Art Valuation under New York law -- How low will a court go in applying the blockage discount?
In Art Valuation under New York law – How many millions would a court assign to Warhol’s Mao Zedong?, we discussed a legal dispute surrounding Andy Warhol’s estate and the applicability of the “blockage discount” under New York law. This blog posting is a continuation of that series.
The blockage discount is a legal principle for adjusting the fair market value of art when there is a significant volume of art by the same artist at issue. In re Warhol, No. 824/87, 1994 WL 245246 * 1 (Surr. Ct., N.Y. Co. 1994). The In re Warhol court summarized a blockage discount as follows: If an immediate sale of a block of art would depress the market, the value of the block cannot be determined by totaling the fair market value of its individual components as of a specific date. Instead, a percentage discount must be applied, based upon: (i) the nature and number of artworks, (ii) the artist’s marketability, (iii) the stability or permanence of the artist’s reputation, (iv) the likelihood of appreciation or risk of depreciation in the art market and the artist’s work, and (v) how long it would take for the various markets to absorb all of the works comprising the block.
The In re Warhol court applied the blockage discount to the 4,118 paintings; 5,103 drawings; 19,086 prints; and 66,512 photographs at issue. Other courts applying New York law have used the blockage discount for as few as 400 works. See Grosz v. Serge Sabarsky, Inc., 24 A.D.3d 264, 806 N.Y.S.2d 498, 500 (1st Dep’t 2005).
In Grosz v. Serge Sabarsky, Inc., 24 A.D.3d 264, 806 N.Y.S.2d 498 (1st Dep’t 2005), the Appellate Division, First Department confirmed the consistent use of the blockage discount principle under New York law. However, the Grosz court questioned whether it was appropriate to apply the discount when only 90 artworks were at issue. The court therefore remanded the case to the trial court for a hearing on this issue.
Thus, it remains to be seen how low the courts will go in applying the blockage discount, and whether a hard and fast rule is in the near future.
