The Legal Canvas, Summer 2009Summer 2009
When times are good, the art market can seem very separate from the world of law. Deals are done, money changes hands, and there are very few legal impediments that cannot be overcome through negotiation. If one deal goes bad, the next transaction is just around the corner. When the market slows down, underlying legal issues can become more apparent. The ecosystem of a dynamic market falls away, and market players may be left figuring out what they are entitled to under the law. Sometimes, they are surprised and distressed at what they find. In this edition of The Legal Canvas, we consider a number of the ways that the worldwide economic downturn has legal implications for the way art market transactions are conducted.
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In this issue...
Selling at Auction in a Down Market
The abrupt change in the art market has shaken its collective mindset – but not altogether displaced expectations based on the "old normal." As much as people may talk about a bubble, or celebrate the return of sanity and connoisseurship, many art owners may be inclined to resist the notion that the prices from the market's boom years do not necessarily represent "true value." People with art to sell may want to believe that somehow, somewhere, they can still get the prices they were seeing at auction and in galleries not so very long ago. The market may have hit the brakes suddenly, but expectations have not had time to decelerate.
Selling Privately in a Down Market
Observing the spring's thin auction catalogs and reduced results, both The New York Times and The Wall Street Journal have reported a trend towards private sales of art. It is hard to test that premise. After all, the sales are called "private" for a reason, and the dealers and auction houses who are quoted in the articles have good reason to proclaim the health of the art market.
In April 2009, JPMorgan Chase Bank notified the Rijksmuseum in Amsterdam that a painting that the museum had purchased in 2008, "The Bend on Herengracht" by Gerrit Berckheyde, had been previously pledged as collateral for a debt that was now past due, and JPMorgan said it wanted to take possession of the painting. The Dutch bank ABN Amro chimed in next, claiming that the Berckheyde was also collateral for its loan to the same individual. For about six weeks, the museum and the Dutch press had reason to worry that the picture would be seized. As of the date of this issue of The Legal Canvas, JPMorgan had decided not to pursue the painting, and ABN Amro had accepted alternate collateral from the individual.
Estate Planning: Is it Time for an Art GRAT? by Michael Arlein
Disappointing as the economic downturn has been, it may present an estate planning opportunity for many art collectors. The depressed value of art means that outright gifts generate less gift tax than they would in a stronger economy, so for collectors who believe the economy will recover this may be an optimum time to give works of art outright to friends and family. By the same token, an art collector who believes his collection will recover its value at an annual rate greater than the prevailing IRS discount rate (ranging from 2.8% to 3.4% this summer) has an opportunity to create a Grantor Retained Annuity Trust (or "GRAT"), which is designed to shift part of the anticipated increase in value to friends or family without incurring any gift tax at all. With a Federal gift and estate tax rate of 45% and state transfer taxes on top of that in some states (including New York), a savvy collector who plans his giving thoughtfully may be able to realize substantial economic benefits right now.
In the Spring issue of The Legal Canvas, we reported on an antitrust case against the Andy Warhol Foundation, the Andy Warhol Art Authentication Board, the artist's estate and its executors. The action was brought as a class action by collector Joe Simon-Whelan, who alleged that the Foundation and the Board had "conspired to control the market for Andy Warhol artwork" by inappropriately refusing to authenticate pictures in order to "create a scarcity in the market for Warhol artwork and inflate the value of the Warhol works in the Foundation's possession."
Christie's Faces Trial Over "Fraud on the Market" Allegations by a Buyer Who Didn't Buy at Christie's by Jo Laird
When you buy art at Christie's, Sotheby's or almost any other auction house, you are automatically bound by the conditions of sale that are printed in the auction catalog and posted on-line. The conditions of sale set out your rights and obligations as a buyer and constitute your contract with the auction house. Among other things, the conditions of sale of both major houses define what your rights are when you think that the art you purchased is inauthentic. You are required, for example, to provide written opinions of experts and to return the art in the same condition as when you purchased it. If it turns out that the art is inauthentic or incorrectly attributed, you are entitled to rescind the sale and recover the purchase price. The warranty is stated to be only for your benefit as the buyer – and not for the benefit of subsequent owners – and you are required to make your claim within five years of the date of the sale.
A university that inherited a valuable art collection many years ago is now facing financial troubles and says it needs to sell the art. The question is: where can the art go? Until July 14, 2009, the answer was nowhere, as a trial court had enjoined the sale of the collection and required it to remain at the university. Now, with a reversal by a higher court, this question has been put back on the table.
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