareholder rights plan, or “poison pill,” is just one of the tools which companies may use to defend themselves from the threat of take-overs from apparently hostile outsiders.  Shareholder rights plans (i.e., seemingly a bit of a misnomer, since they are actually created and enforced by a board of directors), which became popular in the 1980’s as a tool to stave off hostile take-overs, are legal and enforceable in Delaware, as long as a board of directors has investigated the threat of such a take-over and has instituted a plan that is reasonable in relation to the perceived threat to the company.  A shareholder rights plan can be used to defend a company from unsolicited bids by severely diluting the position of any shareholder acquiring more than a specified proportion of a target company’s shares (in this case, 10%) without the prior approval of the company’s board.  Such a plan obviously encourages outside bidders to negotiate with the board, since only the board can redeem the rights plan if it approves of the offer.

In the spring of 2014, Loeb sought a waiver from the 10% threshold to purchase a greater number of shares, but the Board declined to do so, instead offering, at various points, Loeb or one of his nominees a seat on the Board.  Loeb, however, rejected the attempted settlements because appointment to one seat on the Board would have given Loeb only nominal control over the Board, and would have left him with little ability to influence the company’s direction.

Thus, discussions between the parties broke down in March 2014, and Loeb, along with several pension fund shareholders, brought suit to preliminarily enjoin Sotheby’s from holding its annual shareholder vote until the Delaware Chancery Court could rule on whether (a) the shareholder rights plan and (b) the Board’s refusal to grant a waiver from this plan were being used to unfairly benefit the incumbent Board in the upcoming shareholder election.

The final decision, just issued by Vice Chancellor Donald F. Parsons, Jr. of the Delaware Chancery Court in early May 2014, held that the Board acted reasonably when it created the plan, and when it enforced the plan (i.e., refused to grant a waiver from the plan to Loeb), in the face of the perceived threat in the form of a proxy fight by several of its largest shareholders.  Interestingly, although it appeared the Vice Chancellor saw the creation of a shareholder rights plan as being well within the Board’s rights, he found that the Board’s later refusal to grant a waiver was precipitously balanced on the edge of permissible behavior.

In coming to his decision, the Vice Chancellor struggled with conflicting Board minutes and Board member testimony, along with some evidence of animus between Ruprecht and Loeb (putting aside that Loeb appears to be a difficult person to work with anyway).  For instance, while Sotheby’s Board minutes (drafted by the Board’s attorneys), appeared to show how the shareholder rights plan and its refusal to grant a waiver fit exactly under prevailing precedent (even using the exact language of prior decisions relating to acceptable shareholder rights plans), deposition testimony by one Board member tended to indicate otherwise: that the refusal to grant a waiver may have been motivated more in maintaining control over the current Board than in protecting Sotheby’s from predatory behavior by outside hedge funds.  While the latter was perfectly acceptable as a reason for creating and enforcing a shareholder rights plan, the former would have been impermissible.

So what really weighed in favor of the Board and in the court’s rejection of Loeb’s request for a preliminary injunction of Sotheby’s annual shareholder elections?  The Vice Chancellor primarily discusses what he sees as relevant facts, namely, the effort to prevent “creeping control” of Sotheby’s without payment of a control premium; “collusive” ownership purchases by the outside funds; and the Board being made up of mainly independent directors.

Beyond the obvious (i.e., what the Vice Chancellor highlights), other factors appear equally important in the Vice Chancellor’s decision, even if they do not figure as prominently in the final analysis.  For instance, the Board’s attempts to settle with Loeb by giving him or others connected with him one or more seats on the Board appeared to persuade the Vice Chancellor that the Board had acted reasonably, despite distaste for Loeb and his methods.

As well, an important factor in the decision (and this is where smart counsel and financial advisors really count) is that the shareholder rights plan still permitted outsiders bidders to make an all-cash, all-shares tender offer.  Some Delaware courts have found that a refusal to make such an exception in a shareholder rights plan is unreasonable.  Thus, this factor may have also weighed heavily in favor of the Board when the Vice Chancellor found that the Board’s primary motivation in enforcing the shareholder rights plan was not to maintain control (even if, as indicated in deposition testimony, that may have actually been the case).

In the end, as others have already observed, the Board may have won the battle, but lost the war.  Although Sotheby’s Board claimed that its concern in fighting off activist shareholders was to keep Sotheby’s from wasting money it did not have, as well as protecting shareholders from coercive or unfair takeover tactics, the auction house in fact spent $5.7 million fighting Loeb and his compatriots, and will be reimbursing Loeb about $10 million for his troubles.  Moreover, the Board felt that it had to award three seats to Loeb and his nominees, most likely as a result, not only of early reports and preliminary votes indicating that Loeb would win, but in heeding Vice Chancellor Parsons’ apparent warning that the Board’s refusal to grant a waiver was a very close call.  On the other hand, Ruprecht has remained the Chairman of the Board, and Third Point has agreed to cap its holdings at 15 percent.

So what does this mean for the future of shareholder rights plans within and outside the art law domain? It means that shareholder rights plans are alive and well, particularly when well designed—even in the face of shareholder activism, rather than the threat of outright acquisitions.  But it also means that boards should be careful about their internal discussions of such activist funds, and should institute thoughtful consideration of what, exactly, they perceive the threat to the company could be (at least before breaking the bank on their legal and financial costs).  But for now, Loeb and his nominees are a part of the Board, and spring auctions are in full swing.

Sources and Explanations:

About the Author: Elizabeth R. Lash, Esq., is currently with Lash & Associates, LLC, where she works as a consultant on commodities consulting and regulatory issues.  She also provides IP and corporate governance advising in her capacity as a sole practitioner.

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

Case Review: Caterbetti v. Bloomgarden, et al

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By Chris Michaels, Esq.

J. Caterbetti, “Bodega judisprudencial” (2002)
J. Caterbetti, “Bodega judisprudencial” (2002)

On 28 March 2014, a complaint filed in the Supreme Court of New York, County of New York, alleges violations of the consignor/consignee relationship between an artist and the gallery that undertook to sell his works. Plaintiff, Jorge Caterbetti is a professional Argentinean artist whose work comments and critiques legal, social, and political issues. The complaint, filed on behalf of Caterbetti by Matthew C. Kesten and Daniel S. Kokhba of the Kantor, Davidoff, Mandelker, Twomey, Gallanty & Olenick, P.C. firm against the Belenky Gallery of New York and its affiliates, alleges that the defendants lost approximately 65 pieces of Caterbetti’s artwork by failing to exercise all due and reasonable care in the handling, display and storage of the artworks.

According to the complaint, Caterbetti entered into two consignment agreements with the defendants whereby defendants agreed to make reasonable efforts to sell Caterbetti’s works. Pursuant to both agreements, defendants also agreed to exercise all due and reasonable care in handling and storing his work, to return any unsold works to the artist, and the parties to the agreements agreed that the consigned works would not leave the gallery until a payment had been made to the artist. Between 1999 and 2003, Caterbetti consigned approximately 105 pieces of artwork to defendants for sale.

In April 2013, after selling only three of the consigned works, the defendants advised Caterbetti that the gallery was closing. At the same time, the artist learned that the defendants had moved his works out of the gallery and into a storage facility in Manhattan. In an effort to recover his artworks, Caterbetti discovered that approximately 65 of his pieces were missing and that approximately 35 pieces were located in homes of defendants’ relatives.

Among other causes of action, the complaint alleges that defendants’ actions violated the consignment agreements, defendants were negligent in caring for Caterbetti’s paintings, and they breached a fiduciary duty owed to the artist as defined by the recently amended Article 12.01 of the New York Arts and Cultural Affairs law. As indicated in the complaint, Caterbetti is seeking damages in an amount in excess of $500,000, which represents the value of the artwork plus interest accrued from the date he was made aware of the loss in April 2013. Additionally Caterbetti is seeking attorneys’ fees and costs and expenses, which will likely exceed $25,000.

Plaintiffs are represented by Matthew C. Kesten and Daniel S. Kokhba of the Kantor, Davidoff, Mandelker, Twomey, Gallanty & Olenick, P.C. firm. The Gallery’s response is due 20 days from the date of service of the complaint, which, if served on the date of the filing, would have been April 17, 2014. To date, no answer to the complaint has been filed. If the case gains traction, it will be the first example of evoking the recently amended NY Arts & Cult. Affairs law to protect artist’s interests.

Sources:

 

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 @CMichaels88.

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

The Race for a Tax Break: How Buyers Circumvent ‘Use Taxes’ on Art

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By Emma Kleiner

Francis Bacon, "Three Studies of Lucian Freud," (1969). © The Estate of Francis Bacon.
Francis Bacon, “Three Studies of Lucian Freud,” (1969). © The Estate of Francis Bacon.

When Three Studies of Lucian Freud (1969) by Francis Bacon sold last November in New York for $142.4 million, the art world wondered about the identity of the unnamed buyer and the location of the triptych’s new home. Subsequently, the identity of the triptych’s anonymous buyer was revealed: the buyer was Elaine Wynn, who divorced Las Vegas casino owner Stephen A. Wynn in 2010. Although Ms. Wynn is a resident of Nevada, in December 2013, Three Studies of Lucian Freud made its surprising post-auction debut at the Portland Art Museum in Oregon. While the decision to anonymously lend the painting to the Museum may appear surprising at first, the Portland Art Museum regularly attracts recently auctioned items to display in its galleries. The decision for collectors to regularly lend to the Portland Art Museum originates from a reason more basic than the Museum’s location, collection, or galleries – it is based on a tax break.

Although Ms. Wynn has not released the tax plan for Three Studies of Lucian Freud, her tactical decision to show the triptych in Oregon instead of shipping it to her Las Vegas home from Christie’s in New York likely helped her to avoid use taxes in her home state, which, in her case, may have reached $11 million. Use taxes incur when an individual sends home an out-of-state purchase. By shipping recently purchased artwork out of state immediately, the collector avoids the state’s sales tax, but use taxes are in place to make up for that loss. Still, a collector can avoid their home state’s use tax by utilizing a little known loophole. Usually, artwork is subject to a use tax in the state where it arrives after it is shipped from its purchase location, but five states—Alaska, Delaware, Montana, New Hampshire, and Oregon—do not have a use tax. In contrast, California, which established a use tax in 1935, has a use tax rate of 8.75% and Nevada, which established a use tax in 1955, has a use tax rate of 6.85%.  By the time the artwork arrives in the owner’s home state, it has already been “used” in another state, and thus no use taxes are owed. This clever tactic allows art buyers, who sometimes pay tens of millions for artwork, to relocate the artwork to their private residence tax-free.

Similar to the Portland Art Museum, museums in tax-free use states often encourage collectors to loan recently purchased artwork before it disappears into private homes. For example, the Jordan Schnitzer Museum of Art at the University of Oregon in Eugene, Oregon, has experienced such an influx of recently auctioned artwork that they established a program called Masterworks on Loan, which “invites private collectors to share their masterworks with our constituents.” With a nod to the favorable tax breaks provided by Oregon, the Museum’s website proclaims, “Some lenders may receive tax benefits for participating in our Masterworks on Loan program and should consult a tax advisor to learn more.”

Francis Bacon, THREE STUDIES FOR A PORTRAIT OF JOHN EDWARDS (1984)
Francis Bacon, “Three Studies for a Portrait of John Edwards” (1984)

While the decision for an art buyer to exhibit their purchase at a small museum in a tax-free use state may at first seem like an innocuous opportunity for the expansion of arts education, there is a tension between that idea and the harm to the buyer’s home state that usually receives the revenues from use taxes. Upcoming auctions will provide the art world with the opportunity to see if this tax loophole becomes more prevalent. If it does become popular, individual states may be motivated to change their tax code to make up for the loss that is incurred when art is first displayed in a tax-free use state. Later this month, Christie’s in London will auction another triptych by Francis Bacon, entitled Three Studies for a Portrait of John Edwards (1984), estimated sales value between $4.4 and 5.8 million If purchased by an American collector, it is easy to imagine that this work, too, may head to an exhibit in Oregon shortly thereafter.

Sources:

About the Author: Emma Kleiner is a student at Stanford Law School.

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

The Shifting Sands of Art Authentication: As Calder Foundation finds itself in court again who will have the last word regarding authentication?

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By Irina Tarsis, Esq., Center for Art Law

Nils Elias Christoffer von Dardel, "Columbus’ egg" (1924)
Nils Elias Christoffer von Dardel, “Columbus’ egg” (1924)

On 3 March 2014, a well-intentioned Bill to amend the New York Arts and Cultural Affairs Law was introduced in the New York State Assembly. If voted in, the “act to amend the arts and cultural affairs law, in relation to opinions concerning authenticity, attribution and authorship of works of fine art the proposed amendments arguably would protect art authenticators from frivolous or malicious suits brought by art owners.”  For the purposes of the Bill, “art authenticator” is someone who provides authentication of artwork “through documentation, stylistic inquiry, and/or scientific verification.” As proposed, it offers enhanced protection to individuals and entities “recognized in the visual arts community as having expertise regarding the artist” in respect to whose work the authenticator is rendering an opinion. The Bill will prevent collectors from using the legal system to strong-arm art experts into giving favorable opinions about authorship, attribution or authentication. In fact, the Bill may be a response to the increased number of suits brought against art foundations and against art historians as well as to the recent trend of the US- based art authentication committees to disband. (See for example The Keith Haring Foundation to Disband its Authentication Committee and Authentication Committees Disband: Who’s Next?).

Ultimately, it does seem unfair to penalize art historians for withholding favorable opinions in cases where they challenge attribution or deem works of art not genuine. The Bill is intended to allow authenticators and art historians, who have increasingly become reluctant to provide professional opinions about authentication, to have open scholarly discussions debating if suspect or unconfirmed objects deserve to be included in artist catalogues raisonnés and their known oeuvres.

Art authenticators provide an important service not only to the humanities but also to the art market. Indeed, the art market has long relied on art historians and authentication committees to flag suspect art and pass judgment about authenticity. However, neither authenticators nor art historians are able to access the insurance they require to protect them for providing their professional opinion. Protection readily available for malpractice and erroneous professional activity appears to be reserved for professions involved in medicine or law. As a result from the lack of protection, the threat of legal action has driven some art authenticators out of the business.

Authenticators in the United States seem to have been more affected by legal actions than the authenticators in the European authentication markets, where, direct descendants of artists are entitled to issue certificates of authenticity or bring about destruction of works deemed inauthentic. (See for example, Authenticating Picasso and Burning Fake Chagalls). To the detriment of the art community, it has become a common practice for authentication committees in the United States to deny providing any reasoning for determining when certain works of art are deemed to be fake or dubious. This is premised on the argument that if authenticators reveal what red flags triggered their suspicions, the sly art forgeries would simply incorporate mechanism and compensate for the deficiencies in the subsequent forgery, thus making the work of art experts harder still. Incidentally, just this week the man responsible for selling fakes to the Knoedler Gallery was indicted in Spain and was quoted as saying that art works smelling of tea leaves should raise alarm bells as tea bags are frequently used by art forgers. Letting forgers know what to look for, makes the forgery market easily accessible. (For more, read Indictment Details How to Forge a Masterpiece.)

Alas, just as “to err is human” so is making false statements for various disreputable reasons. Even artists themselves have been known to refuse providing authenticity of their own works just to spite the legal owner of a genuine artwork. (See for example Valentina Favero, “Art Law and Authenticity: a critical analysis of some issues from Defendants v. Vandergucht”).

Unlike forensic science, authentication based on connoisseurship is subjective, and it may change over time based on subsequent studies and conclusions. While auction houses offer attribution warranty guaranteeing that within a set period of time after sale, a transaction may be rescinded if attribution of the work definitively changes, art collectors are not 100% protected from the adverse economic effects of attribution revisions that an authentication committee may issue vis-à-vis an object. This occurred in the famous “Double Denied” case involving a silkscreen attributed to Andy Warhol. The Warhol Authentication Committee rejected authenticity twice, even though the silkscreen had been authenticated prior to those 2002 decisions. See Simon-Whelan v. The Andy Warhol Found. for the Visual Arts, No. 07 Civ. 6423 (LTS) (S.D.N.Y. May 26, 2009).

The Bill is very likely to pass in New York in 2014, given the nearly unanimous support it has garnered among various Bar Associations and arts organizations, including appraisers’ and art historians’ organizations. Just in time, perhaps, the recently filed case brought by Gerard Cramer against the Calder Foundation brings a challenge on the very ground that would require heightened standards or pleading under the proposed law.

In 1948 Alexander Calder (1898-1976) an internationally renowned and universally beloved master of sculptures, sold one of his mobiles to Gerard Cramer, a gallery owner in Switzerland. Subsequently, this work entitled “Eight Black Leaves,” appeared in various catalogues, its authenticity remaining unchallenged. According to the complaint, Cramer and Calder remained on amicable terms and corresponded for years after the sale.

The Calder Foundation is a New York based nonprofit, which, according to its mission, catalogues Calder’s works and makes them available to the public for inspection, research and educational purposes. There is a list of Calder’s works available on the Foundation’s website. While the Foundation never completed a catalogue of Calder’s works, it has established a practice of issuing inventory numbers to the works it rules to be authentic.

Following Calder’s death, his sculptures remained popular and desirable. In 2012, Cramer heirs contacted Christie’s auction house indicating they wanted to consign “Eight Black Leaves” for sale. The auction house apparently agreed to accept the work on consignment subject to the issuance of an inventory number by the Calder Foundation, as is the common practice in the art market regarding Calder works.

According to the complaint “it is a well-known fact in the marketplace for Calder works, and works without an inventory number issued by the Calder Foundation cannot be sold as authentic Calder work.” Instead of giving the work a status of a complete work, the Foundation labeled it a fragment. The sales have been blocked because the Foundation alleges that “Eight Black Leaves” are a segment of a larger artwork.

On 28 February 2014, Patrick Cramer, co-administrator of the Estate of Gerard Cramer, brought a suit against the Calder Foundation, as well as individual Calder descendants, alleging that defendants were blocking a sale of their mobile. The wrongful act alleged in the complaint is described as “arbitrary determination of authenticity.” The Complaint states that the Foundation has “compromised its scholarly integrity” by mislabeling “Eight Black Leaves” as a fragment and this act is only one in a bigger scheme to control the market for Calder works. This and other decisions made by the Calder Foundation have allegedly stemmed from conflict of interest and self-dealing, because the Foundation has its own 22,000-item Calder collection, which it deals.

The Plaintiff accused the Foundation of product disparagement, anti-trust violations and other wrongdoings. (See a related case Thome v. Alexander & Louisa Calder Found., No. 600823/07 (N.Y. Sup. Ct. 2008); aff’d 70 A.D.3d 88 (N.Y. App. Div. 2009)).

Why are there more and more cases being filed against authenticators and by authenticators, such as the recently dismissed Calder Estate claim and the pending case filed by the Basquiat sisters? (For details, see Calder Estate Fraud Claim Dismissed or Basquiat sightings, or Case Review: Heriveaux v. Christies, Inc.) The whopping prices that certain twentieth century art giants are netting at auction have attracted a new breed of art buyers – those who purchase art for the purpose of investment. These investors are interested in safeguarding their investments with more just than uncertain scholarly opinion. If auction houses and galleries refuse to sell, and collectors hesitate to buy art works attributed to the blockbuster names unless there is an authentication certificate included in each transaction, an opinion has to be ventured and a certificate signed. This exercise, in theory should be unbiased and free from threat of liability.

As a justification for the new Bill, its drafters have noted that:

 “the role of authenticators as drivers of the art market cannot be overstated. Art authenticators reduce the risk of counterfeits and imitations flooding the art market that could potentially devalue the work of millions of artists. In recent years, the work of authenticators has come under pressure from meritless lawsuits against those who render opinions in good faith. Such defense of expensive and frivolous lawsuits have left many in the industry reluctant to lend their expertise in authenticating art works. This bill would clarify the role of art authenticators to ensure that those who practice their profession, in good faith, would be afforded protections under the law to ensure that only valid, verifiable claims against authenticators are allowed to proceed in civil court.”

The real threat of litigation that may result in case authentication is challenged or revoked necessitates a scapegoat; a scapegoat that the new Bill promises to prevent art historians from becoming. Unfortunately, the possibility of malfeasance by economically motivated authentication entities remains intact. While the proposed Bill tries to address possible conflicts of interest facing authenticators by indicating that entities with a financial interest in the transaction would not receive enhanced protection from the new law, this provision would only ensure that authentication committee members would not be protected if they provide authentication to the works they own and/or are selling.

However, it is important to note that there is a difference between the ‘financial interest’ detected in a specific work being authenticated in order to benefit from the sale and a ‘financial interest’ in other works of the same artist that may explain false denouncements of other works to make them unsellable, or remove competition. There is a reason why even the IRS recognized that bulk discount is merited on inheritance tax owed by heirs of a given artist because if all of the works in the studio were to be sold at once, the uptake on the supply side, would flood the market and result in a reduced demand for the works. Thus, one can reasonably argue that a foundation that has an authentication committee while capable of selling artworks by the same artist on the open market does have a financial interest in controlling the size of the pool, and thus the market and is more likely to find something wrong with the work submitted from the outside.

Cramer is represented by attorneys from Eaton & Van Winkle LLP, Michael A. Lacher and Adam J. Rader. An answer or a motion from the Foundation in response to the complaint is expected by May 8, 2014.

In conclusion: Caveat emptor! Again and always, because the more things change, the more they stay the same.

 

Select Sources:

  1. Complaint, Cramer v. Calder Foundation, et al, (S.D.N.Y. Feb. 28, 2014);
  2. Valentina Favero, “Art Law and Authenticity: a critical analysis of some issues from Defendants v. Vanderguchtdiscussing Arnold Herstand & Co. v. Gallery: Gertrude Stein, Inc, 211 A.D.2d 77 (1995), available here.
  3. Simon-Whelan v. The Andy Warhol Found. for the Visual Arts, No. 07 Civ. 6423 (LTS) (S.D.N.Y. May 26, 2009)
  4. Thome v. Alexander & Louisa Calder Found., No. 600823/07 (N.Y. Sup. Ct. 2008); aff’d 70 A.D.3d 88 (N.Y. App. Div. 2009)

 

About the Author: Irina Tarsis, Esq., specializes in art law, provenance research and cultural heritage law. She may be reached at itsartlaw@gmail.com.

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

 

Restrictions on Ivory in the United States, U.S. Fish and Wildlife Service Director’s Order No. 210

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By Chris Michaels, Esq.

Piano Keys, by Texasgurl
Piano Keys, by Texasgurl

The U.S. Fish and Wildlife Service recently enacted an order seeking to restrict the market for ivory in the United States; an action that may have unintended consequences. For example, in 2012, The New York Times ran an article noting that the market for upright pianos has plummeted in recent years. Formerly considered a “middle-class must-have” the cost of upkeep, coupled with the low cost of new electronic keyboards and foreign-manufactured uprights, caused many owners to discard their older upright pianos. Some of these relics of the past were outfitted with ivory – a material traditionally used to construct the keys. The resale of such ivory may now be subject to the newly enacted order.

While restrictions against the use and trade of ivory have been in place for years, there is an increased demand for ivory in emerging markets like China. In response to this trend, on 25 February 2014 the U.S. Fish and Wildlife Service (the “Service”), through Director Daniel M. Ashe, enacted Director’s Order No 210: Administrative Actions to Strengthen U.S. Trade Controls for Elephant Ivory, Rhinoceros Horn, and Parts and Products of Other Species Listed Under the Endangered Species Act. The Order was enacted to protect endangered species, namely African elephants, by regulating the ivory market in the United States. Specifically, it calls for strict enforcement of existing restrictions on the import, export, and interstate sale of ivory.

At first blush, the Service’s goal of protecting endangered animals through strict regulation of the market seems relatively straightforward. What is less straightforward, however, is the effect the enforcement of the restrictions will have on the sale of ubiquitous objects such as old musical instruments, chess sets, handguns, and other items that contain ivory. Until the new Order was enacted, these types of items could be sold within the United States with little concern for intervention by authorities. With the new Order in place it will become much more difficult to sell these items.

Pursuant to the Order, the interstate sale of ivory is strictly prohibited unless accompanied by an Endangered Species Act (“ESA”) permit. Transport is nonetheless allowed if the item can be qualified as “antique.” To comply with the “antique” exception, the importer, exporter, or seller must show that the object meets the following qualifications. The item:

  • Must be 100 years or older;
  • Must be composed in whole or in part of an ESA-listed species (of which there are approximately 2,140 endangered or threatened species under the ESA);
  • Must not have been repaired or modified with any such species after December 27, 1973 (the ESA was signed in to law by President Nixon on December 28, 1973); and
  • Is being or was imported through an endangered species “antique port.”

The specific “antique ports” include the following thirteen locations: Boston (MA); New York (NY) Baltimore (MD); Philadelphia (PA); Miami, (FL); San Juan, (PR); New Orleans, (LA); Houston, (TX); Los Angeles, (CA); San Francisco, (CA); Anchorage, (AK); Honolulu, (HI); and Chicago, (IL).

The ability to prove the above-mentioned criteria prior to a sale are extremely slim since the majority of antique ivory items lack provenance records.

In addition to restricting sales, the Order restricts the sale of musical instruments using ivory and also makes them difficult to import into the United States. The Order sets forth the following criteria that must be established in order to legally import the item:

  • It must have been legally acquired before February 26, 1976;
  • It must not have been subsequently transferred from one person to another person in the pursuit of financial gain or profit since February 26, 1976;
  • The importer must qualify for a Convention on International Trade in Endangered Species of Wild Fauna and Flora (“CITES”) musical instrument certificate; and
  • The musical instrument containing elephant ivory must be accompanied by a valid CITES musical instrument certificate or an equivalent CITES document that meets the requirements of CITES Resolution Conf. 16.8.

Similar restrictions are now in place for objects containing ivory imported for traveling exhibition purposes. In other words, museums and foundations seeking to exhibit collections with ivory will likely find themselves struggling to meet the requirements set out in the Order. In fact, they are more likely to opt out of exhibiting objects containing or made of ivory to avoid incurring additional costs and risks associated with the exhibition.

The sentiment behind the Order is certainly praiseworthy, but it remains to be seen whether the overall chilling effect on the market for ivory in the United States will actually curb the poaching of African elephants. It surely will not have a chilling effect on continued demolition of antique pianos; however, art loans are another matter altogether.

Sources:

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 @CMichaels88.

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

Getty Seeks to Quiet Title of the Ansouis Diptych: Back to Legal Technicalities or End of an Era?

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By Emma Kleiner

"The Stigmatization of St. Francis, and Angel Crowning Saints Cecilia and Valerian" (The Getty Museum)
“The Stigmatization of St. Francis, and Angel Crowning Saints Cecilia and Valerian” (The Getty Museum)

Employing a popular yet controversial legal tactic, in September 2013 the J. Paul Getty Museum (Getty), represented by Munger, Tolles & Olson LLP, sued in federal court in California seeking an order to quiet title to The Stigmatization of Saint Francis and The Crowning of Saints Cecilia and Valerian. Typically, this type of action is instituted to assert a party’s title to a piece of property, thus preventing claims by others to the property. If successful, any future legal action against the Getty by Geraud Marie de Sabran-Ponteves, the heir to the original owner of the work, would be barred.

In summer 2012, the counsel for Geraud Marie de Sabran-Ponteves, a French citizen, informed the Getty that its client was claiming to be the sole owner. Defendant Geraud Marie de Sabran-Ponteves alleged the artwork belongs to him as a component of a “long-running inheritance dispute”— a claim that the Getty asserts is erroneous. This lawsuit may be a test case for resuscitating technical defenses museums use seeking to keep works with disputed histories within their collections. Legal arguments like these are based on technicalities rather than the merits of a case, and the use of such arguments has a divisive history in the context of art title disputes.

For three decades, the Getty has prized The Stigmatization of Saint Francis and The Crowning of Saints Cecilia and Valerian, also known as the Ansouis Diptych, for being “a beautiful and well-preserved and devotional object” and “[u]nique in subject.”The Ansouis Diptych, currently valued at approximately $2.7 million, has been alternately attributed to a late fourteenth  century Avignon painter and to an early fourteenth  century Naples painter. The Getty purchased this work in 1986 from the Wildenstein & Company gallery, which in turn had purchased it five years earlier from the Sabran-Ponteves family. The Sabran-Ponteves family owned the Ansouis Diptych for generations. In fact, the work is traditionally interpreted as featuring Sabran-Ponteves’ ancestors in one of the panels. Geraud Marie de Sabran-Ponteves asserts that the sale of the artwork to the Wildenstein & Company gallery was unauthorized because the seller, his brother Charles Elzéar, offered it to the gallery without acquiring the consent of the other four siblings.

The Getty, however, is seeking an order to quiet title based on its purchase of the work in good faith and its display of the artwork prior to any legal claims arising. Furthermore, the Getty asserts that Geraud Marie de Sabran-Ponteves’ claims are barred by California’s statute of limitations. According to the Getty, Sabran-Ponteves was aware of the artwork’s location as early as 1987; he even contacted the Getty staff in 1999 about the artwork for the purpose of valuing his family’s estate. To sue in California within the statute of limitations, Sabran-Ponteves needed to bring suit within three to six years of locating the artwork, which he failed to do. In the alternative, the Getty asserts that it owns the artwork by adverse possession.

The tendency for a museum to seek an order to quiet title to an artwork, and the success of doing so in terms of outcome and public opinion, has waxed and waned over the last decade. It is informative to look at how museums have approached similar disputes regarding Holocaust-era assets because the legal techniques discussed above are frequently utilized in such lawsuits. For instance, in 2006 the Toledo Museum of Art filed suit to quiet title of Street Scene in Tahiti by Gaugin. Similarly, in 2006 the Detroit Institute of Art filed suit to quiet title of The Diggers by Van Gogh. In 2008 the Museum of Modern Art and the Solomon R. Guggenheim Foundation filed suit to affirm their respective ownership of Boy Leading a Horse by Picasso and Le Moulin de la Galette by Picasso on the basis that the original owners voluntarily sold the artworks. In 2009 the Museum of Fine Arts, Boston invoked the statute of limitations to affirm ownership of Two Nudes (Lovers) by Kokoschka, and the matter was resolved without reaching the merits of the case. Finally, in 2011, the Museum of Modern Art used a similar argument to affirm ownership of three works by Grosz. The tactical decision to use actions to quiet title and invoke statutes of limitations is readily seen through these examples, as in the dispute with Sabran-Ponteves.

Many museums, including those mentioned above, have received harsh criticism for opting for preemptive legal measures to settle title disputes, instead of conducting provenance research prior to the acquisition of the artwork or working with the individuals claiming rightful ownership of artwork. For example, Charles Goldstein and Yael Weitz, of Herrick, Feinstein LLP (NYC), write: “[M]useums, as institutions that function in a climate of ethical responsibilities, owe a duty to the public to maintain the integrity of their institutions,” which includes allowing for cases involving artworks with disputed histories to be litigated on the merits. Still, other scholars and practitioners argue that actions seeking to quiet title of artwork or actions based upon statutes of limitations are appropriate. For example, not all claims made by heirs of the former owners of artwork are meritorious, and such ought to be dismissed at an early stage of the dispute both to conserve museum resources and reduce the court docket. Furthermore, museums have the obligation to “take all reasonable steps to protect the assets they hold in trust,” including bringing suit to quiet title or invoking statutes of limitations. While scholars often times focus the discussion around Holocaust-era asset lawsuits, this debate readily reaches all situations in which a museum attempts to argue the technicalities rather than the merits of a case.

The controversy surrounding filing suit to quiet title and invoking statutes of limitations continues to influence the manner in which a museum chooses to claim ownership of contested works. In this case, the Getty already holds a controversial reputation due to its past legal problems and public repatriation battles. Now, the Getty took a public relations gamble in attempting to utilize the legal system to bar Sabran-Ponteves from bringing suit against it. Thus the anticipated resolution of this lawsuit by Judge Gary Feess may shed light on whether these legal tactics will continue to be favored or disfavored by museums.

Sources:

About the Author: Emma Kleiner is a student at Stanford Law School.

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

Gurlitt Saga Continues: U-Turn or Rotary?

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By Steffanie E. Keim, Esq. 

Children should not be punished for the mistakes of their parents. Sometimes it gets difficult to determine where mistakes of the parents end and new mistakes, those by their children, begin. The international art community is continuing to look at the Gurlitt saga with great interest, not the least because of the mistakes that have been made in handling the art collection that Cornelius Gurlitt inherited from his father Hildebrand Gurlitt, the German art historian and art dealer who traded in “degenerate” and other art during the Nazi era, but also because of the glacial pace the entire process by the authorities has taken. More than 1,000 works of art were seized in the Munich apartment of art collector Cornelius Gurlitt in 2012 and the ongoing controversy surrounding the case has been widely publicized and reported on since November 2013. (See our original report; as well as an update WhoisGurlitt.info).

Now, there seems to be some new movement in the controversy regarding Gurlitt’s art collection. The German television news service Tageschau reported that Christoph Edel, the court appointed custodian of Gurlitt announced that his client plans to return all works of art which have been stolen or looted from Jewish owners. Concerned observers, including Nicholas O’Donnelle, a litigator and editor of the Art Law Report have already asked who will draw the line between what constitutes “stolen” and “looted” works and those that were just taken or sold under duress.

An agreement in the ongoing negotiations with the descendants of the Jewish art dealer Paul Rosenberg regarding the return of the portrait “Sitzende Frau” (Sitting Women) by Henri Matisse, which is valued in excess of $10 million, and is in custody of the Office of the Public Prosecutor in Augsburg, is expected shortly.  This work of art was looted by the Nazis and was part of the art collection of Herman Goering before it eventually came into possession of the Gurlitt family.  Rosenberg himself and his heirs have pursued the restitution of Rosenberg’s art collection since 1945 and been able to reclaim and re-purchase scattered pieces from his pre-war collection.

According to Edel, further restitution can be expected in the coming weeks as Gurlitt has apparently expressed that he has no interest in retaining art works which have been looted and has given the custodian full discretion regarding the return of works which are verifiably looted. Dr. Hannes Hartung, who had been in charge of negotiating possible restitutions was relieved from his mandate on 26 March 2014, with immediate effect (as reported by the Wall Street Journal on 28 March 2014 by Edel) and future claims are to be are directed to Gurlitt’s court appointed custodian Edel.

In connection herewith it has also been announced, that the collection found at Gurlitt’s Salzburg house, which was initially estimated to contain sixty works is now estimated to contain 238 nineteenth century and classical modernity works, including oil paintings, drawings and sculptures by Monet, Renoir, Manet, Gauguin, Toulouse- Lautrec, Liebermann and Cézanne as well as long missing painting by Jean Desire Gustave Courbet “Portrait of Monsieur Jean Journet” (1850). The art trove has been removed from Gurlitt’s Salzburg house at Carl-Storch-Strasse 9, which was listed as his main residence with the registry office and were he resided for many years, and where he and his art work went as unnoticed by his Salzburg neighbors and galleries as he has been in Munich, where he lives in an apartment, which he shared with his mother until her death.  The Salzburg home has been uninhabited and neglected for years, as were the paintings, drawings and sculptures hidden inside.  The art works, some of which are in poor condition have been removed from the premises for safekeeping and cleaning and are currently stored at an undisclosed location in Austria.

Gurlitt art works stored in secret location (still from the news reel).
Gurlitt art works stored in secret location (still from the news reel).

Gurlitt’s statements and actions continue to be ambiguous and even contradictory.  While he has given a group of journalist access to the art trove and allowed for filming and photographing of some works he continues to refuse to release a list of the collection found in his Salzburg residence.  Although he has vowed to return stolen or looted art works, Gurlitt currently insists on retaining experts himself to research the provenance of the works discovered in Salzburg and promises to publish the findings.  However, the identity of the experts, the timing of their retention, and when the results of such provenance research would be released to the public remains unclear and would be entirely in Gurlitt’s discretion.

Rüdiger Mahlo, the representative of The Jewish Claims Conference in Germany and other Jewish organizations have requested that independent researchers determine the provenance of the works and have insisted that the art trove be made public so Holocaust survivors or their heirs can file claims.

The reactions to and assessments of Gurlitt’s motives in agreeing to return stolen and looted artworks to the heirs of the rightful owners are polarized, as some believe that it might be an expression of goodwill while others believe he is yielding to public pressure or that he may not be as forthcoming as he claims to be since by controlling the process he may very well be controlling the outcome.
It remains to be seen if actual progress is being made in this case or whether it is merely the debate that has shifted from Gurlitt questioning whether he should return any works of art to his pledge to return works of art he considers stolen or looted.  As the story continues to unfold, the chain of events demonstrate that predicting Gurlitt’s next steps remains as elusive and unknown as the man himself and his collection have been for the past decades. For now the collection found and seized in Gurlitt’s Munich apartment in March 2012 demonstrate the contrariness of Gurlitt – while part of the collection has been digitized and posted on the German website lostart.de, it is being juxtaposed by charges filed by Gurlitt claiming the illegal seizure of this collection.

Senior Public Prosecutor in Augsburg, Reinhard Nemetz has made clear however, that while cooperation and reparation by the suspect are being taken into consideration, the investigation will continue and that no plea bargain will be accepted in exchange for restitution of art works.

Postscript: The public rediscovery of the Gurlitt collection raised many questions about how German civil and criminal laws deal with restitution matters. Further, the ongoing search for thousands of missing works has even prompted a new wave of provenance research investigations. Sadly, governments continue to make mistakes when faced with and concerning restitution issues. The Bavarian Department of Justice has admitted to making mistakes in response to the tedious piecemeal handling of the Gurlitt case. Michael Grauel, the Head of the Cultural Committee of the Bavarian Parliament declared that in hindsight things could have been handled differently and better.  While the remarks were introspective, the complexity of the case and the fact that legal authorities are not provenance experts was also noted.  According to Grauel a simultaneous search of the two Gurlitt’s residences, one in Munich, Germany, and the other in Salzburg, Austria, was planned at the time the initial search in Munich took place.  However, the prosecutor’s office in Salzburg denied the German petition for international administrative assistance in the search claiming at the time they received the request that the minimum amount of 100,000 Euros required to authorize such international administrative assistance had not been established.

In a related decision, the Bavarian Higher Administrative Court denied the request for temporary relief from a journalist who had sought information about the Gurlitt collection. According to the order of March 27th, 2014 [Bayerischer Verwaltungsgerichtshof, Beschluss vom 27.03.2014 - 7 CE 14.253], the prosecution in the Gurlitt case will not be “required to hand over a full list of the artworks as well as their dimensions.” since, the public interest does not sufficiently outweigh the confidentiality interest of Gurlitt in his collection and thus does not merit a grant of the temporary injunction. While to-date, less than half of the Gurlitt collection has been digitized and made available to the public via lostart.de website according to the court the journalist does not suffer unreasonable harm by awaiting a decision in the main proceedings. While this decision certainly is frustrating, since so long as the entire collection is not listed and reviewed by provenance researchers, it will be hard to guarantee that all artworks with questionable provenance will have an opportunity to return to their rightful owners, it is a very fact specific decision and faces the heightened pleading burdens of summary proceedings. This decision however does not preclude a different outcome in the main proceedings or even in a request for temporary relief by a different plaintiff with a legitimate interest (possibly the owner of an art work already listed on the lostart.de website who may have further claims regarding art works not yet listed.)

Sources:

About the Author: Steffanie E. Keim is admitted to the bar in New York and Germany and is practicing law and pursuing her interest in art law in New York. She may be reached at 917-669-2514 or steffanie.e.keim@hotmail.com

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

Basquiat sightings, or Case Review: Heriveaux v. Christies, Inc.

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By Chris Michaels, Esq.

Born in Brooklyn, NY in 1960, Jean-Michel Basquiat was a contemporary American artist, who started his career as a graffiti artist in the mid-1970s working in and around the Lower East Side of Manhattan. He gained popularity in the art world in the early 80s when his first solo art show opened in 1981. It was also in 1981 that Artforum magazine published a feature on Basquiat, effectively bringing his work into the mainstream. Basquiat’s art received widespread critical acclaim and in 1985 The New York Times Magazine featured the artist on their cover. Three years later, Basquiat died of a heroin overdose in 1988 at the age of 27. His popularity continued and grew after his death; today Basquiat’s work continues to bring in huge sums at auction. For example, in May of 2013 his painting, Dustheads, sold for $48.8 million at auction.

Basquiat’s “Dustheads,” which recently sold at auction on May 15, 2013 for $48.8 million:
Basquiat’s “Dustheads,” which recently sold at auction on May 15, 2013 for $48.8 million.

After the artist’s death, his estate established a committee to review and determine authenticity of works thought to be Basquiat. The authentication work was directed by the artist’s father, Gerard Basquiat, with assistance from a former curator of American Art at the Whitney Museum. As of September 2012, the authentication committee disbanded. (Read our report on the phenomenon of closing authentication committees here.)

Basquiat’s estate is currently administered by his sisters, Jeanine Basquiat Heriveaux and Lisane Basquiat, who in their roles as administrators are currently suing the Internal Revenue Service, alleging that their brother’s estate was overvalued. (Read: Untitled but Taxable.) The sisters took over the suit, which was originally filed by their father Gerard, after Gerard died. The origins of the IRS suit began when Sotheby’s originally valued Basquiat’s mother’s half of the estate at $36 million. Death taxes were paid by Gerard using the Sotheby’s valuation of the estate. The IRS, however, later valued the estate at $138 million, significantly increasing the amount of death taxes owed by the estate, and imposing nearly $2 million in penalties. The IRS suit is on the docket for a hearing by the United States Tax Court in April of 2014.

With April only weeks away, on 4 March 2014, Basquiat’s sisters filed a claim against the auction house Christie’s, Inc. (“Christie’s”), alleging it was attempting to sell inauthentic Basquiat items. The Complaint concerns publication Christie’s 148-page sales catalogue entitled “Jean-Michel Basquiat: Works From The Collection of Alexis Adler.” The catalogue was published in mid-February 2014 and was created to publicize the auction house’s March 2014 sale of approximately 50 items that Christie’s attributed to/listed as created by Basquiat.

UNTITLED (FLAG), one of the works attributed to Basquiat which was to be sold by Christie's before the case.
UNTITLED (FLAG), one of the works attributed to Basquiat which was to be sold by Christie’s before the case.

The source of the collection featured in the catalogue purportedly comes from Alexis Adler, a woman with whom Basquiat had a relationship and lived with for time between 1979 and 1980 in New York. The collection that Christie’s accepted on consignment for sale was allegedly left behind by Basquiat in the apartment he shared with Adler.

Prior to the catalogue being published, in 2007, Adler attempted to have seven items in her possession authenticated by the Estate’s Authentication Committee. At the time, six out of the seven items were, in fact, determined to be authentic Basquiat works. Nevertheless, according to the Complaint, at no time did Adler or Christie’s attempt to authenticate the rest of the items in her collection.

If, by way of example, Christie’s had in fact submitted the collection to the Estate for authentication and it declined to authenticate some of the items, a proposed New York State bill, if passed, would afford the Estate greater protection if Christie’s then decided to sue for improper/negligent denial of authenticity. Proposed New York State legislation, §13.04 of the New York Arts and Cultural Affairs Law, outlines specific protection for people or entities that qualify and are sued as “authenticators.” Under the bill, an “authenticator” is defined in two ways: 1) “a person or entity recognized in the visual arts community has having expertise on the artist or work of fine art with respect to whom such person or entity renders an opinion in good faith as to the authenticity, attribution or authorship of a work of fine art”; or 2) “a person or entity recognized in the visual arts community or scientific community as having expertise in uncovering facts that serve as a direct basis, in whole or in part, for an opinion as to the authenticity, attribution or authorship of a work of fine art.”

Notably, under the proposed bill, an authenticator shall not include “a person or entity that has a financial interest in the work of fine art for which such opinion is rendered. . . .” The proposed bill does, however, allow for an authenticator to be compensated for their efforts relating to their authenticating a work.

Untitled (We'll Get You Next Time), work attributed to Basquiat, listed in the Christie's catalog.
Untitled (We’ll Get You Next Time), work attributed to Basquiat, listed in the Christie’s catalogue.

Under the proposed bill, if a suit is brought against an authenticator that relates to the authenticator’s opinion concerning a work of art, the claimant must: 1) specify with particularity in the complaint facts sufficient to support each element of the claim or claims asserted; and 2) prove the elements of the claim or claims by clear and convincing evidence. As further protection for authenticators in civil claims, if the authenticator prevails in the action, he, she, or it may recover reasonable attorney’s fees, costs and expenses.

When the catalogue for the online auction was published, however, a notice on the last page was included which read, “All artwork by Jean-Michel Basquiat: © 2014 the Estate of Jean-Michel Basquiat/ADAGP, Paris/ARS, New York.”

In the Complaint, Basquiat’s sisters allege that Christie’s included the above-mentioned notice to deceive potential bidders into thinking that all of the items for sale were authenticated by the committee. In addition, plaintiffs/or their first names allege that Christie’s included the notice to increase the auction prices in order to maximize its revenue from the sale. At the time, the Complaint noted that allowing the sale to continue would serve to damage the Basquiat Estate by putting into the marketplace items of questionable authenticity, which will in turn decrease the value of works actually created by Basquiat.

The plaintiffs in this case are seeking, among other things, a minimum of $1 million in damages and injunctive relief restraining Christie’s from using the Estate’s name in any credits without the Estate’s prior written consent. Plaintiffs’ claims for relief include, but are not limited to, false endorsement, false advertising, deceptive trade practices, and unfair competition.

Plaintiffs are represented by Cinque & Cinque, P.C. law firm in New York. Christie’s has yet to enter its appearance. However, on March 9, 2014, Christie’s postponed the Basquiat auction pending the outcome of this case. No amended complaint was filed as of March 24, 2014. An Initial Pre-Trial Conference is scheduled for May 2, 2014.

Sources: 

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 @CMichaels88.

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

NY City Bar tackles “Hot Topics in Art Law 2014″

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By Megan E. Noh, Esq.

On  12 March 2014, the New York City Bar Association hosted a well attended panel on “Hot Topics in Art Law 2014,” moderated by the chair of its Art Law Committee, Dean Nicyper (Flemming Zulack Williamson Zauderer LLP).  The panel was comprised of three speakers:  Judith Bresler (Withers Worldwide; author of the treatise Art Law: The Guide for Collectors, Investors, Dealers and Artists), Stacy Lefkowitz (Volunteer Lawyers for the Arts), and Howard Spiegler (Herrick, Feinstein).

Judith Bresler addressed the context for the proposed addition of § 13.04 to New York’s Art and Cultural Affairs Law, explaining that an increasingly litigious environment has a chilling effect on art experts and authenticators. Further,  when these individuals are afraid to render their opinions of authenticity, it has a chilling effect on transactions and the marketplace, inviting fakes and forgeries to enter into the stream of commerce. The proposed legislation, designed to provide greater protections for authenticators, was approved by the City Association of the Bar in January 2014, and introduced as a Bill on 11 March 2014. (Text of the proposed Bill is available online).  The Bill defines  an “authenticator” as a person who is recognized as having expertise regarding the artwork in question, who has rendered an opinion of authenticity  in good faith, and who does not not have a personal financial interest in the artwork itself or in the underlying transaction (other than being paid for his/her services in rendering the opinion).  If enacted, § 13.04 would add three forms of protection for authenticators: 1) a plaintiff suing an authenticator would be required to specify the facts supporting each part of each claim (exposing frivolous claims for their lack of merit), 2) the plaintiff would be required to prove his/her claim by clear and convincing evidence (a higher burden than preponderance), and 3) the authenticator could recover legal fees if successful in defending the claim. 

Next, Stacy Lefkowitz spoke on the topic of the law applicable to art consignment transactions. She explained a clear divide in the law: artists consigning their own work receive the protection of NYACAL 12.01 (amended in 2012, partially in response to the Salander O’Reilly fraud, to provide more “teeth” through stronger definitions and enforcement provisions with cross-references to the Estates, Powers & Trusts Law, as well as the requirement of much more specific waiver language), whereas artists consigning artworks by other artists and non-artists consigning artworks receive the lesser protection of the Uniform Commercial Code. Lefkowitz also discussed the subject and jurisprudential interpretation of due diligence required by merchants acting as purchasers of artwork, including some of the common “red flags” that may suggest that a transaction is not commercially reasonable.  Finally, Lefkowitz emphasized the ability of consignors to file UCC-1 financing statements as a proactive protection, as when properly filed, such a statement will ensure that a consignor’s interest supersedes that of other creditors.

Howard Spiegler then reviewed recent developments in repatriation and restitution, including Cambodia’s recovery of statues from Sotheby’s (through settlement of a forfeiture action) and the Metropolitan Museum of Art (by agreement), as well as the December purchase by the Annenberg Foundation of Hopi objects sold at the Paris auction house Drouout for return to the tribe.  With respect to restitution of Nazi-looted Art, Spiegler outlined the aspects of New York law that cause many to view it as a favorable forum for art recovery, such as its application of a “demand and refusal” rule to trigger the statute of limitations, its minimal burden of proof, and its fundamental rule that even good faith purchasers may not obtain good title to stolen property.   Mr. Spiegler also reviewed recent restitution cases, including Baklar v. Vavra (in which a Schiele drawing was at issue), In re Flamenbaum (concerning a thirteenth century gold tablet), Cassirer v. Thyssen-Bornemisza Collection Foundation (a dispute concerning a Pissarro painting), and Chabad v. Russian Federation (a suit to recover religious texts). Spiegler closed by noting that the first “Gurlitt Horde” case has recently been filed in the U.S. District Court for the District of Columbia; this is the first of what the art law community anticipates will be many similar claims arising from the recent discovery of this trove of artworks.

The panelists’ presentations were followed by a spirited “Q&A” session, during which Dean Nicyper and audience members posed some insightful questions.  The program was an excellent review of recent developments in the art law arena, and those who attended will surely be watching the news for further updates to the legislation and cases that were covered.

About the Author: Megan E. Noh, Esq. is the Director of Bonhams Trusts & Estates department in New York. She may be reached at 212.461.6521 or megan.noh@bonhams.com.

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

Case Review: Bilinski v. the Keith Haring Foundation

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By Chris Michaels, Esq.

Keith Haring chalk subway drawing.
Keith Haring chalk subway drawing.

Filed in the Southern District of New York on 21 February 2014, the case of Bilinski v. The Keith Haring Foundation, Inc. finds its origins, in large part, from the decision of the Haring Foundation to dissolve its Authentication Committee in September 2012. (See our article:  The Keith Haring Foundation Announces Its Decision To Disband Authentication Committee). In order to properly understand the implications of the dissolution and the lawsuit, which was brought by owners of works allegedly created by Haring against The Haring Foundation, Keith Haring’s Estate, and the Foundation’s directors, a brief background of the artist, as well as the Foundation he established, is helpful.

Keith Haring, an influential New York-based artist and social activist, gained renown in the 1980s for visual artwork that explored controversial and enduring subjects including AIDS, sexuality, birth, death, and war. His work in the New York City subways (left), captured by photographer Tsing Kwong Chi, catapulted Haring into the pop art stratosphere with the likes of Jean Michel-Basquiat and Andy Warhol. Haring went on to produce more than fifty public artworks around the world and hundreds of smaller scale works.  Some of Haring’s works were discovered as recently as 2007.

In 1989, before his AIDS-precipitated death on 16 February 1990, Haring established The Haring Foundation.  Goals of the Foundation include, but are not limited to, distributing funds to AIDS organizations, distributing property and grants to museums and institutions, and perpetuating the understanding of Haring’s artwork. Notably, pursuant to the Bilinski Complaint, the Foundation never took upon itself to compile and publish a catalogue raisonné of Haring’s artwork. Authentication of the artist’s works was left to an Authentication Committee within the Foundation.

According to the Complaint, before its dissolution, the Authentication Committee accepted applications for review of works thought-to-be-by Haring and decided, often without explanation, whether the submitted work was indeed an authentic Haring. The Plaintiff’s in Bilinski are owners of artwork allegedly purchased from friends of Haring and potentially worth over $40,000,000 if authentic. They are pursuing various causes of action related to the alleged improper denial of the Authentication Committee from declaring the works at issue authentic Haring pieces. Part of the lawsuit also relates to a Press Release authored by the Foundation publicly declaring the pieces as fakes. Interestingly, a few of the causes of action arise under the Lanham Act, which allows for damages to be trebled. As the Plaintiffs’ are claiming damages of not less than $40,000,000, a ruling for the Plaintiffs under the Lanham Act causes of action could prove costly for the Defendants.

The crux of Plaintiffs’ argument in the case is that the decision to dissolve the Authentication Committee allegedly “makes it easier for Defendants to evade liability for the committee’s improper denials of authentic Haring artworks” and improperly inflates the market value of Haring works that have already been authenticated by the committee. According to the Complaint, “[b]y refusing to authenticate the works [at issue] and publicly branding them as fakes, the Defendants have limited the number of Haring works in the public domain, thereby increasing the value of the Haring works that the Foundation and its members own or sell.”

Plaintiffs are represented by David A. P. Brower and Brian C. Kerr of the Brower Piven firm.

Source: Complaint – Bilinski v. The Keith Haring Found., Inc., 14-CV-1085 (S.D.N.Y. filed Feb. 21, 2014).

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 @CMichaels88.

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

Libel by Fiction: Greene v. Paramount Pictures Corporation

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By Richard A. Altman, Esq.

Screen shot 2014-03-09 at 2.04.36 PM

Whether the Center for Art Law hosts its next dinner and a movie evening dedicated to the new Martin Scorsese film “The Wolf of Wall Street” remains to be seen. However, a suit arising from this film, recently filed in the Eastern District of New York, illuminates a curious area of defamation law known as libel by fiction.  It arises when someone claims that a fictional work which portrays a character in a negative light, usually as a criminal or an unchaste woman, is based upon personality or physical characteristics or qualities which the plaintiff possesses, such that people who know the plaintiff will think that he or she is the basis for the person portrayed.  It is rarely successful, but if a plaintiff can show that people reasonably assume that the fictional character is based upon him or her, and that the portrayal is sufficiently negative, it is possible to maintain a defamation claim.

What makes the claim so odd is that it is counter-intuitive and even illogical, because “a plaintiff claims that something that is fictional is not factually accurate.”1  In New York, every libel plaintiff must show that the complained-of portrayal or statement is “of and concerning” him.  This is not an issue in the usual situation, where a plaintiff is actually named in a publication and there is no doubt regarding who he or she is.  But if the plaintiff is only verbally (or visually) described in the fictional work as someone else, it is then the part of the plaintiff’s burden to show that persons who know the plaintiff will necessarily recognize him in the fictional portrayal.  The burden is a heavy one, but, as will be shown, the plaintiff in the new case may have met that burden, and could survive a motion to dismiss.  And perversely, his less-than-spotless reputation may make him more, rather than less,  likely to succeed.

In Greene v. Paramount Pictures Corporation et al., 14-cv-1044 (E.D.N.Y, Feb. 18, 2014), the plaintiff, Andrew Greene, alleges that he is a lawyer, an inactive member of the California bar, and was formerly the head of the Corporate Finance Department of Stratton Oakmont, Inc., from 1993 until his resignation in 1996.  Stratton Oakmont was a large over-the-counter securities brokerage firm in the 1990’s, and its head, Jordan Belfort, was indicted in 1998 for securities fraud and money laundering, which led to the firm’s demise.  Mr. Greene further alleges that the recently released Martin Scorsese film, “Wolf of Wall Street,” contains a fictional character named Nicky “Rugrat” Koskoff, who is “portrayed as a criminal, drug user, degenerate, depraved, and/or devoid of any morality or ethics,”2 and that the character of Koskoff is based upon him.  In the film, Koskoff is played by Leonardo DiCaprio.

Mr. Greene further alleges that in 2007, Belfort wrote a memoir about the firm with the same name as the film, that the book refers to him (Greene) by his correct name, and that the film is based upon the book.  He references similarities between himself and the portrayal of Koskoff, including that they both were close friends with Belfort, that they both went to law school, that they both wore toupées, that the film mocks Koskoff’s toupée, calling it a “piece of shit hairpiece,”3 and that they both had significant leadership roles at Stratton Oakmont.

However, what the complaint omits is that Mr. Greene was one of four former officers of that firm who were collectively fined $10 million in damages by a National Association of Securities Dealers arbitration panel, allegedly for defrauding an investor.  Apparently Mr. Greene’s share was $1.5 million.4  It is not known whether the arbitration was ultimately enforced, or whether the fines were paid, but the findings of the NASD panel, and the assessment of a substantial punitive damage fine, would seem to affect Mr. Greene’s reputation negatively.  Since, by definition, a libel plaintiff claims damage to a good reputation, the likelihood of ultimate recovery here would thus appear slim.  But libel-by-fiction cases have their own rules.

Mr. Greene sets forth five causes of action based upon these facts.  It seems however, that only one has a chance of success.

The first and second causes of action are based upon New York Civil Rights Law §§ 50 and 51, which provide a cause of action for an injunction and damages against anyone who “uses for advertising purposes, or for the purposes of trade, the name, portrait or picture of any living person without having first obtained the written consent of such person.”  But this statute is not a general protection of the right of privacy; there is no such right in New York other than that provided by libel laws.5   A claim under these statutes requires the unconsented-to use of the actual name or likeness of the plaintiff, usually in a photograph.  Portrayal of the plaintiff in fiction under a different name is not sufficient.6  Here, plaintiff does not allege that his actual name or likeness appears anywhere in the film.  Thus, since neither plaintiff’s actual name nor likeness were used, it would seem that he has no claim under Civil Rights Law §§ 50 and 51 for either an injunction or damages.

The third cause of action alleges that the defendants “have consciously and deliberately disregarded and violated Plaintiff’s common law propriety [sic] right to exclusive control of the commercial use of his image, likeness, and characterization,”7 and he seeks an injunction and damages.  But as just stated, there is no such common law right in New York.  The right to control one’s image, likeness and characterization is purely statutory.  Hence the third cause of action is likely to be dismissed.

The fourth and fifth causes of action are in the nature of claims for libel per se.  They allege that the statements and portrayal in the film show him “as a criminal and drug user with misogynistic tendencies.”8  The fourth alleges that the statements and portrayals were made “with malice or [that defendants] acted with reckless disregard as to the truth or falsity of the statements.”9  The fifth alleges that the statements were made “negligently as to the truth or falsity of the statements.”10  Nowhere in the complaint are the actual statements in the film set out verbatim.  There is only one exception, where a character in the film named Donnie Azoff is alleged to say, “Fucking Rugrat that wig-wearing faggot I can’t believe that fucking guy. I want to kill him.”  Belfort’s character then says, “Swear to God, I want to choke him to death. Irresponsible little prick.”11

The failure to set out verbatim in a defamation complaint the exact words complained of is fatal to a claim in New York State courts.12  However, it is not necessarily fatal in federal courts, because pleadings there are governed by F.R.Civ.P. 8.  “While the federal rules do not require the particularized pleading requirements set forth in New York’s C.P.L.R. section 3016, Rule 8 still requires that each pleading be specific enough to afford defendant sufficient notice of the communications complained of to enable him to defend himself.”13  Thus plaintiff still must point to specific language or imagery in the film which states facts to support his claim that he is portrayed as a criminal.  He has not done so.  Obviously the film is far more than just a portrayal of Mr. Greene, and it would seem necessary to identify those portions of the film specifically alleged to be defamatory.

In any event, the only words actually quoted in the complaint are not defamatory.  They are obviously not statements of fact about “Rugrat,” capable of being true or false, but are merely  opinions in the form of invective and abusive language, which is not actionable.  Only statements of fact can be libelous, and calling someone a “wig-wearing faggot” and an “irresponsible little prick,” while certainly nasty and insulting, would not be considered libelous.14

Thus, even leaving aside these significant and possibly fatal omissions, we are left only with a claim for libel by fiction.  This is where it gets interesting.  As noted above, the claim is counter-intuitive, in that it is based on the assertion that a work of fiction is false.  But it does exist:  “In the fiction context, the plaintiff must also show that the viewer was totally convinced that the episode in all aspects as far as the plaintiff is concerned is not fiction at all.”15

In Batra v Wolf,16 the Court refused to dismiss a complaint against the television show “Law and Order,” brought by a lawyer who claimed that a character in an episode of the show was based on him, and portrayed him as corrupt.  The episode was based on a true and widely reported event involving judicial corruption in Brooklyn, and a judge who served time in prison.  The plaintiff, a lawyer named Ravi Batra, had been involved in judicial politics, but was never charged with any crime in connection with the event.  He had however been linked to the corrupt judge in the press.  The lawyer in the episode had the same first name, Ravi, and both the plaintiff and the fictional lawyer were of Indian descent.  In the episode, the surname Batra was changed to Patel.  The court said that the similarities were close enough to entitle the plaintiff to proceed, and did not dismiss the action:

In the context in which Floater was presented, extensive media coverage linking Batra to the Garson/Siminovsky scandal, there is a reasonable likelihood that the ordinary viewer, unacquainted with Batra personally, could understand Patel’s corruption to be the truth about Batra. While the accusations against Batra were for graft rather than for bribery, it cannot be said that this distinction is sufficiently “far-fetched” that Patel’s corruption could never be understood as describing actual facts.17

In Geisler v. Petrocelli,18 the plaintiff had appeared in a work of fiction under her real name, which allegedly portrayed her as participating in a fraud involving a tennis match, and in which she was “lured into untoward sexual conduct which is graphically portrayed.”19  The Court then said:

Rather, it is required that the reasonable reader must rationally suspect that the protagonist is in fact the plaintiff, notwithstanding the author’s and publisher’s assurances that the work is fictional. This points up the disturbing irony inherent in the scheme: the more virtuous the victim of the libel, the less likely it will be that she will be able to establish this essential confusion in the mind of the third party. Thus, the more deserving the plaintiff of recompense for the tarnishing of a spotless reputation, the less likely will be any actual recovery. Such a seeming contradiction is best resolved by the trier of fact since adjudication of the issue as a matter of law will seldom satisfy the expectation that legal holdings be consistent and logical.  Id. at 639.

What makes Mr. Greene’s case unusual is that it is the opposite of Giesler.  If a plaintiff with a spotless reputation is less likely to recover, is a plaintiff with a tarnished one more likely to recover?  It seems no less illogical than a libel-by-fiction claim itself.20

Based on the case law and commentary,  it appears that Mr. Greene can legitimately assert that he and “Rugrat” Koskoff are one and the same, at least as a threshold issue. Maybe the toupée is the clincher. Moreover, considering the dictum in Geisler, the fact that Mr. Greene’s reputation is not spotless ironically might make his likelihood of ultimate recovery greater than if the NASD had never penalized him and if the firm had never crashed and burned.  But then, if that had not happened, there would have been no movie.

Sources:

Batra v. Wolf, 2008 N.Y. Misc. LEXIS 1933 at *5 (Supreme Ct. N.Y.Co. Mar. 14,  2008).
2  Complaint, ¶ 30 at 6.
3  Id., ¶ 28 at 6.
4 See http://www.securitiesarbitration.com/news/1997/04/18/former-stratton-execs-fined-10m/ (accessed March 5, 2014).
Arrington v. New York Times Co., 55 N.Y.2d 433 (1982).
Allen v. Gordon, 86 App.Div.2d 514 (1st Dept.1982), aff’d 56 N.Y.2d 780 (1982).
7   Complaint, ¶ 55 at 10.
8  Id., ¶ 62 at 11.
9  Id., ¶ 60 at 11.
10  Id., ¶ 65 at 12.
11  Id., ¶ 29 at 6.
12  CPLR 3016(a); Buffolino v. Long Island Sav. Bank, FSB, 126 A.D.2d 508 (2d Dept.1987).
13   Gristede’s Foods, Inc. v. Poospatuck (Unkechauge) Nation, 2009 U.S. Dist. LEXIS 111675, 2009 WL 4547792, at *8-9 (E.D.N.Y. Dec. 1, 2009)(citations omitted).
14 Steinhilber v. Alphonse, 68 N.Y.2d 283 (1986).
15 Batra, supra n. 1 at *5 (citing Welch v. Penguin Books USA, Inc., 1991 N.Y. Misc. LEXIS 225 (Sup.Ct.Kings Co.1991)(quotation marks omitted).
16  2008 N.Y. Misc. LEXIS 1933 (Supreme Ct. N.Y.Co. Mar. 14, 2008).
17  Batra, supra, n. 1 at *10.
18   616 F.2d 636 (2d Cir.1980).
19   616 F.33 at 638 (footnote omitted).
20  The subject of libel by fiction is explored in two recent law review articles: “When ‘Ripped from the Headlines’ Means ‘See You in Court’: Libel by Fiction and the Tort-Law Twist on a Controversial Defamation Concept,” 13 Texas Rev. Ent. & Sports L. 117 (2012) and “When Is Fiction Just Fiction? Applying Heightened Threshold Tests to Defamation in Fiction,” 76 Fordham L.Rev. 1853 (2007).

About the Author: Richard A. Altman, Esq. specializes in art law, intellectual property, and defamation.   He may be reached at 212.633.0123 or altmanlaw@earthlink.net.

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

Photographs and Richard Prince: The Gifts that Keep on Giving

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By Irina Tarsis, Esq.

In truth… in art, there are few, if any, things , which in an abstract sense, are strictly new and original through out.” Emerson v. Davies (CCD Mass 1845). J. Story

Remember Cariou v. Prince?

Cariou v. Prince, 11-1197-cv (2d Cir. Apr. 25, 2013) rev’ing 784 F.Supp.2d 337 (S.D.N.Y. Mar. 18, 2011) offers many teachable moments. Starting with the harsh decision by Judge Deborah Batts of Southern District of New York, which ordered the infringing works to be handed over to the Plaintiff for destruction, and ended with the tweet Richard Prince posted when he received twenty-five of his thirty paintings following the Second Circuit Court of Appeals partial reversal of J. Batt’s decision, finding that only five of the works Prince made were not ‘transformative’ as a matter of law. When the twenty-five works were ultimately returned to Prince, he observed that after half a decade of not seeing them he was of the opinion that he should have been sued for “making shitty paintings”.

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Copyright in a Nutshell

U.S. 1976 Copyright Law identifies art and photographs as copyright protected works and lists preparation of derivative works as an exclusive right of the copyright owner. 17 U.S. 101, 106. The fair use defense limits the exclusive rights of copyright holders in certain circumstances when the work is used for valid purposes such as but not limited to criticism, comment, teaching or research. There is a famous four-factor test to decide whether “the use made of a work in any particular case is a fair use,” 17 U.S. 107. Unfortunately, there is no way to predict how judges will apply and weigh the four factors due to the high level of discretion afforded to the judges. A couple examples of this occurred recently when the Cariou appeal was pending and California courts ruled in two fair use cases categorically differently – both citing Cariou but one using J. Batts’ decision and the other using the 2nd Circuit decision (see Morris v. Guetta 2013 WL 440127 (Feb. 4, 2013) and Seltzer v. Green Day, 725 F.3d 1170 (C.A. 9th Cir. 2013).

What’s next?

On 16 December 2013, nine organizations and individuals arguing for the rights of photographers to benefit from the derivative use of their copyright protected works submitted an amicus brief in support of Patrick Cariou in his case against Richard Prince for the appropriation of the images from “Yes, Rasta” book for creation of the “Canal Zone” art works. (For background on Cariou v. Prince, read Appropriate Standard in Appropriation Art). Now, the New York Times’ Patricia Cohen reports that photographers are considering turning to Congress for assistance in protecting their works. She quotes Victor Perlman, general counsel for the American Society of Media Photographers, as saying “The courts have taken an approach to fair use that we do not believe was originally intended… A lot of what’s going to have to happen in fair use is going to have to happen on Capitol Hill.”

While it is hard to imagine that this Congress is capable of assisting anybody, one possible avenue to run interference is to modify the Copyright Act to include compulsory licensing for artists who incorporate copyright protected works of others into their work. The idea of having such a licensing scheme is not new; it was raised at least as early as 2002 by co-author of the Art Law treatise, Judith Bresler, Esq., in an article entitled “Begged, Borrowed or Stolen: Whose Art is It, Anyway-An Alternative Solution of Fine Art Licensing.” J. Copyright Soc’y USA 50 (2002): 15.

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Tweet attributed to Richard Prince.

Richard Prince, whose appropriation of Cariou’s works rekindled the fair use debate, responded to the announcement about photographers appealing to Congress by posting two black and white images on his Twitter account. Entitled “Untitled (protest) Thanks to the National Press Association & The Professional Photographers of America, the pictures include the 2012 Shia Muslims protest condemning killings in north-western Pakistan and a pornographic image of a woman scantily-dressed grasping at her breast and throwing her head back in protest or ecstasy.

AFP image of protests over killings in Pakistan (2012).
AFP image of protests over killings in Pakistan (2012).

The origin of the second image is not easily ascertained; while the credit line for the Pakistan protests indicates that it belongs to Agence France-Press.

Sources: The New York TimesCariou v. Prince, 11-1197-cv (2d Cir. Apr. 25, 2013); Amicus Brief, Cariou v. Prince, 08 CIV 11327 (DAB) (Dec. 16, 2013).

 

About the Author: Irina Tarsis, Esq. is the Founder of Center for Art Law; in addition to provenance research and teaching, she focuses her practice on business and art law.  She may be reached at itsartlaw@gmail.com

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