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, litigation resulted in a Florida Circuit Court awarding the trustees’ fees in the amount of $24.6 million, to be split evenly among the three.

State law 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 spelled out 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 disappointed by Circuit Judge Jay B. Rosman’s decision because he 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.

Rauschenberg was a long time philanthropist, and supported various 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, and his son is determined to see that the goal of the foundation is met.

 

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

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

SPOTLIGHT: ARIS Title Insurance Corporation

By Jill A. Ellman*

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

The ARIS Policy

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

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

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

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

Underwriting Art Risk

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

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

New Technology

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

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

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

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

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

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

Sources

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

Case Review: Crile v. Commission of Internal Revenue

By Chris Michaels, Esq.*

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

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

Susan Crile Website

Susan Crile Website

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

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

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

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

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

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

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

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

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

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

Sources:

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

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

Alternative Alternatives: ALT2 Conference Review

By Jessica M. Curley

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

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

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

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

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

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

The ALT2 Conferences are by invitation only.

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

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

By Elizabeth Lash, Esq.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources:

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

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

Caveat artifex: The case of one Immendorff Ready-Made

By Steffanie E. Keim, Esq. 

The German artist Jörg Immendorff (June 14, 1945 – May 28, 2007) was controversial during his lifetime and the controversies surrounding his art have not ended with his death.

Following Immendorff’s death, his estate became embroiled in numerous high profile lawsuits, including a suit by his illegitimate son, Jean-Louis, from a relationship with Marie-Josephine Lynen, and several suits launched by his widow, Oda Jaune, against various gallery owners and art dealers he had dealt with.

One of Jaune’s suits dealt with a version of the painting, Ready-Made de l´Histoire dans Café de Flore, offered for sale in Düsseldorf with the Viennese auction house Dorotheum auction house in 2007 (the painting was withdrawn from the auction following the criminal complaint by Jaune as discussed below). In 2008, Michael Werner, Immendorff’s long-term art dealer, issued a warning that some works regarded as Immendorff’s may be forgeries. Critics claim that the forgery controversy is merely a public relations stunt and a market dispute between gallery owners and art dealers with financial interests.

To fully understand the particular controversy surrounding what may be the final ruling in the matter concerning one of Immendorff’s paintings, Ready-Made de l´Histoire dans Café de Flore, which was originally purchased at the artist’s studio in 1999, one has to take into consideration the life and work of the artist. Born in 1945, Immendorff was an artist and a political activists from an early age. Immendorff initially became famous with his series, first Café Deutschland (1977 to 1982), and later Café de Flore where he depicted himself in a number of roles surrounded by a community of intellectuals and artists. A student of Joseph Beuys (a well known artist in his own right), one of Immendorff’s  most famous works, Affenplastik, depicts Immendorff as a monkey child  being lead by Beuys. Affenplastik, also known as Malerstamm, is part of a 17-piece series of bronze sculptures and shows Beuys explaining the world with a grand gesture of his raised left arm while leading a monkey child. Explaining and understanding the world was an important mission of Beuys’; Affenplastik casts Immendorff as a willing pupil.

Immendorff was famous not only for his artworks but also for a lavish and controversial life style. In fact, according to his art dealer Michael Werner, “Joerg could not paint as fast as he wanted to spend money,” thus frequently owing money to Werner. Immendorff was known for producing copies of his own work and for selling signed copies from his workshop. He created further legal confusion by signing contradictory agreements with different galleries in addition to selling works directly from his studio during his lifetime. In 1997, Immendorff was diagnosed with amyotrophic lateral sclerosis (ALS) (also known as Lou Gehrig’s Disease), a progressive neurodegenerative disease that eventually fully paralyzed him and led to his death in 2007. As a result of his debilitating condition, during his last decade, his assistants were producing Immendorff works under the artist’s close instruction and direction. Immendorff reportedly had a reputation for strict quality control which often required numerous corrections of a single brush stroke by his assistants before Immendorff would approve a work as finished.

Following the artist’s death, his widow Oda Jaune filed criminal charges claiming that the painting Ready-Made de l´Histoire dans Café de Flore (120 x 100 cm) [Ready-Made B] which was consigned for auction in 2007 by the Defendant, was a forgery based on a painting created in 1987 Ready-Made de l´Histoire dans Café de Flore with the dimensions 150 x 175 cm [Ready-Made A]. The prosecutor’s office did not find enough evidence during its criminal investigation to lay charges and Jaune decided to pursue her claim in a private action in one of the most publicized and closely followed law suits discussed here concerning Immendorff’s painting, Ready-Made de l´Histoire dans Café de Flore [Ready-Made B] which first began in 2008 and seems to have finally been settled in court.

In its decision on August 5, 2014, the Court of Appeals (Oberlandesgericht) Düsseldorf, reversed the lower court (Landgericht) decision which had ordered the destruction of the painting.

The uncontested underlying facts were that Ready-Made B was originally purchased – accompanied by a certificate of authenticity – at Immendorff’s studio in 1999 for the price of 30,000 DM. The original purchaser received Ready-Made B from and paid the purchase price to one of Immendorff’s assistants. The original purchaser then sold the painting to the Defendant, his brother, in 2001. In 2007 the Defendant put it up for auction in Düsseldorf with the Viennese auction house Dorotheum. Once the painting had been listed in the catalogue, several discoveries were made:  i) there was a duplicate original created in 1987 owned by a collector in New Zealand [Ready-Made A], and ii) Ready-Made B had different dimensions than the 1987 version.

The Plaintiff, Oda Jaune claimed that the painting owned by the Defendant and listed in the auction catalogue – Ready-Made B- either was a forgery or was sold without Immendorff’s authorization respectively. According to the Plaintiff, in either case Ready-Made B was an unlawful propagation of Immendorff’s work and she as his heir was entitled to injunctive relief in the form of the destruction of Ready-Made B.

On October 17, 2012 the lower court (Landgericht Düsseldorf, 12 O 473/08), ruled in favor of the Plaintiff and granted the injunctive relief as requested, ordering the destruction of the painting.

The order was based on Articles 97 Abs. 1 a.F., 98 Abs. 1 a.F., 16 Abs. 1 of the German Copyright Act (UrhG). Under Article 97 UrhG, an injured copyright owner can bring an action for injunctive relief requiring the infringer to cease and desist if there is a danger of recurring acts of infringement, as well as an action for damages for intentional or negligent  infringement.  Article 98 UrhG gives the injured copyright owner the right to require destruction of all copies unlawfully manufactured, unlawfully distributed or intended for unlawful distribution in the possession of or owned by the infringer, unless such destruction is disproportionate or unreasonable.

The lower court’s opinion relies heavily on the expert opinion of art historian and Immendorff expert Siegfried Gohr who discusses the differences between Ready-Made A and Ready-Made B in great detail and determines that Ready-Made B was copied using a projector and in his opinion could have not been authorized by Immendorff, since Immendorff was not known to create a “2nd edition” of his works. Based on these factors and his personal knowledge of the artist and his work process, Gohr deemed it unlikely that Immendorff authorized Ready-Made B and stated that if Ready-Made A and Ready-Made B had been painted by the same artist he would need to resign as an art historian.

Based on Gohr’s testimony, the lower court concluded that Ready-Made B was an unlawful copy of Ready-Made A, and further held that the Defendant distributed the copy by putting it up for auction. Pursuant to Article 15 and 16 UrhG, all exploitation rights, including reproduction and distribution, lay exclusively with the author and any reproduction is generally unlawful unless there is consent or legal justification.

In the eyes of the lower court, the Defendant failed to meet his burden of proof, citing a failure to substantiate claims that he reproduced and sold Ready-Made B with Immendorff’s consent. The court also found that the destruction of Ready-Made B was proportional and not unreasonable since the infringement of the author’s rights could not be eliminated in a less drastic but similarly efficient way. The Plaintiff’s predominant interest in avoiding forgeries circulating next to the original without an obvious and easy way of distinguishing one from the other outweighs any rights or interest of the Defendant as the owner according to the lower court.

On August 5, 2014, the Court of Appeals reversed the lower court’s decision and held that Ready-Made B will not be destroyed since its distribution is lawful. The Court of Appeals found it unnecessary to decide whether Ready-Made B is a forgery since the circumstances surrounding the sale of Ready-Made B at Immendorff’s studio are to be construed as apparent consent by Immendorff as the undisputed author of Ready-Made A, to the publication and exploitation of Ready-Made B according to Article 23 UrhG. Pursuant to Article 23 UrhG adaptations or other transformations of a work may be published or exploited only with the consent of the author of the adapted or transformed work.

The Court of Appeals found that the evidence established that Immendorff knew of and had at least tolerated direct sales in his studio by his assistants. He thereby made it look like he consented to the sale and thereby the publication and distribution of works of art sold in his studio as “his“ artworks.

Since the original purchaser was protected in his trust in the apparent consent, the Plaintiff, as the artist’s heir is bound by it and is barred by estoppel, even if the assistant selling Ready-Made B may have sold a painting not authorized by Immendorff. The Court of Appeals refused to determine if Ready-Made B is a forgery or not – even though the assistant selling Ready-Made B was a witness and could have probably answered the questions by whom, when and how exactly the copy was made once and for all. The Court of Appeals even goes as far as admitting that it has doubts regarding the authenticity of Ready-Made B and the accompanying certificate of authenticity, however the appearance of consent based on the totality of the circumstances is sufficient to prevent Jaune from succeeding in her claims.

Courts are historically uneasy when it comes to answering art related questions since they have to rely on expert testimony and the conflicting parties usually find experts with conflicting testimonies, whereby a battle of the experts ensues.

In this case, however, the Court of Appeals decided to allocate the risk with the seller. While the art market and its participants are often blamed for not following basic legal standards or neglecting to perform due diligence, a purchaser may feel rightfully justified in her reliance in the authenticity of a work of art when the purchase is made directly from the artist’s studio and is accompanied by a certificate of authenticity. According to the Court, it is just to allocate risk of selling a fake with the artist in the instances where there are no aggravating circumstances, which would raise concerns in a well-informed objective purchaser. A possible aggravating circumstance would be, for example, a widely reported fact that the artist does not engage in direct studio sales.

The uncertainty whether the question regarding the authenticity of this and other works by Immendorff will affect the market value of his entire oeuvre remains. The current risk allocation seems to invite a decline in market value across the board due to the fact that the court may have “created” new Immendorff works by labeling every artwork an “Immendorff” that was sold directly from the artist’s studio.

Given that the art market is unpredictable and is subject to many influences, not the least of them aesthetic taste and fashion, legal decisions with a potentially large impact on the art market end up having little or none of the expected effect. It remains to be seen how Ready-Made B does compared to other Immendorff works if and when it is offered for sale again.

In conclusion the old age “caveat emptor” is not the only lesson for the art world. In this case the Court of Appeals sided with the purchaser specifically because the seller, in this case artist, did not do enough to protect his legacy but instead potentially endangered it by his own actions.

Sources:

  • Henri Neuendorf, “Lawsuit Erupts Over 400 Jörg Immendorff Works” Artnet
  • Benebelte Affen, http://index-magazin.com/online/benebelte-affen/
  • Article 17 Section 2 UrhG
  • Article 23 Urhg

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.

Case Review: United States v. Twenty-Nine Pre-Columbian and Colonial Artifacts, From Peru

By Chris Michaels*

Screen shot 2014-10-06 at 12.52.16 PM

An example of a Pre-Columbian Peruvian artifact, which is not related to the above-mentioned case, that is currently for sale at the Artemis Gallery in Colorado is pictured below.

Screen shot 2014-10-06 at 12.51.59 PMMiami has long operated as a market for stolen cultural objects. The high-profile case of Henri Matisse’s “Odalisque in Red Pants,” which was recovered in Miami in 2012, is a prime example of Miami being one of the top destinations for hot cultural objects. On 11 September 2014, an Order out of the Southern District of Florida addressed a Motion filed in U.S. v. Twenty-Nine Pre-Columbian and Colonial Artifacts From Peru, which shed more light on the illicit cultural heritage trade that pervades South Florida. The recent Order, issued by U.S. District Judge Joan A. Lenard, allowed the United States government to pursue a claim for the forfeiture of artifacts illegally exported from Peru.

The property in dispute in the U.S. v. Twenty-Nine Pre-Columbian and Colonial Artifacts From Peru case arrived in Miami in 2010. Jean Combe Fritz, a citizen of Peru, was caught at Miami International Airport on 21 August 2010 with thirty-two ancient artifacts stashed in his luggage. The artifacts included bone carvings, ornaments, and Inca burial bundles. Upon initial examination by officers of the United States Custom and Border Protection (“CBP”), Fritz told the officers that he intended to send the artifacts to his aunt in San Francisco. After more extensive questioning, however, Fritz admitted that the artifacts were to be distributed to three people, whose names Fritz received from his father.

The artifacts were seized by the CBP, submitted to Dr. Carol Damian, the Director of the Patricia and Phillip Frost Art Museum, for further examination and subsequently identified as archeological and ethnological material from Peru. The U.S. then submitted detailed photos of the artifacts to the Minister Counselor of the Embassy of Peru, Luis Chang, who in turn notified the United States government that the artifacts were indeed a part of the Peruvian cultural heritage and, as such, governmental authorization was required to export the items. For these particular items, Chang noted, no such authorization was provided.

The United States moved for forfeiture of twenty-nine of the thirty-two artifacts under sections 2601-2613 of the Cultural Property Implementation Act (“CPIA”), which addresses the illicit trafficking of cultural property. In this complaint, the United States argued that the artifacts were produced by indigenous tribal people in Peru during the Pre-Colombian or Colonial periods, the artifacts are important to the cultural heritage of the Peruvian people, and that the artifacts were subject to export control by Peru.

Another three artifacts were seized by the United States as stolen cultural property under 19 U.S.C. §1595a. In the complaint, the United States argued that these artifacts were illegally introduced into the United States because they were stolen, smuggled, or clandestinely imported or introduced. Based on the Order alone, it is unclear why two separate actions for the artifacts were commenced, but both were challenged by Fritz in a Motion to Dismiss, which sought dismissal for lack of subject matter jurisdiction, failure to state a cause of action, and lack of due process of law.

In denying the Motion to Dismiss, the Court first addressed the novel issue raised by Fritz’s attorneys of whether the Court of International Trade (“CIT”), which is based in New York City, has exclusive jurisdiction over actions that arise out of any law providing for embargoes. The District Court noted that the CIT has exclusive jurisdiction over civil actions commenced by the United States arising out of import transactions concerning civil penalties, the recovery of a bond, or the recovery of customs duties. Therefore here, the Court correctly reasoned that the CIT did not have jurisdiction over the two actions because they involved criminal forfeiture of property. Thus, District Court retained jurisdiction over the cases.

The Court also denied the Claimants argument to dismiss the cases for the United States’ alleged failure to state a claim. With respect to the first case involving a forfeiture action under the CPIA, the Court noted that the United States has the burden to show that the artifacts have been listed by the Secretary of the Treasury on a designated list. The burden then shifts to the claimant to show that the artifacts were legally imported. If the claimant cannot prove legal importation, the artifacts are seized and offered for return to the State Party. In this case, the Court stated that the United States successfully demonstrated that the artifacts were of Pre-Colombian “remains… metal objects, and textiles.” Further, the Court noted that the Claimant failed to show that the artifacts were legally imported. As such, the Court found that the United States would likely be able to meet its burden of proof regarding the CPIA claim.

As for the forfeiture action involving the other three artifacts, the Court found that there was probable cause to believe that the Claimant clandestinely introduced the artifacts into the United States illegally. Accordingly, the Court denied the Motion to Dismiss on the failure to state a claim issue.

Finally, the Court dismissed the argument that the Complaints should be dismissed based on a denial of the due process argument. The Court ruled that because Fritz was provided notice of and the opportunity to protest the detention of the artifacts, he could not claim that he was denied due process.

Reasoning in this ruling brings to light some of the procedural aspects of cases involving stolen cultural heritage objects that find their way to Miami and potentially other ports of entry into the United States. By denying the Motion to Dismiss and allowing the United States to proceed with the forfeiture cases, the Court has laid another brick in the wall that closes off Miami from Latin America as a destination and illegal market for these kinds of stolen artifacts. While the ruling is not groundbreaking in terms of its application of law, it is noteworthy as a step in the right direction for the resolution of cultural heritage cases in United States Courts.

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.

Boston Raphael: Legal Art History

20140311143536713_0001By Belinda Rathbone*

In 1969, my father, Perry T. Rathbone, then Director of the Museum of Fine Arts, Boston (the MFA or the Museum), bought a previously unknown painting by Raphael from an elderly art dealer in Genoa. Attributed to one of the great artists of the Italian Renaissance, this portrait of a young girl was to be the crown jewel of the MFAs centennial year: 1970. But questions about the legitimacy of its exportation from Italy, compounded by widespread doubts about its attribution to Raphael, almost immediately turned this celebratory event into a tragic fiasco. For my father, it spelled the unraveling of his distinguished thirty-two year career as a museum director. In the then emerging field of art law, the Boston Raphael became a landmark case.

At the time, Italian export laws established in 1939 stipulated that any work of art considered an important piece of the nations cultural heritage could be exported only after the state itself was given a two-month option to acquire it.  Furthermore, if the right was not exercised, a hefty 30% export tax was imposed on any potential buyer from outside of Italy.  This law effectively paralyzed the Italian art trade for important works, and the Art Dealers Association of Italy fought the export tax for years, without success. However, an unknown or unpublished work stood a reasonable chance of legal export. Though technically speaking an important work of art, whether known or not, should have been registered with the Italian government, it was unusual for private owners to volunteer such information. The result was that countless works of art in private hands remained unregistered, including the Boston Raphael. Dealers and foreign collectors alike took advantage of this gray area of the law; while they weighed the odds, the only certainty they could rely on was that once the object was safely outside Italy, Italian law did not apply. As explained by art law specialist John Merryman in Law, Ethics, and the Visual Arts, although the offended nation could punish the smuggler, if it could catch him, and might have the power to confiscate the illegally exported article if it should be returned to the national territory, it could not expect the foreign nation to punish the smuggler or seize and return the object. With the Museum Boards approval, Rathbone agreed to pay art dealer Ildebrando Bossi $600,000 for the painting, drawing on the previously untapped Charles Bayley Fund, which was earmarked for the purchase of an important painting.

Unfortunately for the MFA, contemporaneously with the acquisition, Italys top art sleuth, Rodolfo Siviero [1911-1983], was looking for a high profile export case to burnish his diminishing reputation before he retired. Almost as soon as the picture was unveiled in Boston, Siviero began his investigation into its source, working through a network of art historians in Italy. Before long he had traced the picture to Bossi in Genoa, who already had a reputation for illicit art smuggling. Siviero also began to question the U.S. Customs agents to track the paintings recent arrival in Boston. At the same time, as if there was not enough for the Museums administration to worry about, experts on both sides of the Atlantic began questioning the paintings attribution to Raphael.

With scandal looming, Rathbone and the trustees of the MFA were now faced with a dilemma: how to quell both Sivieros accusations of smuggling, as well as questions from U.S. Customs agents who had been consequently alerted. Seeking legal counsel, they hired the Washington D.C. law firm of Covington & Burling (Covington), whose lawyers at first reassured them that they had operated within the law. What they did not know at that time was that MFA curator Hanns Swarzenski, who had hand carried the picture to Boston from Genoa, had neglected to declare it when he came through customs in September 1969. While there was and still is no import duty to pay on an object over 100 years old, the painting should have been declared. This technicality, which under regular circumstances would have been considered a minor omission, would end up costing MFA its first and only Raphael.

On the morning of 7 January 1971, U.S. Customs agents, armed with a search warrant, entered the Museum without warning and seized the painting. Because of its fragile nature and the below freezing temperatures outside, the MFAs head conservator was able to persuade them to leave it in the Museum in a vault under the customs seal. One week later a registered letter arrived from U.S. Customs informing the Museum that it was liable for a penalty of $1,200,000 (the estimated domestic value of the painting, even though the penalty twice exceeded what MFA paid in the end) for Swarzenskis  failure to declare the painting at Customs in violation of the provisions of section 1497, Title 19, United States Code. Soon afterward Rathbone and Swarzenski appeared before a grand jury in Boston to determine if they had conspired to defraud the U.S. government.

Meanwhile lawyers from Covington in collaboration with Ropes & Gray in Boston hammered out a nine-page petition for the mitigation of fines and release of the painting from Customs, arguing that The penalty proposed is extremely severe, particularly when the government has no revenue at stake such disastrous consequences should not be visited upon the museum because of the failure of one employee to declare a non-dutiable painting.

The fine was reduced from $1.2 million to $5000, and no indictment was returned from the grand jury. No treaty existed requiring the U.S. to return the painting, an action that could only be considered as an act of generosity. The UNESCO convention of 1970, which the U.S. had joined other signatories in adopting, had broken ground on new agreements between nations on the means of prohibiting and preventing the illicit import, export, and transfer of ownership of cultural property, but these were far from codified when the picture left Italy in 1969. However, in a meeting called on short notice when Rathbone was traveling abroad in the summer of 1971, the MFA trustees voted to voluntarily return the painting to Italy.

Soon after a formal agreement between the MFA trustees and assistant U.S. Treasury secretary Eugene Rossides, the painting was escorted on a flight to Rome in September 1971, and received by the triumphant Siviero. The MFA was never reimbursed for the money they had already spent on the painting, about $350,000 USD, for another unfortunate piece of timing was that the elderly Genoese art dealer, Ildebrando Bossi, died in prison awaiting trial for illegally exporting the Raphael. The Italian government had seized his assets and apparently felt no obligation to refund the MFA.

Many questions remain about this curious case. Most importantly: was the painting an authentic Raphael, and therefore an important piece of Italys cultural heritage? Based on its consignment to storage in the Uffizi Gallery in Florence since the early 1980s, it would not seem so. Were the MFA Trustees meeting their fiduciary responsibility in returning the disputed painting with no promise of a return on their investment, and its attribution in question?

The case of the Boston Raphael served to heighten awareness of the need for more consistent policies between nations on the export of works of art. The UNESCO convention of 1970 sought to reconcile values of cultural property and the promotion of free trade, breaking ground for bilateral or multilateral agreements on the export laws pertaining to works of art and antiquity. In recent years high profile cases involving illegally excavated antiquities bought by American art museums have brought these issues to the foreground and led to a more vigilant regulatory environment. The Boston MFA is one of the few museums to employ a full time provenance researcher and earlier this year the Museum announced that it would be returning eight antique sculptures to Nigeria after confirming that they had been stolen before making their way onto the United States art market and acquired by the Museum.

About the Author: Belinda Rathbone is a biographer and fine arts journalist. She is the author of Walker Evans: A Biography, and The Guynd: A Scottish Journal.

For the full story of the Boston Raphael read her forthcoming book, The Boston Raphael, Boston: David R. Godine, which reviews the circumstances behind the acquisition and return of the painting, the various conflicting motivations behind the key players in the episode, and the questionable inevitability of its outcome.

Case Review: Karlsson v. Mangan

By Chris Michaels*

On 11 June 2014, Plaintiff Anders Karlsson filed a case in the Central District of California against various individuals and entities alleging that they set up fraudulent investment schemes involving fake or forged artworks, attributed to Pollock and de Koonig, as well as breached their fiduciary duties to Plaintiff regarding his investment in a luxury yacht. The Plaintiff, Anders Karlsson, is engaged in mining, procuring, and wholesale and retail purchases and sales of boutique, minerals, fossils, gems, and natural history items. The named defendants are, John Leo Mangan III, Michael William Force, Taryn Burns, Jovian “John” Re, Leslie James, and the entities Art Possible, LLC, Art Force, LLC, and Raven Art, Inc.

In the Complaint, Karlsson alleges that his former personal friend of nineteen years, Defendant Leslie James, became aware that Karlsson was about to generate substantial sums of investment capital through the sale of an interest in one of his companies. The Complaint states that, armed with this information, Defendant James and the other Defendants conspired and acted in concert to defraud Karlsson through the use of fake and/or forged artworks.

The first claim in the Complaint involves the alleged breach of a Joint Venture Agreement (“JVA”) between Karlsson and Defendants Raven Art, Inc., Mangan, and Force. Pursuant to the JVA, Karlsson purchased a Jackson Pollock painting for $1,000,000, in which Karlsson maintained a 23.5% interest. The Raven Art Defendants represented the Pollock to be authentic and, according to Karlsson, he relied on their representations when purchasing the painting. Under the terms of the JVA, the painting was not to be moved from storage in Long Island City, New York without Karlsson’s written consent nor without insurance approved by Karlsson. Additionally, the JVA stipulated that painting was not to be sold for less than $30,000,000.

Karlsson maintains that, in spite of the terms of the JVA and in breach thereof, the painting was, in fact, moved without his consent and without the requisite insurance to an expert chemical art researcher in London, England. While the Complaint does not specifically state why the painting was moved to the researcher, it appears that the move was to have the researcher confirm the authenticity of the painting. In addition to the breach of contract claim on this issue, this claim of the Complaint also notes that Karlsson now has legitimate issues regarding the authenticity, provenance, and true value of the painting.

In the second claim, Karlsson maintains that he paid Defendant Re, identified in the Complaint as a “major source” of renowned artworks, $793,000 for twenty-one artworks. The artworks were represented by Re, Art Force, and Art Possible to Karlsson as being genuine and authentic works, with documented valid provenance. Of the twenty-one works purchased, three of them were Jackson Pollock paintings. Karlsson states that works were purchased pursuant to “earn-in” contracts, under which the Re, Art Force, and Art Possible were required to perform services to authenticate the artworks. To date, Karlsson asserts that no authentication services have been performed by the Defendants and, in fact, Karlsson claims that at least four of the works are fake: all three Pollock paintings and a Max Ernst sculpture. Karlsson maintains that the Defendants had knowledge of the fakes, and also states that some of the remainder of the artworks purchased also appeared to be fakes and/or with falsified provenance. Among other things, Karlsson is seeking declaratory relief on the issues of authenticity, provenance, and the true value of the Re supplied artworks.

The third claim of the Complaint deals with another earn-in contract whereby Karlsson purchased works from the Art Force Defendants for $695,000. Similar to the second claim, Karlsson states that he was coerced to buy the works, including a John Fernely, Sr. oil on canvas, because of representations made by Art Force that the works were authentic. Karlsson now claims that the works are fakes and he believes that the Art Force defendants knew of their falsity before the sale.

The fourth claim of the Complaint involves another earn-in contract issue, this time between Karlsson, Art Force and Art Possible, wherein Karlsson purchased nine artworks and agreed to provide the capital, time, and effort to arrange for repair and restoration of the works. As stated in the Complaint, Karlsson now believes that at least five of the nine artworks are fakes and the other four are of uncertain authenticity.

The fifth claim in the Complaint, solely against Defendant Leslie James, alleges breach of contract, fraud in the inducement, and theft and conversion, among other causes of action. In this claim, Karlsson claims that James bought several fake Picasso artworks from the Art Force Defendants in order to include them in a compendium of works that James is self-publishing. As James was compiling works to include in his publication, Karlsson delivered to James a collection of twelve paintings by Gaston Longchamps to be photographed for inclusion. Karlsson claims that James returned eleven out the twelve paintings and is now refusing to return the last painting.

Additionally, Karlsson asserts here that he personally loaned James $75,500 and James provided two paintings as collateral: a Pollock painting and a de Koonig painting. When Karlsson demanded repayment of the loan and James refused, Karlsson paid to have the paintings authenticated by art experts. The results of those authentication efforts were negative and, when Karlsson informed James of the results, James demanded their return so that they could be sold. Karlsson now alleges that James never intended to sell the paintings and states that they are now displayed in James’ publication as authentic paintings.

Finally, the last claim of the Complaint avers that Defendants Art Possible, Mangan III, and Force induced Karlsson to purchase a yacht for a price that far exceeds its fair market value and that is less than the value represented to Karlsson by the Defendants.

Through the Complaint, Karlsson is seeking, among other things, compensatory, special and actual, consequential, and punitive and/or treble damages. Karlsson is also seeking injunctive relief to compel specific performance of the various agreements outlined above.

Interestingly, in the claims associated with the alleged fake and/or forged artworks, Plaintiff alleges he is entitled to declaratory relief as to the issues of authenticity, provenance, and true value of the artworks. Through this call for relief, it appears that Plaintiff is requesting the court to definitively rule on the authenticity of the works even though Plaintiff is stating that, for the majority of the works, the requisite provenance research and authentication efforts have yet to be performed. It seems likely that the expensive and lengthy process of determining the authenticity of these works will need to be performed by a third party before any determination is made.

Plaintiff is represented by Meir J. Westreich of Pasadena, CA.

Sources:

  • Complaint, in Karlsson v. Mangan III, C.D. Cal., Filed on June 11, 2014).

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 @CMichaels88.

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

Mr. Corcoran and the Trustees: The Corcoran Gallery of Art, a petition for Cy Pres, and the fate of an institution

Screen Shot 2014-07-25 at 10.19.23 AMBy Caroline Camp

The Corcoran Gallery of Art in Washington, D.C. began as the private art collection of Mr. William Wilson Corcoran (1798-1888). In the mid-19th Century, Corcoran would host public viewings of his collection but, given the growing number of artworks and visitors, he decided to create a formal structure to support the collection and his own personal mission of promoting the arts. In 1869, he executed a Deed of Trust with the charitable purpose of maintaining an institution in D.C. dedicated to art and “encouraging the American genius.” The trustees obtained federal charter and later, in 1890, established what is now the Corcoran College of Art + Design in a further effort to fulfil the intent of Mr. Corcoran’s original Deed.

Fast forward to 2014, nearly 150 years after Mr. Corcoran created this institution. According to the Corcoran’s website, the public Gallery holds over 16,000 artworks and the College has 615 undergraduate or graduate students enrolled. Although these figures look healthy, the institution’s corresponding financial figures appear less so. Currently, the fate of the institution hangs in the balance between two competing forces – Mr. Corcoran’s 19th century intentions and the 21st century financial realities. A court case is pending before the Superior Court of the D.C. Civil Division to determine which force shall prevail.

***

In 2012, amidst rumors of financial and other struggles, the Corcoran’s trustees released a statement which acknowledged that the institution was “struggling with the effects of a difficult economy” and considering the “available options,” which included the sale of their historical home (the Flagg building). Two years later, the New York Times reaffirmed that the Corcoran was facing “Facing mounting debts, a shrinking endowment and tens of millions of dollars in renovations.” This coincided with an announcement from the trustees that the Corcoran was proposing to enter into a partnership with the George Washington University and the National Gallery of Art. Under the proposal, the George Washington University would take over the operation of the College, and the National Gallery of Art would take responsibility for the Gallery’s contemporary/modern art collections. Remaining art works would be donated to other museums.

On its face, the trustees’ proposal violates the initial charter that established the Corcoran, and seemingly runs afoul of Mr. Corcoran’s intentions behind creating the entity.  In order to proceed, the trustees must prove before federal court that the original objectives created by Mr. Corcoran are impossible to carry out and that the proposal is the closest alternative.  To do so, the trustees filed a Cy Pres petition with the Superior Court of the District of Columbia Civil Division.  “The doctrine of cy pres is an equitable remedy intended to modify a charitable use while preserving a charitable purpose,” the District of Columbia states in its response to the petition.  The District supports the petition, indicating that the proposal is necessary to keep the institution in D.C.

Not everyone supports the proposal, however.  A collection of such individuals opposed to the trustees’ proposal, including Corcoran students and employees, banded together to form Save the Corcoran.  The organization filed a twenty-page brief with legal arguments and exhibits in response to the petition, requesting a delay in the Cy Pres ruling.   In response, Judge Okun ruled on July 21, 2014 that current students and employees have legal standing to challenge the petition, but other members of Save the Corcoran do not. Proceedings were extended so that both sides could present arguments.

***

How should the Corcoran best realize the charitable purposes set out in a document from 1869 and the intentions of an absent founder? How should these intentions be realized in the midst of serious financial difficulties? Similar questions were posed in the contentious case of the Barnes Collection, and many commentators have noted this parallel, including Randy Kennedy at the New York Times. In that case, after several years of arguments, Mr. Barnes’ original intentions for his art collection were modified so that the Barnes Foundation could overcome financial difficulties. While Judge Okun decision was pending, University of Maryland indicated its willingness to assist with preservation of the Corcoran legacy, and offered partnership to Corcoran.

In the closing arguments on August 6, Andrew Tulumello, representing the challengers to the petition, argued “There is no historical precedent for what the trustees — who, like generations of trustees, are only temporary stewards of this institution — are preparing to do here[.]” Charles Patrizia, representing the trustees, countered that the proposal is the only way forward, and “there is no white knight” that can supply the money necessary to save the institution.

On 19 August 2014, Judge Okun approved the merger initially supported by the trustees. The Court found that “The GW/NGA proposal is the best way to effectuate Mr. Corcoran’s original intent, given the Corcoran’s current financial circumstances and the option that actually are available to the Trustees at this time.” Full opinion is available here.  No appeal expected.

Sources:

About the Author: Caroline Camp, Esq., one of the founding members of Center for Art Law. She specializes in intellectual property and art law issues,Screen Shot 2014-07-25 at 10.19.23 AM and she can be reached at carovcampATgmail.com.

Knoedler Obituary (1857 – 2011): Select Legal History of the Oldest American Art Gallery

By Irina Tarsis*

What we call the beginning is often the end. And to make an end is to make a beginning. The end is where we start from. ~ T. S. Eliot

Every important art museum and private collection in the United States likely owns works of art that at one point or another, or more than once, sold through one of the oldest and finest American art galleries, Knoedler & Co (the Gallery). A tour through the annals of case law also uncovers many a Knoedler references, from matters under review by the United States Tax Court to illegal wire-tapping hearings, from the United States Customs Court citations to nineteenth century unfair competition conflicts, from World War II looted art to Soviet nationalization title disputes, from warranty breaches to racketeering, and fraud.

The rise and demise of the Gallery span three centuries. It was established by Michael Knoedler and members of a French firm Goupil, Vibert & Cie (later Boussod, Valadon & Cie) in 1848, well before the founding of the major museums in the United States. In 1857, Michael Knoedler bought out the Gallery from his French partners and shifted from selling French Salon paintings to providing old master paintings to the American art market. In 1971, the Gallery was acquired by Armand Hammer, a clever businessman and the founder of The Armand Hammer Museum of Art and Culture Center in California, who decades earlier brought valuables nationalized by the Soviets into the United States and sold books, paintings, jewels and much more in American department stores as well as antique shops.

On November 11, 2011, the Gallery suddenly announced that it was shutting down and going out of business. The apparent reason for closing this venerable institution was the sale of dozens of works falsely attributed to the high-ticket twentieth century artists such as Jackson Pollock, Mark Rothko, and Robert Motherwell. The Gallery and its principles and agents were subsequently sued for fraud, racketeering, breach of contract, breach of the covenant of good faith and fair dealing, unjust enrichment and more.

Recognized for its significance in the field, parts of the Gallery’s archives were purchased by the Getty Institute in 2012. The archive contained letters written by the preeminent nineteenth and twentieth century collectors and artists, including Léon Bakst, Alexander Calder, Edgar Degas, Greta Garbo, Paul Gauguin, Sarah Bernhardt, Childe Hassam, Winslow Homer, Rockwell Kent, Henri Matisse, Irving Penn, Mark Rothko, John Singer Sargent, and Edward Steichen.

The Gallery had been in existence for more than 160 years and its demise was a sad chapter in the American art and business history. This article will explore select cases that map a footprint the Gallery left on the American legal history.

Intervivos 

The first legal action on record involving the Gallery, in a role of a plaintiff, dates back to 1891. Michael Knoedler tried to stop successor in interest to the French gallery from operating under the name he was using for his business. In 1887, three decades after he bought out the the New York concern, new owners of the French gallery owners opened another storefront in New York City, operating under the name of “Goupil & Co., of Paris; Boussod, Valadon & Co., successors.” The name was confusingly similar to that used by Knoedler, who has been doing business under the name of “Goupil & Co., M. Knoedler & Co., successors” since the 1850s. Nevertheless, the court held that the acts of the defendants did not “depreciate the value of the good-will of the concern bought by M. Knoedler in 1857,” and that Knoedler did not acquire “the exclusive right to use the name of Goupil & Co. as a trade designation in [the United States]”. In 1893, the Second Circuit Court of Appeals affirmed the ruling denying Knoedler’s request to enjoin the French art gallery from using the Goupil & Co business name in New York and the United States.

Next, in 1919, the Gallery protested assessment of import duties by the collector of customs at the Port of New York. In the case of M. Knoedler & Co. v. United States, 36 Treas. Dec. 63, T. D. 37898, G. A. 8229 (1919), the court considered proper classification of a bronze statue produced by Auguste Rodin. There, a board of three assessors agreed that Rodin was a professional sculptor of high order and his sculpture, imported by Knoedler, was produced (carved, remodeled and improved) by the artist. Thus the court held that the bronze statue was an ‘original’ and not subject to an ad valorem 15% fee as initially estimated. At the time the sculpture was valued at 12,000 francs.

Some of the Gallery-affiliated sales from the 1930s and 1950s would instigate legal action decades later. For example, between 1997 and in 2000, the Gallery found itself a third party defendant to the dispute between the Seattle Art Museum (the Museum) and Elaine Rosenberg, heir of Paul Rosenberg, an important Jewish art dealer in Paris, whose collection was confiscated by the Nazis during World War II. The facts of the dispute revealed that in 1954, the Gallery sold a 1928 Matisse painting, Odalisque, to Virginia and Prentice Bloedel, who bequeathed it to the Museum. The Museum took possession of the painting in 1991 and full ownership in 1996. Elaine Rosenberg sued the Museum to recover the painting, and the Museum impleaded the Gallery, alleging fraud and/or negligent misrepresentation at the time of the 1954 sale. The Gallery was able to get out of the dispute, with its costs reimbursed, by demonstrating that it was not a party to the Bloedel’s bequest to the Museum.

Ultimately, the Museum Board of Trustees decided to return Odalisque to the Rosenberg heirs in 1999, and following the return, the Museum and the Gallery reached an out-of-court agreement, whereby the Museum was able to chose “at least one painting from the inventory of the Knoedler gallery” and the Gallery waived its right to collect awarded attorney’s fees. The Director of the Gallery at the time, Ann Freedman, was quoted as saying “If there’s anything I would choose to emphasize, it’s that this settlement is larger than our specific case… Being in the world of art, this case has the potential to be part of a universal understanding and healing.”

Four years later, in 2004, the Gallery was defending itself for a sale of another painting stolen during World War II. In 1955, the Gallery sold a painting Spring Sowing by the Italian artist Jacopo da Ponte to the Springfield Library and Museum Association (the Association) for $5,000.  The bill of sale stated that the defendant “covenants with the grantee that it [is] the lawful owner of the said goods and chattels; that they are free from all encumbrances; that it have [sic] good right to sell same as aforesaid; and that it will warrant and defend the same against lawful claims and demands of all persons.” However, in 1966, the Director General of the Arts for the Italian Government wrote to the Association’s director, claiming that Spring Sowing belonged to the Uffizi, a museum in Florence, Italy. Apparently the painting was on loan to the Italian Embassy in Poland before World War II, and it went missing during the War. The Association exchanged letters with the Gallery staff and Italian officials, and while the Gallery staff acknowledged that probably this painting was the one stolen from the embassy, little action was taken until the early 2000s, when the Italian government reached out again to the Association. Following the 2001 return of the painting, the Association sued the Gallery alleging breach of contract, breach of implied warranty, fraud and deceit, negligence and misrepresentations, among other counts. The ultimate decision or the terms of a settlement between the Association and the Gallery are not public; however, the court refused to dismiss this case even though the Gallery argued that the plaintiff’s actions were time barred. In fact, the court refused to decide the case at the pleading stage, and found that the Museum may be able to argue equitable estoppel to overcome the Gallery’s time limitations argument, ruling that the statute of limitation was tolling since the 1960s.

Posthumously

Ann Freedman turned out to be the last of the Gallery directors. Now a principle of another art gallery at 25 East 73rd Street in New York City, called FreedmanArt, Freedman worked at the Knoedler Gallery from 1977 through 2009.

When venerable establishments like the Gallery crumble, the aftershocks tend to reverberate far and wide. The circumstances of its demise in particular, sale of numerous forgeries at high market value prices, triggered many legal proceedings. The fakes came from a single source, an art dealer named Glafira Rosales, who offered the Gallery dozens of “previously unknown works painted by important Abstract Artists.” Rosales provided only basic background about the original collector of these works, but the art world was eager to embrace a crop of fresh Pollocks, Rothkos, Klines and other prized artists. Many art experts, including curators with the leading galleries and authors of catalogue raisonnes, seasoned collectors and gallerists, such as Ann Freedman, viewed the works offered by Rosales and believed them to be authentic. As more heretofore unseen works were entering the market, Rosales fabricated provenance information, even allegedly naming Alfonso Ossorio, an artist and a collector, as a conduit from the famed artists to the anonymous collector as an explanation of their long lost status.

The too good to be true discovery of the Abstract Expressionist treasure trove was simply just that. On September 16, 2013, Rosales plead guilty to all counts brought against her, including charges of wire fraud, tax evasion, failure to file financial statements, money laundering, and more. She is facing a prison sentence of almost 100 years, revocation of her U.S. citizenship, as well as monetary penalties in excess of $80 million. Rosales is reportedly cooperating with the government, but that does nothing for the defunct Gallery.

Between 2011 and 2013, there were half a dozen legal actions started against the Gallery in the Southern District of New York, and complaints continue to materialize.  First, on December 1, 2011, Pierre Lagrange, a businessman from London, filed a complaint against Knoedler Gallery LLC and Ann Freedman, having received a forensic report that showed that the work attributed to Pollock that he purchased from the Gallery for $17 million was a forgery. In 2012, John D. Howard sued Freedman, Rosales and the Gallery, accusing them of common-law fraud, breach of warranty, mistake and RICO violations, for selling him a fake Rothko for $8.4 million.

Next, in rapid succession, the Martin Hilti Family Trust, Domenico and Eleanore De Sole, Frances Hamilton White, David Mirvish Gallery Limited, and The Arthur Taubman Trust all sued to recover their losses on forgeries the Gallery sold to them from the Rosales Collection. For example, Frances Hamilton White brought action seeking compensatory and punitive damages for the sale of a fake Pollock. Together with her ex-husband, she purchased a purported Jackson Pollock painting for $3.1 million, which has since been determined to be a forgery. In the complaint, the plaintiff submitted that she “chose to acquire art through Knoedler because of its reputation as New York City’s oldest art gallery.” She purchased multiple works for about $5 million because she and her former husband relied on the “knowledge, experience and sterling reputation” of the Gallery and its staff. The collectors tried to unwind the sale when the work was declined on consignment by an auction house because it did not appear in a Pollock catalogue raisonne. White alleged that the defendants “profited greatly from the fraudulent sale(s),” namely Rosales received about $670,000 for her “Pollock”, a price well below market value, while the Gallery and its agents kept more than $2.4 million.

The most recent complaint to name the Gallery as defendant was filed on August 30, 2013. Michelle Rosenfeld Galleries sued two collectors, Martin and Sharleen Cohen, and Knoedler Gallery LLC, because Rosenfeld felt threatened that its art sales from 1997 and 1998 were under suspicion by the Cohens. These clients allegedly requested a refund for a Pollock and a de Kooning Rosenfeld sold to the Cohens (having first purchased them from the Gallery). Rosenfeld is seeking declaratory judgment that any claim by the Cohens is barred as a matter of controlling law, that any continued pursuit of refund would be frivolous and merit compensation of Rosenfeld’s legal expenses. Lastly, Rosenfeld requests an indemnification by the Gallery against any purported liability in case the claim by the collectors proceeds.

According to Freedman, Knoedler sold about 40 paintings from the Rosales Collection. In a conservative prognosis, more suits against Knoedler are coming down the legal conveyer belt. The aftershocks of the Gallery’s demise are also leaving marks in the courts. Most recently, Ann Freedman, named defendant in some of the lawsuits, brought a legal action of her own. In Freedman v. Grassi, she alleges that another art dealer, Marco Grassi owner of Grassi Studios gallery, defamed her when his opinion of Freedman’s due diligence in investigating the Rosales Collection appeared in the New York Magazine. Grassi was quoted as saying, “It seems to me Ms. Freedman was totally irresponsible, and it went on for years… Imagine people coming to someone and saying every painting you sold me is a fake. It is an unthinkable situation. It is completely insane. A gallery person has an absolute responsibility to do due diligence, and I don’t think she did it. The story of the paintings is so totally kooky. I mean, really. It was a great story and she just said, ‘this is great.’ by stating that she did not do her due diligence.”

Freedman alleges that she was acting in good faith and with due diligence conducted research into the provenance of the Rosales Collection. She alleges that Grassi deliberately published a false defamatory statement about her to harm her reputation, and thus she seeks compensatory damages, nominal damages and punitive damages, as well as judgment interest allowable by law, attorney fees, legal costs and any other appropriate relief. Whether Freedman’s case survives pretrial motions or not remains to be seen. However, the Gallery is now figuring in association with a First Amendment and freedom of speech dispute.

Even posthumously the Gallery finds itself in a rare situation having shaped the habits of generations of collectors, going out of business with a bang and not a whisper, and having been sued multiple times. The way things are developing, it may merit the prize for the most sued art galleries of the modern times, second perhaps only to Salander-O’Reilly. However, as the Rosales conspiracy fades away, and the complete history of the Knoedler Gallery waits to be written, what is worth emphasizing is that this venerable Gallery will more likely be remembered for its avant-garde aesthetic and the authentic gems it dealt in rather than the fakes and legal disputes that marred its last chapter. Having left an indelible mark on the world of art in the United States, the Gallery’s legacy is larger than the series of recent and pending cases.

On September 30, 2013, U.S. District Judge Paul G. Gardephe ruled in de Sole and Howard actions against Knoedler Gallery, Ann Freedman, Glafira Rosales and other Defendants. The Judge dismissed all claims of wrongdoing against the gallery owner, Michael Hammer; but he denied most motions to dismiss charges against Freedman and Rosales, such as the charges of fraud, unilateral and mutual mistake, fraudulent concealment, and aiding and abetting fraud. Naturally, the court granted Plaintiffs leave to amend their complaints.

Postscript

Since the scandal broke in the press, at least 10 cases have been brought against the gallery and its affiliates. The artist who is believed to have created all of the Rosales forgeries, Pei–Shen Qian, fled to China from where he had been quoted as saying that “he was duped too”.  Before the Knoedler legal saga ends, collectors should heed the warning of John Cahill, a New York-based art attorney wrote “[if] impact of the Knoedler scandal will likely have repercussions on the New York art market for years to come, it highlights one of the risks that art purchasers should now be aware of. While maintaining the confidentiality of sellers is an accepted part of the art world, the Knoedler case highlights the importance of actually knowing the identity of the consignor.”

*Note from the Editors: This article is reprinted with permission from: Entertainment, Arts and Sports Law Journal, Fall/Winter 2013, Vol. 24, No. 3, published by the NYS Bar Association, One Elk Street, Albany, NY 12207.

Sources:

  • Knoedler v. Boussod, 47 F. 465, 1891 U.S. App. LEXIS 1455 (C.C.D.N.Y. 1891).
  • United States Dept. of the Treasury, United States. Customs Court. Treasury Decisions Under Customs and Other Laws, Vol. 36, Jan.-Jun.1919 (Washington, Government Printing Office, 1919) 63.
  • Schapiro v. Commissioner, T.C. Memo 1968-44, 1968 Tax Ct. Memo LEXIS 254, 27 T.C.M. (CCH) 205, T.C.M. (RIA) 68044 (T.C. 1968).
  • People v. Broady, 5 N.Y.2d 500, 158 N.E.2d 817, 186 N.Y.S.2d 230, 1959 N.Y. LEXIS 1447, 74 A.L.R.2d 841 (N.Y. 1959).
  • Ward Eggleston Galleries v. United States, 1955 Cust. Ct. LEXIS 7 (Cust. Ct. Jan. 4, 1955); Thannhauser v. United States, 14 Cust. Ct. 62, 1945 Cust. Ct. LEXIS 7 (Cust. Ct. 1945).
  • Knoedler v. Boussod, 47 F. 465, 1891 U.S. App. LEXIS 1455 (C.C.D.N.Y. 1891), aff’d, 55 F. 895, 1893 U.S. App. LEXIS 2026 (2d Cir. N.Y. 1893).
  • Springfield Library & Museum Ass’n v. Knoedler Archivum, Inc., 341 F. Supp. 2d 32, 2004 U.S. Dist. LEXIS 20438 (D. Mass. 2004); Rosenberg v. Seattle Art Museum, 42 F. Supp. 2d 1029, 1999 U.S. Dist. LEXIS 4302 (W.D. Wash. 1999).
  • James Panero, “‘I am the Central Victim’: Art Dealer Ann Freedman on Selling $63 Million in Fake Paintings,” NY Mag. (Aug. 2013) available at http://nymag.com/daily/intelligencer/2013/08/exclusive-interview-with-ann-freedman.html.
  • Press Release, The Getty Trust, “Getty Research Institute Acquires Archive of the Historic Knoedler & Company Gallery,” (Oct. 18, 2012), available at http://news.getty.edu/press-materials/press-releases/knoedler-and-company-gallery-archives.htm.
  •  Rosenberg v. Seattle Art Museum, 124 F. Supp. 2d 1207, 2000 U.S. Dist. LEXIS 7770 (W.D. Wash. 2000), aff’d, 42 F. Supp. 2d 1029, 1999 U.S. Dist. LEXIS 4302 (W.D. Wash. 1999).
  • John Cahill, “An Update on the Knoedler Law Suits” Sotheby’s (4 May 2014), available at http://www.sothebys.com/en/news-video/blogs/all-blogs/art-law/2014/06/an-update-on-the-knoedler-gallery-lawsuits.html
  • Complaint, in Freedman v. Grassi, Supreme Court of New York, Filed on Sept. 11, 2013, 1.
  • Lagrange et al v. Knoedler Gallery, LLC, 1:2011 cv08757 (S.D.N.Y. Dec. 1, 2011).
  • Howard v. Freedman et al., 1:2012-cv-05263 (S.D.N.Y. Jul 6, 2012).
  • Konowaloff v. Metropolitan Museum of Art, 702 F.3d 140 (2d Cir. 2012).
  • De Sole v. Knoedler Gallery, LLC, 2013 U.S. Dist. LEXIS 20368, 2013 WL 592666 (S.D.N.Y. Feb. 14, 2013).
  • The Martin Hilti Family Trust v. Knoedler Gallery, LLC et al., 1:2013-cv-00657(S.D.N.Y. Jan 29, 2013).
  • White v. Freedman et al., 1:2013-cv-01193 (S.D.N.Y. Feb. 21, 2013).
  • David Mirvish Gallery Limited et al v. Knoedler Gallery, LLC, 1:2013-cv-01216 (S.D.N.Y. Feb. 22, 2013).
  • The Arthur Taubman Trust et al v. Knoedler Gallery, LLC et al., 1:2013-cv- 03011 (S.D.N.Y. May 3, 2013).
  • Rosenfeld v. Knoedler Gallery, 653030/2013 (Aug. 30, 2013).

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.

Case Review: US v. Mask of Ka-Nefer-Nefer (8th Cir.)

By Angelea Selleck
Screen Shot 2014-08-10 at 9.50.38 PM

After nearly three years of legal battles between the United States government and the St. Louis Art Museum (the “SLAM”), the forfeiture case known as U.S. v. Ka-Nefer-Nefer (8th Cir. Jun 2014) has finally come to an end. Ka-Nefer-Nefer was an ancient Egyptian noblewoman during the Nineteenth Dynasty. The case was concerned with the ownership of the sacred funerary mask of Ka-Nefer-Nefer, which the SLAM purchased in good faith for half a million dollars from Phoenix Ancient Art, an international art gallery based in Switzerland with a murky past. Years following the purchase, Egyptian authorities approached the SLAM, claiming that the mask was stolen and illegally removed from Egypt. Upon this realization, the United States government attempted to seize the mask from the SLAM with a civil forfeiture action. Instead of complying with the government’s request, the SLAM sued the US government to assert their ownership. On 12 June 2014 the Eighth Circuit Court of Appeals decided that the mask would to stay in the possession of the SLAM.

Before discussing the details of the case, it is important to elaborate briefly on the process that museums undergo when acquiring an antiquity. Most museums in North America abide by the Code of Ethics set out by the International Council of Museums (ICOM) and the Association of Art Museum Directors (AAMD). The SLAM is a member of the AAMD and has adopted the principles set out in the Guidelines on the Acquisition of Archaeological Material and Ancient Art, which, among other requirements, state that museums should thoroughly research the ownership history of a work prior to the acquisition and make a strong effort to obtain all written records and documentation regarding its history. More importantly, the Guidelines also emphasize that museums should not acquire a work unless the provenance research confirms that the work was outside its country of discovery before 1970, which reflects the criteria in UNESCO’s 1970 Convention on the Means of Prohibiting and Preventing the Illicit Import, Export and Transfer of Ownership of Cultural Property. The SLAM is not a member of ICOM however, which tends to carry more weight in ethical matters.

It is also important to point out that it is rather uncommon for museums to sue the government when asked to return an object. Patty Gerstenblith, DePaul School of Law Professor, commented that this is a very unusual response to forfeiture claims and it is the first time a public institution like a museum decided to expend its funds to proactively sue the government.  Neither the museum’s nor the government’s litigation costs have been disclosed as of yet.

The United States government claims that the mask was stolen before it was brought into the country, thereby violating the Tariff Act of 1930. The United States filed a motion based on the National Stolen Property Act (NSPA), which allows the US government to prosecute on behalf of a foreign government and defend their national ownership law. The Act serves to deter U.S. citizens from dealing with international stolen goods. The strength of NSPA was illustrated in the landmark case U.S. v Schultz, where prominent art dealer Frederick Schultz was convicted of importing and selling looted Egyptian antiquities.

In the Schultz case, the U.S. court upheld Egypt’s patrimonial law, Egyptian Law on the Protection of Antiquities Law 117, which asserts Egyptian public ownership of antiquities and restricts private possession or ownership of cultural property. This law is arguably one of the world’s clearest ownership laws and probably the most efficient route for repatriation by stating all antiquities are the property of the government. Upholding Egypt’s patrimonial laws could have been a more efficient way to return the mummy mask to its original owners.

Screen Shot 2014-08-10 at 9.50.52 PMAccording to Egyptian records, the Ka-Nefer-Nefer mask was excavated in 1952 and registered as Egyptian property a year later. It was then placed in a storage facility at Saqqara and later sent to Cairo in 1966. It was not until 1973, during a routine inventory, that museum authorities noticed the mask was missing. The Museum has no record of sale or transfer of the mask between 1966-1973. The SLAM maintains that they conducted due diligence and purchased the mask from reputable sources. Furthermore, the SLAM claims that prior to the purchase, they inquired about its provenance with the Art Loss Register, the International Foundation for Art Research, INTERPOL and consulted with the then-director Mohammed Saleh, of the Cairo Museum. All of these institutions had confirmed that this piece was licit and there were no reports of the mask missing at the time of the proposed purchase.

In order to assert their ownership of the mask, SLAM maintained that they purchased the mask in good faith and that the statue of limitations had expired when the United States filed for forfeiture. The SLAM claims that the US government received notice of the importation in 2005 but only filed the forfeiture complaint until 2011. Due to the fact that the statute of limitations in the United States is five years, and more than five years have passed, SLAM believes that they have rightful ownership of the mask. 

In April 2012, the U.S. District Court, Eastern District of Missouri, dismissed the US government’s forfeiture complaint for failing to articulate with specificity “how the mask was stolen and smuggled, or how it was brought into the United States contrary to law”. Afterwards, the US filed a motion to reconsider when the government revealed new information that could support an amended complaint. However, the Court denied this motion and the parties attempted to settle this matter out of court. The negotiations failed and US government then appealed to the Eighth Circuit Court to re-open the case . The issue raised in their appeal is whether the District Court abused its discretion in denying the government’s post-dismissal motion for leave to file an amended civil forfeiture complaint.

Oral arguments took place in mid-January 2014, during which time Circuit Court Judge James Loken held that the US government made mistakes in the eyes of the District Court and that “they will have to beg for a do-over”.  The Court resumed on 12 June 2014 where the Court of Appeals affirmed the District Court’s procedural ruling.  Judge Diana Murphy acknowledged that the lower court did not abuse its discretion when dismissing the government’s forfeiture case. Murphy also emphasized that “the government was dilatory” with their amended complaint. In addition, she included cautionary comments about the subject matter of the case:

“The substantive issues underlying this litigation are of great significance, and not only to museums which responsibly seek to build their collections. The theft of cultural patrimony and its trade on the black market for stolen antiquities present concerns of international import…

…While this case turns on a procedural issue, courts are bound to recognize that the illicit sale of antiquities poses a continuing threat to the preservation of the world’s international cultural heritage. Museums and other participants in the international market for art and antiquities need to exercise caution and care in their dealings in order to protect this heritage and to understand that the United States might ultimately be able to recover such purchases.”

While the case of the US v. Mask of Ka-Nefer-Nefer has been settled, it will be interesting to see if there will be any future diplomatic actions undertaken by either the United States or Egypt for the return of the Ka-Nefer-Nefer mask.

Sources:

 

About the Author: Angelea Selleck is a contributing writer with Center for Art Law; she is a research intern at Iran Human Rights Documentation Center in New York.

Infamous Piracy: How the Lucrative Market for Forgeries is Transforming the World of Fine Art

2014-07-30

By Emma Kleiner

Stories of art forgeries capture the public’s imagination in a singular way: fascination centers upon the art itself and the disbelief that collectors, galleries, and professionals could have been misled by a fraud. Today, the expanding and profitable international art market has a correspondingly lucrative market in art forgery. While there have always been ways for forgeries to enter the art market, today’s forgery market is enlarged by the ease of creating fake masterpieces coupled with the multitude of sites where fakes can be sold—at auction, through galleries, or online. The negative publicity generated by any involvement with fine art forgeries is usually enough to steer away potential buyers or admirers; however, in a small set of cases the hoaxes or forgeries themselves become well-known in their own right and take on an infamy of their own. While no centralized national or international system for analyzing how to best regulate the art market exists, the recent strands of art forgery cases around the globe offer policy considerations to help eliminate the market for forgeries.

The art market has rebounded almost to its 2008 pre-crisis level. In 2013, the international art market registered sales of $64.5 billion, which was “close to its highest ever recorded level.” However, buyers are wary of collecting unfamiliar artists, and art purchases have largely focused on household names such as Francis Bacon, Andy Warhol, and Yves Klein. The lucrative art market creates a market ripe for talented forgers, who view art forgery as a very profitable enterprise. Based on a number of recent incidents, it appears that successful art forgeries are easier than ever to execute, with wealthy collectors eager to believe in, and ready to fuel, the high prices commanded by art masterpieces. Just recall the now defunct Knoedler Gallery, which closed in 2011 following the discovery that the gallery had sold $63 million of fakes. Although Ann Freedman, the gallery’s former president, insisted that she had no knowledge that she was selling forged modern classics, there were basic elements that should have alerted her to that fact. In one painting the signature was visibly spelled incorrectly: the painting was signed “Pollok” instead of the correct spelling of “Pollock.” Even so, the painting, which was purchased by the gallery for $230,000, was eventually sold to a Wall Street executive for $2 million.

With the new era of online art retailers, the art forgery market is becoming even more decentralized and easily profitable. In June 2014, John Re, an East Hampton painter, was arrested after netting $1.9 million selling forged Jackson Pollock paintings to private collectors and online through eBay. This forger used shell bidders to drive up prices of the fakes on eBay while assuring bidders that his paintings were “real.” Similarly, British amateur artist Geoffrey Spilman was arrested last year after selling forged modern masterpieces on eBay. Consequently, Spilman was banned for life from eBay. These events highlight the issue that the art market is quickly moving online. Online buyers may present an easier target for forged artwork due to the lack of pre-auction previews, the absence of quality records, and the awareness that auction experts did not vet the pieces. This new area of selling and buying art necessitates strong guidelines for digital art markets.

The abundance of art forgeries sold at auction, online, through galleries, and by private collectors has created a ripple effect in the art market. The repercussions of buying and selling fakes are beginning to be reflected in the management and practices of artists’ reputations and foundations. A recent trend is the increasing reluctance of artist foundations to recognize any new or uncovered artwork as authentic. Artist foundations do not want to become targets for litigation if an authentication dispute flares up between individuals, and thus many foundations no longer offer authenticating services. The Andy Warhol Art Authentication Board, Inc., created in association with the Andy Warhol Foundation for the Visual Arts, was dissolved in 2012. The authentication boards of the Keith Haring Foundation and the estate of Jean-Michel Basquiat were likewise dissolved in 2012. Such disassociation largely shields artist foundations from litigation alleging the foundation authenticated a forgery. However, this insulation not only affects buyers and sellers wishing to determine the authenticity of artwork, it also negatively affects art historical knowledge of these artists. Unauthenticated works cannot be included in official catalogues raisonnés and will remain unknown to future scholars and collectors. Therefore, if artist foundations refuse to analyze problematic artwork, then future scholarship will suffer. This larger impact of the forgery market is critical to appreciating the urgency with which the proliferation of fakes must be curbed. The forged art market affects not only buyers and sellers; it also affects the collective knowledge of future generations.

Usually, the public relations nightmare of being caught in an art forgery scandal is enough to destroy reputations, as demonstrated by the closing of the Knoedler Gallery. However, as mentioned above, the hoaxes themselves sometimes become famous in their own right due to the mastery of the forgery. For example, an exhibition is being planned for fake Amedeo Modigliani statues to be exhibited in Livorno, Italy, the artist’s hometown. Three carved heads were found in July 1984 as part of a hoax orchestrated by local students. Modigliani is famously a popular target for art forgers, and thus this episode become part of the legacy of Modigliani himself and his hometown of Livorno. Commenting on the plan for this exhibition, Livorno Culture Councilor Mario Tredici stated, “For a long time we have wanted to tell a story that was unique in the 20th century and is sure to be a tourist attraction.”

Today, there is no unified national or international approach to curbing the forged art market. The current debate in India, where the art market is currently encountering an unprecedented number of uncovered fakes, might be helpful to informing policy decisions in the United States, where cases concerning art forgeries are fractured across jurisdictions and courts. Art experts in India have called for contradictory safety measures. Some express favor for creating a national authentication body in charge of art sales. However, other scholars have expressed a less common alternative preference for deregulating the currently tightly regulated art market in India. In a recent Op-Ed, Girish Shahane, Artistic Director of the India Art Fair, explains how the tightly controlled national art market in India has stunted the development of the art market and encouraged the proliferation of fakes through the promise of great profit: “Expertise and transparency have been strangled by the Antiquities Act, which makes the owning and selling of antiquities difficult, their export illegal, and restricts trade in the work of a number of modern artists labeled national treasures . . . While there is no silver bullet solution for the problem of forgeries, partial fixes emerge as a natural consequence of trade.” This proposal suggests that greater cooperation and unified trade practices amongst art industry professionals around the globe would create mutual responsibility. The opaqueness of the art market is in part responsible for the circulation of forged artwork, and, instead of effectively shutting down the art market through the creation of regulatory bodies, perhaps it is time for the art world to acknowledge the damaging effects of fakes and open up new pathways to international discussion.

Sources:

 

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

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

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

*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

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)

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)

By Chris Michaels*

P. Picasso, "Madam Soler" (1903)

P. Picasso, “Madame 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)

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

By Benjamin Takis*

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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.

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.