Is Art Getting Crunched?
In recent months, the Wall Street Journal (“WSJ”) has reported that art loans are subject to the credit crunch that is affecting the economy-at-large. For example, an article in the April 27, 2008 edition of the WSJ noted that many art lenders, including banks, who typically loan funds backed by fine art, are “reining” in these loans. The WSJ noted that significant question remains about what will happen if these loans go “sour” due to the possibility of the diminishing value of the fine art that is being used as collateral for the loans.
In a December 30, 2007 article in the Washington Post, Ian Peck, chief executive of the art-finance firm Art Capital Group, was quoted as saying that the art market trails the Dow Jones industrial average and other market indexes by about six to eight months. Since October 9, 2007, when the Dow hit an all-time high of 14164, the average has since dropped to around 13,000 and has remained volatile since that time.
If the art market does go in the direction of the stock market, many banks and lenders may be looking to recover on their loans and the borrowers may be looking to protect themselves from the onslaught of potential litigation.
The 2002 case of Christie's Inc. v. Davis, 247 F.Supp.2d 414 (S.D.N.Y. 2002) may be an indication of what’s to come. There, the court granted summary judgment to Christie’s when it sought to collect on multiple loans made to defendants. The loans were secured by hundreds of pieces of fine and decorative art and antique furniture (the “art”), most of which the defendants kept in their house in Greenwich. After the defendants defaulted on the loans, Christie's filed the action, seeking repossession of the collateral, pursuant to the New York recovery of chattels statute, C.P.L.R. Article 71. The court found that the language of the loan documents permitted Christie’s to foreclose on the art, notwithstanding the fact that the art was worth twice the value of the loan.
Art lenders and borrowers are strongly encouraged to review their rights with an attorney. This is especially true in the current credit crunch.
