Art Valuation under New York law - How many millions would a court assign to Warhol's Mao Zedong?
The famous portrait of Mao Zedong by Andy Warhol will be put up for private sale in Hong Kong at the end of May 2008 and may go for $120 million. See, for example, this article. Would a court applying New York law also value it at $120 million? The answer is, as usual, it depends. One factor is whether it is being valued on its own or as part of a large block of Warhols.
As emphasized by the court in a legal dispute regarding Warhol’s own estate, the value of art is “‘inherently imprecise and capable of resolution only by a Solomon-like pronouncement.’” In re Warhol, No. 824/87, 1994 WL 245246 * 1 (Surr. Ct., N.Y. Co. 1994), quoting Morris v. Messing, 48 T.C. 502, 512. For this reason, to ascribe a value to Warhol’s voluminous art assets, the In re Warhol court applied a legal principle referred to as the “blockage discount.”
At issue in In re Warhol was the amount of legal fees owed to the lawyer for the executor of Warhol’s estate. The lawyer’s contract provided that his fees were a percentage of the value of the estate. The estate included Warhol’s art assets - 4,118 paintings; 5,103 drawings; 19,086 prints; and 66,512 photographs. Not surprisingly, the lawyer’s appraisers valued Warhol’s art assets much higher than the appraiser of the sole beneficiary of the estate – the Andy Warhol Foundation for the Visual Arts. How much higher? The spread was $600 million.
The Foundation applied a significant blockage discount to the fair market value[1] of the art assets, whereas the lawyer applied none. The 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.
After finding the analysis of both experts unreliable, the court made its own evaluation based upon the wealth of data provided to it. After arriving at its own fair market value, the court elected to apply a blockage discount that it fashioned (and even applied different discounts to each subcategory). Ultimately, In re Warhol reveals that although there are precise legal principles for art valuation, the ultimate value ascribed by a court may be just as unpredictable as the art market itself.
This posting is part of an ongoing series concerning art valuation under New York law.
[1] “[T]he price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts.” Id. at * 1.
