Case Review: Galin v. Kunitake Hamada (2015), or Legal Storm over “Ice Storm”

By Elizabeth Weber, Esq.*
Screen Shot 2015-11-12 at 12.10.59 PM
In early September 2015, a former Tennessee news anchor who invested in Andrew Wyeth’s Ice Storm [the Painting] sued a Japanese art dealer in the Southern District of New York over the proceeds from the Painting’s May 2015 sale at Christie’s. The investor, Reed Galin, purchased a one-third interest in Ice Storm from his childhood friend and college roommate, now-disgraced art dealer David Ramus, in the late 1980’s.

The controversy over Ice Storm began in 1989 when Ramus bought the painting from Christie’s for $319,000 to be financed via an extended payment plan. Under the terms of the plan, Ramus would have to pay Christie’s one-third of the final bid price plus the buyer’s premium by June 23, 1989, another one-third of the final bid price by July 24, 1989, and the remaining one-third by August 23, 1989. About one month later, Galin entered into a written agreement to purchase an interest in Ice Storm from Ramus for just over $106,000. According to the complaint, Ramus “agreed that neither the Painting, nor any interest in it, would be sold or transferred to anyone, without [Galin’s] prior knowledge and consent.” Complaint at 5, Galin v. Hamada, No. 1:15-cv-06992 (S.D.N.Y. 2015). Soon thereafter, Ramus sold another one-third interest in Ice Storm to Don Sentell. Galin had prior knowledge of and consented to the one-third interest sale to Sentell.

Unbeknownst to Galin, Ramus had already sold 100% interest in Ice Storm to the Coe Kerr gallery in New York City later in 1989 in exchange for another painting, Children in the Wood, by Frank Weston Benson. However, Ramus continued to assure Galin that he was actively searching for an Ice Storm buyer throughout the early 1990’s, blaming the years of stagnation on the slow art market.

In a separate proceeding, Ramus was indicted and tried by the U.S. Attorney in the U.S. District Court for the Northern District of Georgia for fraud and conversion arising out of his fraudulent art dealings with a number of individuals, Galin being one of them. The Georgia case culminated in Ramus’s conviction and sentencing to a federal prison in 1996. United States v. David S. Ramus, No. 1:95-CR-199-01 (N.D. Ga. 1996). As it turns out, Ramus had sold a number of paintings in his possession without the knowledge of the piece’s owners, nor did Ramus pay the owners for the sale of their property.  Because Ramus sold Ice Storm without Galin’s knowledge nor did Galin receive any proceeds of the sale, Galin was officially designated a victim of Ramus’s crimes by the U.S. Attorney. Although Ramus’s property interest in Ice Storm was extinguished through bankruptcy proceedings and the other co-owner, Sentell, extinguished his rights as a Settling Creditor, Galin acted as a non-Settling Creditor in the 1990s proceedings. (Note: A non-Settling Creditor does not settle the outstanding debts at issue in a bankruptcy proceeding.) Accordingly, by acting as a non-Settling Creditor, Galin did not waive his rights to pursue a property interest in Ice Storm piece. Unlike other pieces that Ramus fraudulently converted, Ice Storm was never recovered by the authorities.

When Ice Storm appeared on consignment through Christies the identity of the consignor was left out. In his complaint, Galin indicates that he searched for Ice Storm for years, contacting art dealers in an attempt to locate the piece. Finally, in May 2015, Galin learned that the painting was being offered for auction at Christie’s by Tokyo-based art dealer Kunitake Hamada. Hamada purchased Ice Storm in December 2013 from K.K. Shinoda Bijutsu in Tokyo. See Memorandum of Law in Support of Defendant’s Motion to Dismiss, Galin v. Hamada, No. 1:15-cv-06992 (S.D.N.Y. 2015). 

Galin contacted Christie’s, which then reviewed Galin’s claims. As a result, Galin, Christie’s, and Hamada all agreed to allow Christie’s to sell Ice Storm and instead focus any assertion of rights on the proceeds from the sale only, and not the actual painting. The parties agreed to allow the sale of Ice Storm to proceed to preserve the painting’s market value, and determine competing claims later. The business decision aligned with the theory that by withdrawing a piece from sale, followed by litigation over it may damage the value of the work. Ice Storm sold for $820,000 (plus $169,000 as the buyer’s premium.) The net proceeds from the sale total $803,600 after deductions.Currently, the proceeds from the sale are being held by Christie’s pending the outcome of this litigation to be disbursed pursuant to a court order.

This action is before the U.S. District Court for the Southern District of New York because the Southern District has subject matter jurisdiction over all the parties through diversity because the plaintiff is not domiciled in the same state as any of the defendants and the amount in controversy exceeds $75,000. Further, the complaint alleges that the court retains in rem jurisdiction over Ice Storm because Hamada claims an interest in the piece, which is currently located in New York state. In the complaint, Galin asserts his right to an equitable lien on the sale proceeds of Ice Storm. Galin further seeks the imposition of a constructive trust on the proceeds of the sale. A constructive trust is an equitable remedy used by courts to prevent unjust enrichment and, in this case, would result in Hamada paying the proceeds of the sale to Galin.

Hamada subsequently moved to dismiss Galin’s claim for failure to state a claim upon which relief may be granted.  See Motion to Dismiss and Memorandum of Law in Support of Defendant’s Motion to Dismiss, Galin v. Hamada, No. 1:15-cv-06992 (S.D.N.Y. 2015).  In the motion, Hamada asserts that “a dealer in Ramus’s position can pass good title to a third-party with respect to goods entrusted by a seller in Galin’s position, even if the dealer acts with larcenous intent toward the seller.”  Memorandum of Law in Support of Defendant’s Motion to Dismiss at 1, Galin v. Hamada, No. 1:15-cv-06992 (S.D.N.Y. 2015).  Accordingly, argues Hamada, because Galin entrusted Ice Storm to Ramus, Ramus could pass good title to the Coe Kerr Gallery despite of Ramus’s unlawful conduct, and Galin has no claim against Hamada for the proceeds of Ice Storm’s sale.

Attorney for plaintiff is Richard A. Altman. Attorneys with Cahill Partners LLP are representing the defendant.

Sources:

  • Galin v. Hamada, No. 1:15-cv-06992 (S.D.N.Y. 2015).
  • In re David S. Ramus, No. A94-77777 (Bankr. N.D. Ga. 1997).
  • United States v. David S. Ramus, No. 1:95-CR-199-01 (N.D. Ga. 1996).

About the Author: Elizabeth Weber is a lawyer living in Brooklyn, NY.  She graduated from the University of Florida Levin College of Law, where she received her certificate in Intellectual Property Law and served as an active member of the Art Law Society and the Journal of Technology Law and Policy.

The Eaton Collection: Off the Block at Rago

By Rebecca Krishnan-Ayer*Screen Shot 2015-06-10 at 12.26.01 AM

The Contested Sale

The New Jersey-based auction house Rago Arts and Auction Center (est. 1988) stirred controversy with the April 2015 projected sale of 450 works of art and artifacts from the Japanese-American internment camps established during World War II. In the wake of the New York Times article announcing the auction, activists and community leaders alike banded together to ignite a social media campaign against the auction house, whose annual sales total approximately $30 million. Rago initially stood behind their decision to proceed with the sale, citing a lack of alternate options available to the client for relinquishing the items. As the New York Times reported, “A spokeswoman for Rago wrote in an email that the unnamed auction consignor, who knew the Eaton family, is ‘not in a financial position’ to donate the material to institutions and ‘did not feel qualified to choose one institution over another.’ The consignor has described the protests as a ‘social media attack’ meant to ‘bully us into compliance with their demands.’”

Meanwhile, protest groups established a Facebook page, “Japanese American History: NOT for Sale,” assembling over 6,700 followers. Critics also launched a Change.org petition, lambasting “the betrayal of those imprisoned people who thought their gifts would be used to educate, not to be sold to the highest bidder in a national auction, pitting families against museums against private collectors.” Among those issuing a rallying call for action was Japanese American actor George Takei, who helped catapult the controversy to the forefront of Japanese American cultural groups’ and foundations’ agendas–he himself was interned in one of these camps at the age of five. Eric L. Muller, Dan K. Moore Distinguished Professor in Jurisprudence and Ethics at University of North Carolina School of Law, assisted with preparing the sale catalog for Rago, and declined to proceed with a lecture planned at the auction house after learning that the consignor had refused to transfer or donate the property to Japanese-American cultural institutions. “I did not feel that I could deliver a public lecture connected to the sale in good conscience,” Muller told the ArtsBeat blog of the New York Times of the ethical quandary he faced. As the social media campaign opposing the sale gained traction and an injunction was issued from one former internment camp site, the Heart Mountain Wyoming Foundation, Rago announced their agreement to cancel the auction on April 15, 2015. The auction house’s decision and underlying motivations still draw criticism from activists such as Shirley Higuchi, chairwoman of the Heart Mountain Wyoming Foundation, who stresses that only after the immediate threat of legal action did Rago agree to withdraw the items from the auction block.

The Objects

The ownership of the collection, comprising 23 lots, can be traced back to the 1950s. Following World War II, a number of former internees and Japanese American families donated works of art and furniture to Allen Hendershott Eaton, a historian conducting research for his 1952 book, Beauty Behind Barbed Wire: The Arts of the Japanese in Our War Relocation Camps. The objects were then handed down to an unnamed family friend of Eaton’s heirs based in Connecticut. Among the items bestowed to Eaton were unique “handmade cigarette boxes, delicate bird brooches carved of wood, intricate family nameplates, a cat figurine shaped from tree roots, and watercolors of life inside the camps, including children playing in dirt lanes and outdoor assemblies,” the LA Times reports. In an interview with NPR, Delphine Hirasuna, a scholar specializing in art created in the internment camps observes: “Here is something that gives them pride about what the[ir] grandparents created under really bad circumstances.” The emotional value of the collection far exceeds its monetary value (Rago appraised the lots for a collective estimate of around $26,000) and includes oil paintings and rare black and white photographs depicting families, internees creating works of art, and the rarely seen environs of camps in the West. Individuals born in internment camps or whose relatives experienced the tragic imprisonment of 120,000 Japanese Americans following the U.S. bombing of Pearl Harbor stand by the injustice in selling and monetizing such seminal memories and facets of history.

The Outcome

Screen Shot 2015-06-10 at 12.23.26 AMOn May 2, 2015, the Japanese American National Museum in Los Angeles announced plans to acquire the hotly contested collection as a result of Takei’s efforts to halt the public sale and with the cooperation of the would-be consignor. The museum recently honored Takei, a board trustee, for his contributions with the Japanese American National Museum’s Medal of Honor for Lifetime Achievement. According to Takei, “To put [the Eaton collection] up on the auction block to the highest bidder, where it would just disappear into someone’s collection, was insensitive. The most appropriate and obvious place for the collection was the Japanese American National Museum.” Rago Arts and Auction Center presumably played a role in the amicable settlement and urged the arts community to engage in a broader discussion on related legal and ethical dilemmas facing other institutions. Its managing partner, Miriam Tucker, affirms, “The issue extends beyond what is legal. It is something auction houses, galleries and dealers are faced with regularly.”

The Rago case recalls the efforts and ethics involved in recovering other culturally significant property such as Nazi-era looted works or Native American artifacts. Marc Masurovsky, co-founder of the Holocaust Art Restitution Project, describes a certain “sensibility and sensitivity” that must be acknowledged when dealing with such works. The attempted sale of the Eaton collection also raises interesting issues regarding precedent and discretion when it comes to auction houses accepting consignments, institutions acquiring objects, or galleries purchasing works. Legality aside, ethics and public good seem to challenge the notion of a “pure transaction” involving works of art and objects of cultural heritage.

Note from the editors: On the footsteps of the positive outcome for the Eaton collection, Center for Art Law is acutely interested in the auctions of Hopi artifacts that have taken place and continue to occur in France despite the communal and legal efforts to halt those contested sales. While Rago decided, with some backing from the court, to withdraw the Eaton items from auction, Hôtel Drouot, the largest auction house in Paris, has been proceeding with the sales of Hopi relics despite public outcry.

Select Sources:

About the Author: Rebecca Krishnan-Ayer received a B.A. in Art History and French Literature from Johns Hopkins University.

 

Online Art Auction: New Rules of the Old Game

Online Auctions Apr 1

By Melissa (YoungJae) Koo*

Name of the Game

There are no federal rules governing auctions in the United States. Regulations governing conduct of auctioneers, as well as licensing and bonding requirements are reserved for individual states and municipalities. While some states do not require licenses, states like Georgia, Texas, Virginia, have statewide auction laws that require continuing education courses for auctioneers. On the other hand, while New York and Oklahoma do not have state laws governing auction licensing, they have cities that have promulgated licensing requirements. For example, in New York City, to conduct a public auction, an auctioneer must be licensed and backed by a surety bond. The license fee is $400 for a two-year period. With the emergence of online auctions, the traditional methods of conducting and regulating public auctions are in transition.

Still in the early stages of adoption and overshadowed by traditional auctions at physical auction rooms, online art auctions have been steadily growing in popularity and generating a more substantial portion of overall art market sales. Notably, leading brick-and-mortar auction houses have already taken part in online ventures and observed an increase in numbers of online bidders. After the abandonment of the short-lived online auction partnership with eBay in early 2000s, Sotheby’s and eBay signed a new agreement in July 2014 to stream online Sotheby’s auctions on eBay. Sotheby’s and eBay’s first scheduled sales were to start April 1, 2015. Reportedly, even earlier Sotheby’s has seen a 20% surge in number of new online bidders in 2014, and ten lots sold for more than $500,000 to online bidders. As reported in the Wall Street Journal, Christie’s sold $35 million of art online in 2014, which is up 60% from 2013. Chairman and CEO of Phillip’s, another major auction house, hinted at the possibility of Phillip’s expanding into online sales as well.

New Players

With traditional auction houses giving some attention to online art auctions, auctioneer start-ups have been forging a strong presence online. Since their launch, businesses like Paddle8, Artnet, and Auctionata have been attracting art buyers to buy and sell artworks online. For example, Paddle8, launched in 2011 in response to the “increasing thirst for access to contemporary art,” has been funded by a consortium of big-name investors, both private investment firms and individual investors of the art world. Paddle8 had four founding members, each with finance, auction house, business and curatorial background. Artnet, a publicly traded corporation listed in the Prime Standard of the Frankfurt Stock Exchange, was originally founded in 1989 and migrated online in 1995, providing various resources for the international art market such as the Price Database, Analytics Reports, and artnet News. It established artnet Auctions in 2008 as the world’s first online auctions platform for the sale of modern and contemporary artworks. Auctionata was founded in 2012 in Germany with investment capital funded by investment firms, and held the first live auction in the history of the internet in December of 2012. Recently, on March 30, 2015, Auctionata announced that it has raised $45 million from venture capital, making the total capital raised close to $100 million. Unlike online auction competitors which focus mainly upon on works of fine art, Auctionata also holds auctions for memorabilia, wine, jewelry, and watches.

One of the main differentiating factors between the traditional auction houses and online art auctions is the limitations in the highest prices realized. In 2013, the European Fine Art Foundation’s Art Market Report indicated that online art sales accounted for only a small segment of total revenue of the art market, generating about 2.5 billion euros compared to the total 47.4 billion euros in the whole art market. Online art market has been known to focus on the mid market range of art prices, from a few hundred dollars to a little over $100,000. This tendency is in part due to the buyers’ concerns about provenance and authenticity of the items consigned and may account for online buyers’ aversion to bid on or buy art priced over $100,000 with confidence. Also, traditionally, collectors want to experience an artwork’s scale and texture first-hand, as the “spectre of forgery makes [buyers] wary of dealing with virtual vendors” in the secondary market. Steve Lazarides, a specialist who runs both physically gallery and an online shop, has been reported as stating that a relationship is formed between a buyer and a seller when the price of an artwork tops $8,000. In addition, discussing buyers’ need for trust when bidding over $10,000 for an artwork online, Ben Hartley, International Managing Director of Auctionata, stated that art collectors are less comfortable buying emerging contemporary artists’ works than works of well-known artists which have established provenance and have already been sold at auction houses or reputable galleries in the past.

Numbers Game

Despite the limitations sprouting from buyers’ concerns about provenance and authenticity, the “ceiling is gradually lifting upwards.” Indeed, prices on online art auctions have been steadily increasing, with some sales getting close to or surpassing the million dollar range. Artnet set the $1 million record in 2011 with the sale of “Flowers” (1978) by Andy Warhol for $1.3 million, a record they have not since been able to beat. Later, Auctionata sold Egon Schiele’s “Reclining Woman” (1916) for $2.3 million at a streamed auction in Berlin to an online buyer, who had sent an art expert to inspect the painting first. With these ceiling-shattering sales in online-only art auctions, the prospect of further growth looks promising. Paddle8 reported total sales of $17.8 million in the first half of year 2014 with 60,000 registered members worldwide and, similarly, Auctionata has reported a boost of 163% in sales for 2014 with the vastly growing client base, according to a recent report from Art Market Monitor.

As the online art auction businesses grow, their legal implications are little-known or reported. Few cases relating to Internet art auctions have been filed and “to date none has been found at the precedential level,” according to the author of Art, Artifact, Architecture and Museum Law, Alexandra Darraby.

Spotlight: Auctionata

Center for Art Law recently sat down with the Vice President and General Counsel of Auctionata, Jonathan Illari, to discuss business and legal aspects of being in-house at an online auction house. Before joining Auctionata, Mr. Illari, a graduate of Boston University School of Law, was Associate General Counsel of another major international auction house. With his valuable experience earned at a traditional art auction house, he is an asset in the field of emerging online art auction business.

According to Illari, a career at an online art auction platform like Auctionata has two intertwined aspects of business: promotional and legal. In terms of promotional aspect, Illari pointed out the unique two-fold business model of Auctionata: live video stream auctions, filmed in a New York studio, and the “Online Shops” e-commerce marketplace with a set price, subject to counter-offer. Due to the nature of live video stream auctions, which is broadcasted by a local crew specialized in TV productions, the legal department has to make sure that the company follows all applicable auction and dealer rules and regulations in New York City such as an official auctioneer and auction house licensing rules under the New York City Administrative Code Title 20, much like with established auction houses. In addition, Illari said that the location of the business, New York City, the biggest art market in the United States where all the major art auction houses are headquartered, comes with equally most expansive codes and regulations relating to art auction such as business licenses and tax certifications. The legal department has to ensure the auctions comply with the local laws—not just those related to auctions but those related to types and quality of products being auctioned such as wine and cultural property, for example. In addition, international laws such as EU Data Protection laws are another example of issues online auction businesses should be mindful of, as there is a significant client base abroad.

Illari pointed out that one of the most common legal issues arising at the online art auction business is related to client identification and verification. Given that the business transactions occur online only, attracting many international clients all over the world, issues arise in identifying bona fide purchases and minimizing business risks and liabilities. Illari stated that buyers are vetted from Auctionata directly as well as its third party partner sites. Although admittedly verification can be an issue in an online marketplace, which always has the potential to host bad actors, Illari commented that one advantage from a fine art perspective is that when unique goods are auctioned online, people tend to bid in good faith because they want the particular item being offered, not just “any” painting, print, sculpture, etc. Despite the best efforts, the issue could still be aggravated when clients do not pay. Illari stated that when nonpayment occurs, debt collection in an international online marketplace can become a jurisdictional hindrance, as it is difficult to pursue the client and the client’s assets especially when he or she is located outside of the United States. When a buyer absolutely refuses payment, like other auction houses, Auctionata could choose to cancel the sale and offer the item to an underbidder, although the original bidder would still remain liable for any loss in revenue or costs to resell. Depending on the circumstances, a buyer can also lose all future bidding privileges. For Auctionata, in terms of jurisdiction of all legal matters arising from the business including contract disputes, New York law remains the binding law, regardless of where claimants are based.

Illari also mentioned various types of buyers of online art auctions: they range from individual collectors to galleries, similar to clients of traditional auction houses. The variety of goods offered on Auctionata makes the site attractive to both the casual and educated consumers, meaning that the online art auction business “must be a hybrid to be able to fully serve the needs and requests” of the full range of clients. Another unique aspect of online art auction business is the impersonal relationship with the clients, given the nature of the client base and limited proximity. To minimize issues arising from the lack of in-person interactions with clients, online business may offer on-site exhibition of the works being auctioned as well as free valuation services.

In summary, traditional art auction houses have reported to continuously renew the record on sales of art both offline and online, young online art auction businesses, too, have been growing in parallel. Illari stated that as online auctions are generally an emerging market, there many not much laws, regulations, or case law specifically governing this field of business, leaving online auction businesses to largely adapt to their own environments. As we explore the little-known or reported legal issues arising from the new promising businesses, it would be interesting to monitor how they develop in the legal realm.

**The author wants to thank Jonathan Illari for his time and kindness for the interview.

Selected Sources:

About the Author: Melissa (YoungJae) Koo, Legal Intern with Center for Art Law, is a third year student at Benjamin N. Cardozo School of Law, concentrating in Intellectual Property law, especially art and fashion law. She can be reached at youngjae.koo@law.cardozo.yu.edu.

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

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

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

by Merve Stolzman

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

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

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

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

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

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

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

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

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

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

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

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

Sources:

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

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

By Elizabeth Lash, Esq.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Sources and Explanations:

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

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

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

By Emma Kleiner

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

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

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

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

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

Francis Bacon, THREE STUDIES FOR A PORTRAIT OF JOHN EDWARDS (1984)

Francis Bacon, “Three Studies for a Portrait of John Edwards” (1984)

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

Sources:

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

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

After Restitution, Nazi-Seized Posters Seek a New Home

By Angelea Selleck

Note from the editors: Before the story of a treasure trove of Nazi-era looted and displaced paintings found in Munich broke out last week, there have been few big scale discoveries and restitutions of art objects displaced preceding, during and after World War II. The world is poised to see what happens to the Cornelius Gurlitt trove. What does happen to the works once they are returned to their rightful owners? The following article describes a recent recovery case.

* * *

According to The Miami Sun Post, the Posters are currently on exhibit at the Jewish museum of Florida through December 15, 2013. This exhibit includes works that will be exhibited to the public for the first time. Part of this extensive collection will eventually be donated to museums, including Jewish Museum of Florida.

At the beginning of 2013, Germany’s top federal appeals court ended a seven-year legal battle by ruling for the restitution of thousands of rare posters to the son of a collector, whose collection was seized by the Nazi’s in World War II. The Federal Court of Justice in Karlsruhe established that Peter Sachs, 75, was the rightful owner of the posters collected by his father, Hans Sachs. The court warned that if the German Historical Museum would keep the posters it would be “akin to perpetuating the crimes of the Nazis” and ultimately requested that the posters be returned to Peter.[i] Having recovered ownership of the collection, Sachs consigned them for a November 2013 sale at Guernsey’s auction company in New York[ii]. As a private individual he is unable to display the collection and make it accessible to a wider public.

The sale will take place 75 years after the posters were seized from Hans Sachs’ home in 1938 on the orders of Nazi Propaganda Minister, Joseph Goebbels, who wanted them for a museum of his own. The collection was indeed impressive as Hans had been collecting posters since highschool and by his mid-twenties was Germany’s leading private poster collector[iii]. His collection included advertisements for exhibitions, cabarets, movies, political propaganda and consumer products. After the seizure of his posters, Sachs was arrested and deported to the Sachsenhausen concentration camp in north Berlin[iv]. He was released two weeks later and fled to the United States with his family.
After the war, Sachs assumed the collection had been destroyed and accepted compensation of $50,000 in 1961[v]. Years later he learned that part of the collection, 4,344 of about 12,500, had survived and been given to the East Berlin Museum. Sachs’ efforts to arrange a viewing were unsuccessful; he died in 1974, at 92.

The return of Sachs’ collection is not only a success story – as most such cases end rather less fortuitously – but due to the sheer volume of pieces a rather exceptional case. As one might assume, restitution is a very difficult legal process and in recent years many countries have become reluctant to comply with international efforts.

The 1998 Washington Principles, which called for an investigation into cases of plundered art and a fair resolution, called upon international institutions to play a more active role in returning artworks to victims. Unfortunately, the Washington Principles are not enforceable nor do they mandate a particular outcome. A decade letter, the Terezin Declaration echoed similar principles. Both have little legal bite but they have had moral impact on countries, which elicited some changes in policies.

Some countries have made efforts to reach out to victims. Recently, museums in the Netherlands has reviewed their acquisitions since 1933 in an effort to be more transparent and found over a hundred pieces that were likely taken from Jewish owners.[vi]

However, provenance research is a recurring issue that plagues the restitution process and many museums remain reluctant to closely examine what is in their collections[vii]. Thousands of looted artworks in public collections are unresearched and unidentified. While some museums are helpful and proactive others can be passive and obstructionist.[viii]

Recognizing the need for thorough provenance research and increased due diligence dealing with World War II cultural property losses, on October 22, 2013, the Holocaust Art Restitution Project (HARP) and the Ciric Law Firm organized a program entitled “Due Diligence in Cultural Heritage Litigation-Is There A Minimum Threshold?” intended “to provide a suggested framework and associated checklist to satisfy due diligence requirements in provenance research for cultural objects.”[ix]

In light of all this, Sachs’ case stands out as one of more successful recent restitutions of Nazi-confiscated artworks or collections.

Sources:

The Provenance Research Training Program;

[i]David Rising, “Hans Sachs Art Collection Seized by Nazis Must Be Returned, Court Orders,” Huffington Post,  March 16th 2012. Found at:  http://www.huffingtonpost.com/2012/03/16/hans-sachs-collection-nazis_n_1352819.html

[ii] Eve M. Kahn, “Posters Lost to Nazis Are Recovered, and Up For Sale,” New York Times, October 17th 2013. Found at: http://www.nytimes.com/2013/10/18/arts/design/posters-lost-to-nazis-are-recovered-and-up-for-sale.html?_r=0&adxnnl=1&pagewanted=1&adxnnlx=1383093941-/4Bb8SCF9APtJw0FtKuNvA

[iii]David Rising, “Hans Sachs Posters Seized by Nazis in 1938 Back in Family’s Possession,” Huffington Post, January 17th 2013. Found at: http://www.huffingtonpost.com/2013/01/17/hans-sachs-posters_n_2495902.html

[iv] ibid.

[v] Eve M. Kahn, “Posters Lost to Nazis Are Recovered, and Up For Sale,” New York Times, October 17th 2013. Found at: http://www.nytimes.com/2013/10/18/arts/design/posters-lost-to-nazis-are-recovered-and-up-for-sale.html?_r=0&adxnnl=1&pagewanted=1&adxnnlx=1383093941-/4Bb8SCF9APtJw0FtKuNvA

[vi] “Dutch Museums Identify 139 Likely Nazi Looted Artworks,” Huffington Post. Found at:

http://www.huffingtonpost.com/2013/10/29/dutch-looted-art_n_4173157.html?

[vii] Jochem Kürten, “Nazi Looted Art Cases Remain Unsolved Mysteries” Deutsche Welle, June 20th 2013. Found at: http://www.dw.de/nazi-looted-art-cases-remain-unsolved-mysteries/a-16863346

[viii] William Cohan, “The Restitution Struggle: Malaise, Indifference, and Frustration,” ARTnews, September 11th, 2013. Found at: http://www.artnews.com/2013/09/11/the-restitution-struggle/

From DIA To Dia: Deaccession Debate Rages on as Dia Founders Sue To Prevent Sale Of Twombly And Chamberlain Works

by Hanoch Sheps, J.D.*

John Chamberlain's "Candy Andy" (1963)

John Chamberlain’s “Candy Andy” (1963)

In a complaint filed last week on November 7, the founders of the Dia Art Foundation (Dia), Heiner and Fariha Friedrich, brought deaccessioning issues back to the fore – and eventually to the courtroom. They are suing both the Foundation’s current administrators and an auction house for injunctive relief to ultimately prevent the deaccession (removal from the collection and sale) of works by Cy Twombly and John Chamberlain. (See the Center for Art Law posting last week about deaccessioning in connection with the Detroit Institute of Art; Columbia Law School Event Explores the Legal & Ethical Dilemmas of Deaccessioning as DIA Bankruptcy Pushes the Envelope on Deaccession Debate).[1]

Cases like this question the ability to and discretion with which a museum’s board acts when removing artworks from its collection. In their complaint, the Friedrich’s hark back to the founding of Dia as a museum where artists like Cy Twombly (1928-2011) and John Chamberlain (1927-2011), Donald Judd (1928-1994) and Robert Whitman (b. 1935) could bring their work, away from commercial consumerism and for the benefit of the public. (See the Art Market Monitor’s initial reporting of the lawsuit here: Dia Founders Sue to Stop Sotheby’s Sale of Twombly and Chamberlain). The Friedrich’s further claim that they founded Dia to keep seminal contemporary works available to the public – not to be sold to the highest bidder. Dia is a nonprofit organization founded in 1974 continuing a mission of fostering artists with potential to change perceptions of art. After learning from Dia director Philippe Vergne about the plans to sell two works, the Friedrich’s co-authored a letter to Dia’s Board of Trustees, excerpts of which are included below (the full letter can be found in the lawsuit, a link to which is included above):

The original collection was formed to preserve the great art of our time from the ravages of the art market and to present it to the public in the most beautiful way…The artists trusted the original board of Dia to guard and preserve their work. They also allowed the board to purchase works from their own holdings which they had kept out of the market in the hopes that these special works would go to an institution which would properly value, preserve and present them to the public. Thus, any intention to put artwork for sale…is a betrayal of trust toward the public to which the Foundation is beholden.

Although no state has a statute that expressly addresses the general issue of deaccessioning, this case, brought in the Supreme Court of New York, is implicitly about policy and ethical considerations. (See Malaro, Marie C. and Pogány DeAngelis, Ildiko. A Legal Primer on Managing Museum Collections – 3rd Ed. Washington: Smithsonian Books, 2012.). Deaccessioning as a policy is a matter for the board’s discretion, but rarely does it go without notice or comment from the media and the general public, and in this case a lawsuit. Depending on the manner in which museums receive artworks from donors, a court may have no role in the decission to deaccession. For example, if donors attach restrictions to a charitable donation, a museum would have to seek court approval to sell the piece. The IRS also keeps tabs on artworks donated to charitable entities if they are sold in order to assess taxes on the donor for related or unrelated uses of the gift. Alternatively, if the artwork is on an extended loan, a museum may not be able to pass clear title to a piece through a sale anyway (one of the Friedrich’s claims rests on a Twombly piece that is allegedly on long term loan and to which Dia does not have clear title to pass upon auction). Ultimately, the outcome of any particular deaccession relates back to the initial acquisition of the artwork (by donation, purchase or otherwise) and any subsequent changes to the museum’s control over the piece.

Although there are multiple reasons and theories for deaccessioning, the Friedrich’s focus here is intention, namely that Dia’s board will not undermine the original mission of preserving the donations for future generations.

[1] Note, while the Dia Art foundation in New York and the Detroit Institute of Art are commonly abbreviated as DIA/Dia, they are entirely separate entities.

*About the Author

Hanoch Sheps, J.D. is a recent graduate of New York Law School. He may be reached at Hanoch.sheps2@gmail.com or 201-696-6881.

Disclaimer

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

Over the Phone Auctions – A Missed Connection

Phone bidding at auctions is nothing new (the image on the left dates back to a 2006 sale); however, the practice has grown in recent years.[1]  For many buyers and collectors phone bidding is more convenient, it allows for anonymity, and some choose it because they do not want their governments knowing how much money they are spending.[2]  Regardless of the reasons, the popularity of over the phone bidding is evidenced by the amount of business several well-known auction houses have recently done using this method.[3]

However, phone bidding creates many problems both logistical and legal.  Logistically, phone bidding usually requires that the auction house have multiple landlines available during the sale.[4]  As for the buyer using a cell-phone, he or she needs to remain in an area where there is a strong signal and have an additional line available in case the call gets dropped.  If a call does disconnect, the one bidding on the buyer’s behalf must quickly call back and inform the buyer of what is happening at the auction simultaneously as events occur.

Legally, over the phone bidding implicates enforceable fiduciary duties.  Fiduciary duties are owed as between the one bidding on the buyer’s behalf (agent) and the buyer (principal).  These are not specific statutorily enumerated duties but require that the agent act in the principal’s best interest.[5]  Depending on the circumstances, this would likely require the agent to inform the buyer of any bids placed, place bids when the buyer authorizes the agent to do so, not place bids the agent is not authorized to, and any other duties a court may determine proper in that circumstance.

A prime example of the legal problems arising from over-the-phone bidding is the 2009 case involving a dispute between art collector Gregory Callimanopulos and Christie’s over the sale of a Sam Francis painting titled Grey.[6] In Callimanopulos v. Christie’s Inc., 621 F. Supp. 2d 127 (S.D.N.Y. 2009), plaintiff bid on a lot over the phone via his agent April Richon Jacobs, Christie’s Co-Head of Evening Sale.  He made a bid for $3 million, and the auctioneer Christopher Burge declared the Francis painting was sold to him as the hammer dropped.  The dispute arose because seconds later the bidding was reopened and Grey ultimately sold to another bidder, Joanne Heyler, Director and Chief Curator of the Broad Art Foundation for $3.2 million. Callimanopulos sued to enjoin Christie’s from conveying the painting to Heyler but his request for injunctive relief was denied.  The court found that at the time of the sale, Burge did not notice Heyler’s bid, which occurred just before the fall of the hammer. The oversight was pointed out by other Christie’s employees and at Burge’s discretion, bidding resumed.[7]

The court analyzed N.Y. U.C.C. § 2-328(2), which covers sales at auctions.  The provision states:

A sale by auction is complete when the auctioneer so announces by the fall of the hammer or in other customary manner. Where a bid is made while the hammer is falling in acceptance of a prior bid the auctioneer may in his discretion reopen the bidding or declare the goods sold under the bid on which the hammer was falling.[8]

In other words, if a bid is made while the hammer is physically falling (before it makes contact), the auctioneer can exercise discretion in deciding whether to accept the sale or reopen the bidding.  This is exactly what occurred in this case.  Burge exercised his “discretion” by choosing to recognize Heyler’s $3.2 million bid, made while the hammer was falling, even though he did not learn of the bid until after the hammer had fallen on Callimanopulos’ $3 million offer.  The court ruled that no binding contract was formed between Callimanopulos and Christie’s and the painting was allowed to go to Heyler.

In addition to N.Y. U.C.C. § 2-328(2), Christie’s auction catalog includes terms and conditions which contain a right of refusal provision that states:

The auctioneer has the right at his absolute and sole discretion . . . in the case of error or dispute, and whether during or after the sale, to determine the successful bidder, to continue the bidding, to cancel the sale or to reoffer and resell the item in dispute. If any dispute arises after the sale, our sale record is conclusive.[9]

This provision allows Christie’s to essentially rescind the sale if any dispute related to the sale of the painting later arose and provides added protection since N.Y. U.C.C. § 2-328(2) already works to determine the successful bidder based on the auctioneer’s discretion.

Callimanopulos v. Christie’s  highlights the discretion an auctioneer has in determining the final bid.  It is conceivable to imagine another scenario where an over-the-phone bid is made as the hammer is falling.  In such a case the auctioneer will have ultimate discretion in determining whether the over the phone bid was made while the hammer was falling or after – a situation that may be harder to discern if there is nobody, other than the agent bidding on the other side, physically present to notify the auctioneer when the bid was made.

An over the phone buyer may also argue that the terms in an auction catalog do not apply to phone bids, however this argument has been rejected in a number of cases, and an over the phone buyer will be bound by all the same laws and provisions as any other auction participant.[10]


[1] Daniel Grant, The Pleasures and Perils of Auction-House Phone Bids, ARTNews, http://www.artnews.com/2013/10/16/pleasures-and-perils-of-phone-bids-at-auctions/ (Oct. 16, 2013).
[2] Id.
[3] Id. (for example, an auction at Christie’s on May 23, 2013 brought in over $21 million from phone bids, just over 40% of the total amount of sales for the entire auction).
[4] Id.
[5] See e.g., Arthur B. Laby, The Fiduciary Obligation as the Adoption of Ends, 56 Buffalo L. Rev. 99 (2008) (for a general discussion on fiduciary duties).
[6] Callimanopulos v. Christie’s Inc., 621 F. Supp. 2d 127 (S.D.N.Y. 2009); see also Christie’s Post War and Contemporary Evening Sale, Sale 2167 http://www.christies.com/salelanding/index.aspx?intSaleID=22114 (May 13, 2009).
[7] Id.
[8] N.Y. U.C.C. § 2-328(2).
[9] Callimanopulos v. Christie’s Inc., 621 F. Supp. 2d 127, 130 (S.D.N.Y. 2009).
[10] See e.g., Hessel v. Christie’s Inc., 399 F. Supp. 2d 506, (S.D.N.Y. 2005) (holding that conditions of sale printed in an auction catalog applied to telephone bids and that, even if those conditions did not apply, N.Y. U.C.C. § 2-328 held the plaintiff liable for the price of the pieces he purchased).

UPDATE: Banksy’s "Slave Labour" Mural Up for Auction Again

Former home to Banksy’s “Slave Labour” in Wood Green, a suburb
north of London.  The street art remaining is anonymous.

The controversial Banksy taken from the wall of a store in Wood Green in up for auction again by the Sincura Group in London.  The stenciled spray paint mural disappeared in May 2012 and resurfaced at an auction house in Miami, where it was withdrawn from the sale under pressure from the Wood Green community and threats of legal action.

The mural under question: Bansky’s “Slave Labour,” 2012.

The building and store owner have not taken any legal action, and the Metropolitan Police of London told the BBC that no crime was reported.  The Sincura Group refuses to reveal the work’s owner and maintains that the sale is
completely legal.  Meanwhile, the community of Wood Green claims ownership of mural and continues to fight for its return.

The community is relieved that the mural is up for auction in London and hope it will remain in London if the £900,000 ($,1371,420) minimum is achieved.  In addition, they are petitioning to remove the mural from auction.

The Member of Parliament for the area, Lynne Featherstone, told the BBC: “This [the auction] is admirable, perhaps, but also incredibly optimistic.  So now I make this direct plea to the owners of the Banksy piece: You have this one last chance to do the right thing.  You have deprived a community of an asset that was given to use for free and greatly enhanced an area that needed it.  I call on you, and your consciences, to pull the piece from both potential sales and return it to its rightful place.”

The mural will appear on the block June 9th.

For our past coverage visit: “Who Owns Street Art?”

Source: “Banksy’s Slave Labour Mural Auctioned in London,” BBC, June 3, 2013.