How do you solve a problem like Gurlitt?

By Irina Tarsis*

As Hollywood is celebrating the 50th Anniversary of “The Sound of Music,” set in Salzburg, Austria and the public release of “Woman in Gold,” a film based on successful legal actions to recover Nazi-looted art scheduled for release April 1, 2015, the Gurlitt saga continues to permeate the media and the legal scene. The News Wires are alive with the name of ‘Gurlitt,‘ and every related court decision and legal filing is music to our ears.

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Cornelius Gurlitt (1932-2014), was born into a family of artists, art historians and musicians. He was a son of one of the four infamous art dealers who had been involved in sales of “degenerate art” and purchases of works for the Führermuseum in Linz, among other transactions during the Third Reich. In 2013, the story broke that Cornelius, who was under a tax investigation, inherited a large art trove of paintings, drawings and prints, split between his apartment in Munich, Germany and a house in Salzburg, Austria. The insiders of the German-speaking art world, and probably beyond, must have known of the collection, particularly since the 2011 Lempertz auction of the Max Beckmann’s “Lion Tamer,” that was stolen from Alfred Flechtheim during World War II and was consigned by Cornelius Gurlitt.

Having vacillated between refusing to part with his collection and agreeing to allow researchers access to determine provenance of the works, Gurlitt passed away in 2014. Reportedly, he reached an agreement with the German government regarding access to the art; however, in his Will, Gurlitt bequeathed the contested art collection to the oldest fine art museum in Switzerland, Kunstmuseum Bern. Validity of the Will was challenged by Gurlitt’s relative, Uta Werner, who reportedly had promised to make Gurlitt’s documents public.

On March 25, 2015, it has been reported that the German court reviewed the challenge to Gurlitt’s will and ruled it valid.

Only days earlier, in two separate instances, Monika Grütters, Germany’s culture minister as of December 2013, announced that she approved and signed restitution agreements to release two of the paintings, a Matisse and a Liebermann, that have been affirmatively determined months ago as to have been looted from victims of the Nazi prosecution. Matisse’s “Seated Woman” is expected to be returned to the heirs of Paul Rosenberg and Liebermann’s “Two Riders on the Beach” should be sent to the heirs of David Friedman. The agreements are expected to be approved with the Munich court that is in charge of the Will and thus the Gurlitt estate.

After much dissonance and delay, let the next movement in the Gurlitt concerto be more of restitution agreements and release of documents – “these are a few of my favorite things.”

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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 presents general information and is not intended as legal advice.

The European VAT: Good for Tax Revenue, Bad for the Commercial Art Market?

by Elizabeth R. Lash, Esq.

As an American, one might be forgiven for assuming that Europe, with its traditional support for the arts (at least, as a cultural phenomenon), would be equally supportive in its tax regime for the same. While in some limited instances, the European Union continues to provide a more favorable regime for the independent artist, the trend towards an ultimately higher value-added tax (“VAT”) on the sale, import and export of artwork, particularly with respect to art sold by galleries and in the resale market, may discourage the growth of an EU-wide commercial art market in comparison with more favorable tax regimes outside the EU.

VAT was initially intended to be used as a single tax rate applicable to all goods and services across all European Union member states. While the standard rate was originally set at 15% in 2006, member states could theoretically request reduced rates in one or two categories, set at no less than 5%. In reality, as each member state negotiated the terms of its entry into the EU, the list of categories has expanded to at least 21, with rates above and below the standard rates (which already varies from 17% to 27%), along with multiple categories of rates below 5% (zero rates, “parking rates” (i.e., rates negotiated with entry into the EU), and super reduced rates). As well, categories of rates are inconsistently drawn, from too narrow to overly broad: it includes, among others, such categories as printed books, e-books, cultural institutions, household cleaning, sporting facility use, bicycles, and writers and composers.

When it comes to artwork, VAT rates vary widely, ranging from 5% (Malta) to 25% (Sweden) (although there is a reduced rate for independent artists’ sales). In addition, VAT may be calculated on the margin (i.e., the difference between the original sale price and the purchase price), instead of under the standard or reduced rate (whichever is applicable to artwork in that particular member state). In a number of member states, the VAT may be set at multiple rates: one for independent artists; another for galleries and dealers; and still another for the import or export of art.

Further complicating this picture, the EU Commission may not only pressure (or even sue) a member state as to the categories for which reduced rates are permitted, but may also regulate individual tax cases affecting artists and collectors. One example in particular is the Flavin case, whose outcome confounded the international art community (and sets an unfavorable precedent in future, similar circumstances). In 2006, a British gallery (named the “Haunch of Venison”) imported two well-known American conceptual artists’ sculptures: Dan Flavin’s light sculpture, and Bill Viola’s video installations. The former consisted of several tubes of fluorescent lights, while the latter consisted of several audio-visual productions playing on various projection screens. The British customs office imposed a 20% rate instead of the reduced 5% rate for artwork. However, upon appeal to the British VAT and Duties Tribunal (the “Tribunal”), the reduced rate was re-instituted in 2008.

But despite this local regulator’s final decision (with no further appeal by the parties to the EU courts), the EU Commission weighed in anyway with its own regulation, issued in September 2010, which specifically overturned the Tribunal’s decision, ostensibly to effectuate the uniform taxation rules on imported goods. The EU Commission found that it was not the installations themselves which constituted artwork, but the results of such installations, whether of the “light effect” of Dan Flavin’s light sculpture, or the videos screened on Bill Viola’s video installations. Thus, in effect, the EU Commission found that the installations should have been taxed just as if a hardware or electronics store had imported lightbulbs and video components. For conceptual artists, this represented a major blow to the sale in and import of their artwork into Europe.

Then take Germany. Germany formerly assessed a reduced VAT of 7% on sales of art (other than photography). However, due to pressure from the EU Commission, which had opened proceedings against Germany regarding this reduced rate category, Germany passed legislation to raise the rate to 19%, effective January 1, 2014 (Germany’s standard VAT rate since 2007). In response, German federal legislators passed a national directive that permitted the tax to be assessed on only 30% of the purchase price, relying in part on an exception to the VAT directive that had been used in France for several years. But the application of this directive was restricted less than a year later by the German states to artwork priced under 500 Euros, and a few other categories, essentially undercutting the law’s essential purpose—to provide a more favorable rate for the commercial art market. Meanwhile, artists selling out of their studios remain subject to the 7% rate. While this may be acceptable for those select artists who sell out of their own studios, it does not bode well for those who are represented by galleries.

In 2014, in another instance of muddying the tax waters, the French government increased VAT on the sale of art in France from 7% to 10%, while still permitting imports of non-EU artwork to be taxed at 5.5%. Only a year later, the French legislators acknowledged this inconsistency, and reduced the VAT on direct sales by French artists to 5.5%, effective January 1, 2015. Meanwhile, in Spain, the current VAT on artwork was raised from 8% to 21% in September 2012, initially as part of the general rate assessed on goods and services related to “culture.” Within a year, after much hue and outcry, Spain decreased the rate again to 10%. Meanwhile, in Italy, the VAT on the sale and import of artwork is still 22%.

The dust may eventually settle on the various VAT rates and their application, but the newest wrinkle is a regulation (Council Implementing Regulation (EU) No 1042/2013) which changes how VAT is assessed—from the place of supply to the place of purchase. While this does not affect traditional visual artists and sculptors, it does impact those who are considered to supply services or goods digitally to consumers—for instance, freelance website designers. The regulation, effective January 1, 2015, requires such businesses to assess VAT based on the country of the purchaser, rather than the VAT of their own country, placing yet another burden on artists in figuring out the application of VAT—even though the regulation was meant, in part, to apply to the likes of e-retailers such as Amazon.com.

In light of the fluctuations in tax rates and their applications, with the ultimate trend inching towards a uniformly high VAT rate, the art market looks nowhere near as enticing in the EU as it does in those countries and locales not subject to the vagaries of the VAT rate debate. In the U.S., for instance, no VAT exists (although, of course, the U.S. does have a sales tax), and there is no import duty assessed on original works of art. Hong Kong does even better—it has no sales tax, import tax, or export tax on artwork. To some degree, the numbers back this up: according to an annual study conducted by Arts Economics for the European Fine Art Foundation, in 2013, the U.S. accounted for 38% of the global market by value, while the EU as a whole dropped 3% points to 32%. (The UK ranked separately at 20%–perhaps not a surprise in light of its 5% reduced VAT rate on artwork, the Flavin case notwithstanding.) Moreover, in the EU itself, the numbers for those member states with the highest VATs declined or remained the same. And while Hong Kong and Singapore did not rank individually as the top winners in 2013 (having perhaps to do with factors other than VAT or customs duties), still, such figures may show in part the effect of applicable tax regimes.

Then there are the so-called “free ports,” located around the globe, which have become popular as a way to store works of art intended primarily as an investment. A free port is essentially a tax haven: artwork may be shipped directly to the free port, and as long it is stored there, VAT will not be assessed on the import. (Of course, once the work is shipped outside the free port to its new destination, any applicable tax will be assessed.) An additional benefit for potential purchasers (depending on the local laws applicable to the free port) is that VAT may not be assessed on any sales of artwork made within the free port—at least not until the artwork has left the free port. (So, hypothetically speaking, if a sale has been made, but the work never leaves the free port, VAT will never be assessed.) Arguably, the art fair Art Basel became popular just for that reason, having made its initial home base in a Swiss free port. As of right now, there are free ports located in Switzerland, Luxembourg, Singapore, and Beijing. (One of the best indications of how popular the Singapore free port has become is that Christie’s auction house now has an office located there.)

The EU Commission has previously expressed that VAT rates are not to be used to control social and economic policy in the EU, and clearly is increasingly attempting to pressure member states, whether through regulation, litigation, or other alternative avenues, to raise VAT rates to a uniformly high rate. However, in the face of global competition, one can only wonder what this trend may mean for the EU in the future as a major player in the commercial art markets.

 

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About the Author: Elizabeth R. Lash, Esq., serves as in-house counsel at Kroll, where she focuses on reviewing agreements relating to cyber security and data breach notification.

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

Lessons learned from the Sacking of the Summer Palace in China: Diplomacy and Restitution Revisited

One day two bandits entered the Summer Palace. One plundered, the other burned….Before history, one of the two bandits will be called France; the other will be called England…I hope that a day will come when France, delivered and cleansed, will return this booty to despoiled China. Meanwhile, there is a theft and two thieves.

– Victor Hugo, “The Sack of the Summer Palace”

by Merve Stolzman

Built between 1750 and 1764 during the Qing dynasty, the Yuanmingyuan Garden in Beijing, commonly known as the Old Summer Palace, was a masterpiece of imperial garden design. A variety of halls, pavilions, palaces, temples, bridges, fountains, lakes, and hills dotted across this “Garden of Gardens.” The buildings within it were elaborately carved and decorated, and housed thousands of Chinese paintings, antiquities, and other works of art. However, in 1860, during the Second Opium War, British and French forces looted and burned down the Old Summer Palace.

Chinese emperors restored the gardens, first in 1886 and then in the early 1900s, and the government designated it as a public park in 1924. Nevertheless, over 150 years later, thousands of looted Chinese artifacts remain on display in foreign museums around the world, such as the British Museum and Château de Fontainebleau. (Read about recent (Mar.1, 2015) theft of “Asian” artifacts from Chateau de Fontainebleau here). Some, however, have found their way back home.

In February 2014, the KODE Art Museum in Bergen, Norway entered into a trilateral agreement with a Chinese businessman, Huang Nubo, and Peking University to return to China seven marble columns that once decorated the Western-section of the Old Summer Palace for permanent displayed at Peking University. The columns were part of a 2,500-piece collection of Chinese antiquities housed at KODE. Johan Wilhelm Normann Munthe, a collector of Chinese artifacts who settled in China in 1886, donated the collection to the KODE between 1907 and 1935, but how he obtained the looted columns remains a mystery.

International law mandates the restitution of illicitly exported cultural artifacts to their states of origin. Article 7(b)(ii) of the UNESCO 1970 Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property (“1970 Convention”) requires states parties to recover and return cultural property within their territory that was illegally exported out of the territory of another state party, should that state request restitution. As of January 2015, 127 states have ratified this convention, and enacted national legislation giving effect to the obligations contained within.

One such example is the Australian Protection of Movable Cultural Heritage Act (1986). Part II, Division 2 of this legislation provides that where a foreign country’s moveable cultural property was illicitly exported and subsequently imported into Australian territory, the government can seize the property and return it to that country. The export of the property in question from the host state must have been prohibited at the time of export. While this provision is permissive, Australia has implemented it on several occasions to honor restitution requests from foreign governments. It has set up bilateral agreements with the Republic of Korea and China’s State Administration of Cultural Heritage regulating the import, export and return of the cultural property of those countries. The government has also accepted several standing requests for seizure and return of illegally exported artifacts from countries such as Argentina, Egypt, Cambodia, and Greece.

Notably, in September 2014, the Australian government complied with India’s request for the return of two statues of Hindu deities stolen from temples in Tamil Nadu. The National Gallery of Australia bought one in February 2008 from New York-based art dealer, Subhash Kapoor. The Art Gallery of New South Wales bought the other in 2004 from the same dealer. India Kapoor is currently on trial in India for allegedly stealing many antiquities, including the two statues, and smuggling them out of India.

While Australia’s conduct illustrates how the international restitution regime can effectively be implemented, the Norwegian-Chinese context exposes a gap in the legal regime. This gap centers on the non-retroactive nature of the 1970 Convention and national restitution laws. Both Norway and China are parties to the 1970 Convention. However, the convention does not contain any provisions that apply it retroactively to cultural artifacts that were smuggled out of the territory of a state party before the convention came into force. Recognizing this, UNESCO set up the Intergovernmental Committee for Promoting the Return of Cultural Property to its Countries of Origin or its Restitution in case of Illicit Appropriation (“ICPRCP”) in 1978. This permanent advisory body, comprised of twenty-two UNESCO member states that rotate every four years, encourages and helps facilitate bilateral negotiations between UNESCO member states for the restitution of cultural property of “fundamental significance” illicitly exported out of the host country before 1970. ICPRCP also advises on mediation and conciliation procedures to the member states concerned. However, in order for the host state to request the restitution of cultural property through the ICPRCP mechanism, it needs to initiate bilateral negotiations with the other member states concerned. These negotiations also must have stalled or failed before the request. Since 1983, the ICPRCP has assisted in six successful restitution negotiations.

Norway’s restitution laws, found primarily in § 23a of the Cultural Heritage Act (1979), require that Norway return unlawfully exported cultural objects to their state of origin. However, it is important to acknowledge that the KODE case is not one where the cultural artifacts in question were unlawfully exported. Section 9 of the Regulations on the export and import of cultural objects defines unlawful export in part as “any export from the territory of a State in breach of this State’s legislation on the protection of cultural objects.” KODE acquired the columns between 1907 and 1935, and the Law of the People’s Republic of China on the Protection of Cultural Relics, which governs the export of movable Chinese artifacts, was first enacted in 1982. Consequently, Munthe did not export the Old Summer Palace columns illegally because there were no laws at that time that regulated their export. The timing of KODE’s acquisition of the columns prevents China from obligating Norway to return its national treasures through the 1970 Convention or Norway’s restitution laws. Moreover, unlike Australia, Norway has not entered into a bilateral restitution agreement with China. In effect, the existing framework does not provide China with a legal basis to claim restitution of its cultural objects looted before the mid-to-late 1900s.

Whether China and Norway attempted to negotiate the return of the columns is unknown, and given that diplomatic ties between both countries have been frozen since 2010, it is unlikely that Norway and China would have initiated bilateral negotiations over the return of the columns. These circumstances prevent China from soliciting the ICPRCP’s help in resolving the matter, since, as mentioned above, the intergovernmental body requires the two states concerned to have initiated bilateral negotiations, and these negotiations need have failed or been suspended, before requesting the cultural property’s restitution through the ICPRCP’s mechanism.

In the context of the seven columns at KODE, China’s inability to compel Norway to restitute its artifacts through legal or diplomatic measures is not problematic because KODE agreed to return the columns to China through private negotiations. Such mechanisms are potentially effective alternatives to legal claims or bilateral agreements between governments, and China has benefitted from them on several occasions. For instance, French billionaire, François-Henri Pinault, purchased two bronze heads, one of a rat and the other of a rabbit that were once part of a fountain clock in the Old Summer Palace, and donated them to the National Museum of China. However, these private agreements are contingent on the will of museums and individuals to enter into such arrangements, which may be difficult to obtain. The Chinese government explicitly recognized this in its 2011 periodic report to UNESCO on its implementation of the 1970 Convention. In response, it has attempted to negotiate the return of its cultural property with foreign museums. Such efforts are commendable and necessary.

International and domestic law have set up an enforceable framework for the return of illicitly exported cultural property. However, this regime has failed to address the restitution of artifacts stolen and imported into other countries before the early twentieth century. The laws that regulate the modern import and export of stolen cultural property will likely never be applied retroactively. After all, non-retroactivity is a fundamental legal principle, particularly in the international context where states are only bound by the laws to which they agree. For this reason, it is important for states, and the rest of international community, to support and promote bilateral negotiations, voluntary donations and/or private restitution agreements. In the absence of mandatory obligations to restore looted objects to their state of origin, such arrangements are essential to the success of the international restitution framework, and may spearhead efforts to promote restitution at the national and international level.

Note from the Editors: Despite the wide acceptance of the 1970 Convention, United Nations Security Council still finds it necessary to issue Special Resolutions to prevent illicit traffic in cultural property. See for example, UN Security Council Resolution 2199.)

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About the Author: Merve Stolzman is a third-year law student, American University Washington School of Law; she is the current Symposium Editor of the American University International Law Review. Her areas of interest include: international humanitarian law, the use of force, cultural heritage law, international investment law, and international development law.

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

Jorge Luis Rodriguez, Growth (1985)

Jorge Luis Rodriguez, Growth (1985)

By Emma Kleiner*

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

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

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

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

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

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

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

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

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

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

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

Mark Rothko, Untitled (1961)

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

By Chris Michaels, Esq.*

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

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

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

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

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

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

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

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

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

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

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

Sources:

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

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

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

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

Yelpers report… Gallery 63 Antiques is no more.

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

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

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

CM jan2015

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

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

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

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

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

Sources:

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

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

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

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

By Larissa Neumayer *

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources: (last accessed 10/05/2014)

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

Rauschenberg Estate Saga of Trust and Fees Explained

BY Jessica Curley*

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

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

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

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

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

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

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

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

 

Sources:

 

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

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

SPOTLIGHT: ARIS Title Insurance Corporation

By Jill A. Ellman*

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

The ARIS Policy

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

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

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

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

Underwriting Art Risk

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

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

New Technology

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

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

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

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

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

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

Sources

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