Art Law Blog : New York Art Law Lawyer & Attorney : Fox Rothschild Law Firm : Theft, Intellectual Property, Institutional Negotiation : Manhattan, New York City

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.

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One way that the New York legislature has attempted to protect unwary artists is through the enactment of the New York's Arts and Cultural Affairs Law Section 12.01.  (See Footnote 1)

This statute is particularly relevant in today's uncertain economy because it prohibits an art merchant from taking a security interest in an artwork that is loaned to the merchant by the artist, thereby prohibiting the artworks from being subject to the claims of the merchant's creditors, in the event that the merchant goes out of business and/or files for bankruptcy protection.

The statute provides, in part:

1. Notwithstanding any custom, practice or usage of the trade, any provision of the uniform commercial code or any other law, statute, requirement or rule, or any agreement, note, memorandum or writing to the contrary:

(a) Whenever an artist or craftsperson, his heirs or personal representatives, delivers or causes to be delivered a work of fine art, craft or a print of his own creation to an art merchant for the purpose of exhibition and/or sale on a commission, fee or other basis of compensation, the delivery to and acceptance thereof by the art merchant establishes a consignor/consignee relationship as between such artist or craftsperson and such art merchant with respect to the said work, and:

(i)      such consignee shall thereafter be deemed to be the agent of such consignor with respect to the said work;

(ii)    such work is trust property in the hands of the consignee for the benefit of the consignor;

(iii) any proceeds from the sale of such work are trust funds in the hands of the consignee for the benefit of the consignor.

In Zucker v. Hirschl & Adler Galleries,Inc., 170 Misc.2d 426, 648 N.Y.S.2d 521 (Sup. Ct., N.Y. Co. 1996), the Court granted partial summary judgment for the plaintiff-artist Joseph Zucker on the basis that the statute expressly precluded the claim by the defendant art gallery that Zucker's works were subject to the gallery's security interest.

In plain terms then, in the event of the merchant's bankruptcy, under New York's law, an artist's work should not be subject to the claims of the merchant, the merchant's estate, or its creditors. Not all states, however, may protect artists the way New York does. If you are an artist, you should find out what state's law applies to you before consigning your work, and whether or not your works will be protected.

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Many art buyers operate under the belief that a confidentiality agreement with an art gallery is a bulletproof mechanism to preserve the secrecy of their identities. A recent case by a New York Surrogate Court shows that this is a misperception because the law is above these private agreements.

In Lumerman v. Tunick et. al., No. 0489/05, 2008 WL 920666 (Surr. Co., Westchester Co. Mar. 14, 2008), a New York Surrogate Court ruled that Sotheby's, Inc. ("Sotheby's") and Christie's, Inc. ("Christie's") had to turn over information concerning the identities of buyers, despite confidentiality agreements with the buyers.

At issue in the case were over 200 of the decedent's artworks by the famous artist Willem de Kooning. In May 2007, the decedent's first wife and three daughters (over the objection of the second wife) sued to recover certain of these artworks that had been consigned to Christie's and Sotheby's prior to and shortly after the decedent's death. Among others, the lawsuit named Christie's, Sotheby's, and "John Does" as defendants. The John Does referred to persons and/or entities who purchased the subject items from Christie's and Sotheby's (the "buyers"). After Christie's and Sotheby's refused to identify during discovery the names of these buyers, the plaintiffs filed a motion to compel. Both Christie's and Sotheby's opposed plaintiffs' motion on the basis that confidentiality agreements were in place with the buyers which prevented them from disclosing the buyers' identities. Christie's and Sotheby's also claimed that having to disclose this information would damage their trust-based relationships, threaten the privacy and safety of the buyers, and harm their reputation and business advantage. Christie's and Sotheby's also argued that the plaintiffs should first be required to prove that they are entitled to the return of the artworks.

The court rejected all of these arguments, and compelled Christie's and Sotheby's to turn over the information requested about the buyer's identities. The court found that: (i) New York's C.P.L.R. § 3101, which requires "full disclosure of all evidence material and necessary to the prosecution or defenses of action," was met because without this information, the plaintiffs would not be able to maintain an action against the buyers - i.e., satisfy New York's demand and refusal rule; (ii) denying the requested disclosure would increase the chance that the art would be re-sold or moved beyond the jurisdiction of the court; and (iii) proving ownership first would be a waste of judicial resources, because the plaintiffs would still need to know who was in possession of the artworks to satisfy New York's demand and refusal rule.

This case presents an important reason why clients should understand that a confidentiality agreement is not impregnable and its enforceability may one day be subject to the discretion of a court.

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The chapter 11 bankruptcy of the Salander-O'Reilly art galleries (located on New York City's Upper East Side) shows that the financial distress of a consignee of art is not always readily apparent. In today's credit crunch, sadly, consignors may not recognize how their failure to take adequate steps to protect their interests in art prior to entering into a consignment arrangement may result in tragic consequences should the consignee end up in bankruptcy.

In both In re G.S. Distribution, Inc., No. 331 B.R. 552 (Bankr. S.D.N.Y. 2005) and In re Morgansen's Ltd., 302 B.R. 784 (Bankr. E.D.N.Y. 2003), aff'd in part, No. 04-CV-0268, 2005 WL 2370856 (E.D.N.Y. Sept. 27, 2005), parties who consigned their goods did not file financing statements to protect their interest in these items. After the consignee ended up in bankruptcy, the consignors fought vigorously to prevent their consigned goods, in the consignee's possession, from being subject to the claims of the consignee's general creditors. This is because, as explained by the court in In re G.S. Distribution, Inc., "property acquired under a consignment arrangement, even if it is not paid for, may be subject to the claims of the consignee's creditors," and a debtor in possession or a bankruptcy trustee "may be entitled to exercise these rights under the Uniform Commercial Code ("U.C.C.") for the benefit of the estate and its creditors." 331 B.R. at 561.

Specifically, the In re G.S. Distribution, Inc. court explained that if the transaction is a consignment as contemplated by New York's U.C.C. - Secured Transactions ("New York's Article 9"), the consignor must ordinarily file a financing statement to protect its interest in the property from the claims of a bankruptcy trustee or a debtor in possession acting on behalf of the estate. Id.at 361. However, if the consignment relationship does not satisfy the definition in New York's Article 9, the consignor is not automatically free from the claims of the consignee's creditors. Instead, In re G.S. Distribution and In re Morgansen's Ltd. explain that the parties' relationship will be evaluated under New York's U.C.C. –Sales (New York's Article 2) and common law principles of bailment to determine whether, in the absence of a financing statement, the consigned goods are subject to the claims of the consignee's creditors.

In today's distressed market, these two decisions are important. These cases show that, in the absence of an enforceable financing statement at the outset of a relationship, a party may later be at the mercy of a court's ad hoc determination because although the parties may describe the relationship as a "consignment," the law may treat it differently. This could result in a court order that consigned art is subject to the claims of the consignee's creditors, and thus, the loss of extremely valuable property.

If you are considering consigning art, it is important to consider whether a financing statement makes sense for you, and if so, where and how it should be filed, and how often it must be updated. For general information on financing statements in New York, see N.Y. Department of State: Uniform Commercial Code, http://www.dos.state.ny.us/corp/ucc.html.

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The New York Times reported on September 12, 2009 that the theft of 10 silkscreen paintings by Andy Warhol has the Los Angeles Police Department “searching for clues” and “people in the art world scratching their heads.”  The paintings were apparently stolen from the West Los Angeles home of Richard L. Weisman, a businessman and prominent collector. A $1 million reward has been offered by Mr. Weisman for information leading to the paintings’ recovery. The stolen works, which consist of paintings of athletes including Muhammad Ali, Chris Evert, Dorothy Hamill, Tom Seaver, Jack Nicklaus and O. J. Simpson,  were taken from Mr. Weisman’s dining room.

Curiously, the Times noted that, despite the horrific crime, the paintings were not going to net Mr. Weisman any significant sums of money anytime soon.  In 2007, Mr. Weisman’s set of the “Athlete Series” was the subject of an exhibition at Martin Summers Fine Art, a London gallery, where they were for sale as a group for about $28 million but ultimately did not sell. Since that time, the prices of Warhols have fallen. Moreover, the article states that the crime was apparently ill-advised:  “art experts found it strange that anyone would walk off with just the ‘Athlete Series’’ because the market is “insular” enough to make the works “untradeable.” The article does not mention, however, that the black market for stolen art remains one of the world’s most profitable illegal industries.

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On September 11, 2009, the New York Times reported that Art Capital Group, the art finance lender that filed a lawsuit in New York Supreme Court in July claiming that Annie  Leibovitz owed it hundreds of thousands of dollars, settled out of court with Ms. Leibovitz. However, as the Times reported, the photographs and the homes remain pledged as collateral for the loan, and another deadline to pay back the loan could arrive in the next few months, placing both Art Capital’s and Leibovitzs’ respective positions unresolved. Such a deadline means that Ms. Leibovitz’s work remains cut out for her. Indeed, as the Times also reported, if Ms. Leibovitz does not pay back the loan, Art Capital could still foreclose and sell her photographs and her homes in Manhattan and Rhinebeck, N.Y. 

As we have mentioned in the past, artwork pledged as collateral is increasingly common, particularly when other assets have lost value in the economic downturn. As this article in the Telegraph points out recent high-profile examples of art as collateral include the following two transactions: The Triumph of Music and The Sources of Music by Marc Chagall, as collateral for an existing loan of $35 million from JP Morgan Chase, put up by The Metropolitan Opera works by Picasso, Warhol and Dali from the collection of he American artist and filmmaker Julian Schnabel to help finance the development of an apartment block in New York. The article quotes Christie's president Marc Porter as stating that the art lending business is changing. "For years, one of the reasons this wasn't especially big business was that everyone was getting money for something else. It was easy money everywhere. But now people are looking to every asset to unlock cash." There are myriad legal issues that attend to the use of art as collateral, particularly since such loans are primarily commercial transactions governed by the Uniform Commercial Code. Lenders, borrowers, dealers, collectors and other involved in such transactions are encouraged to speak with an attorney prior to, during, or after, engaging in such a transaction to full understand the complexities involved. 

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Many investors believe (or want to believe) that art remains one of the most stable and wise investments that one blessed with enough capital might indulge. Art investment funds often advertise that, whereas the price of stocks may fall sharply in one trading day, art may provide a safe harbor for those who play the long game -- particularly for works by old masters.

Boiled down to their essence, art funds are investment vehicles that are in many ways like hedge funds and private equity funds, but specialize in art and seek to maximize the rate of return on works in their collection. (From time to time, this blog will chronicle issues germane to those who invest in or manage such funds.)

Of course, such art investment funds have not been immune from the so-called Great Recession. Indeed, Bloomberg.com recently reported that Christie’s recently dropped its plans to start a an art-investment fund and a lending division, and that at least seven employees working on Christie’s financial projects have been fired or have left the London-based auction house since December, moves which augur poorly for the immediate future of the art lending business. (The article can be found in its entirety here.

The article also points out that the art market as whole continues to look -- to put it mildly -- weak. Christie’s worldwide sales of contemporary art fell 69 percent during the first half of 2009, while its New York auction sales fell 51 percent during the same period. In May, Sotheby’s contemporary art auction in New York was down 87 percent from the previous year.

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Among other economic indicators one can look to in order to take the temperature of the economy is the art market.  For years prior to the talk of government bailouts, collateralized debt obligations, and Cash for Clunkers, the art market continued to raise eyebrows with tales of art work being sold at record prices.  Anyone remember in 2006 when Jackson Pollocks’s No. 5, 1948, was sold for about $140 million? Ah, the good old days.

Now that the Obama administration and the heads of the Federal Reserve are beginning to paint a more rosy picture of the overall economy, let’s take a look at the art auction markets to see whether things may be turning around there as well.

Daily Finance reports here, that, after shrinking for the past five quarters, the Art Price Global Index, increased 4.97 percent in the second quarter of 2009.

The article also reports that auction houses like Sotheby's (BID) and Christie's (CTG) experimented with “selling lower-quality as well as offering fewer lots and eschewing price guarantees.”  Since then, Sotheby's CFO has said the market has bottomed out and ArtPrice is reporting increases in sale prices and confidence.

When the unemployment rate is particularly high, the price of art may seem to some to be a less than important economic indicator.  Yet, it is, like many other indicators, telling.  When times are rough for the general population, the market for art suffers.  And now as the economy (hopefully) turns for the better, so do signs of life begin to appear (hopefully) in the sale of fine art.  However, lest anyone get excited about a rebound in the art market, see the other blog entry entitled The Great Recession and Art Investment Funds. 

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As some readers of this blog may be aware, the concept of a statute of limitations may be best described as a maximum time-period by which certain legal proceedings must be initiated or the potential plaintiff may lost his or her right to sue (subject to certain exceptions -- of course!).  One of the most troubling and profound issues that arises with statutes of limitation is whether claims made for the return of stolen or “looted” art can be, or should be, barred when decades or more have passed without anyone making a claim for the return of the subject art.  This question is perhaps at its most pressing point when the subject art was stolen from victims during a genocide such as the Holocaust.

Recently, the U.S. 9th Circuit Court of Appeals in San Francisco struck down on constitutional grounds a 2002 California law giving owners and heirs to artworks looted by the Nazis additional time -- until the end of 2010 -- to sue for their return.  The appeals court agreed with the U.S. District Court in Los Angeles who dismissed a lawsuit in October 2007 that California officials overstepped their authority when they passed the state's Holocaust art-restitution law, because they intruded on what is strictly a federal government prerogative to shape policies on war and foreign affairs. 

The appeals court did, however, allow the plaintiff, Marei Von Saher, the daughter-in-law of a Jewish art dealer who fled Germany in 1940, to amend her complaint against Pasadena’s Norton Simon Art Museum and its supporting foundation to allege facts that might make the suit timely under the three-year statute of limitations generally applicable to actions for recovery of stolen property. 

Von Saher sued two years ago following the collapse of mediation over her claim that she and her family are the rightful owners of “Adam and Eve,” a diptych painted by famed German artist Lucas Cranach the Elder in the 16th century.  The German artist painted them around 1530, and they were valued at $24 million in 2006, when the museum had them appraised for insurance purposes.  

In her 2007 suit against the museum, Saher said that she learned in late 2000 that the Cranachs were at the Norton Simon Museum; the museum contended that she first came forward with her claim in 2001. Mediation sessions in 2005 and March 2007 failed to resolve the dispute, according to the Norton Simon Foundation.  In its written opinion, the Ninth Circuit’s panel of judges noted that Norton Simon attorneys already have submitted news clippings and other published items to show that the Adam and Eve paintings were famous attractions at the museum decades before Von Saher came forward with her claim -- evidence that the museum can use to argue that Von Saher came forward far too late to satisfy the standard, three-year statute of limitations that she must now meet.

Information used for this entry was obtained from the Los Angeles Times and the Metropolitan News Enterprise.

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One of the more interesting cases in the art world concerns claims made against the Andy Warhol Foundation for the Visual Arts and the Estate of Andy Warhol, among other parties, for violations of state and federal antitrust laws. 

The case, which is styled as a class-action, alleges that defendants conspired to control the market for Warhol works by exerting “complete control over the authentication of Warhol artwork by virtue of the Board’s status as sole recognized authentication authority for Warhol works and the Foundation’s publication of an official catalogue of Warhol works,” and by allegedly denying “the authenticity of works that were previously owned by the Estate and stamped with serial numbers from the Estate” for the purpose of allegedly causing a scarcity in the market for Warhol artwork and to inflate the value of the Warhol works in the Foundation’s possession.

Reviewing the defendants’ motion to dismiss (See Simon-Whelan v. The Andy Warhol Foundation for the Visual Arts, Inc., ___ F.Supp.2d ___ (S.D.N.Y. May 26, 2009) [Slip Opn., at 1-2], the District Court found that the allegations in the complaint sufficiently satisfied the plausibility standard set forth in Twombly to defeat the motion to dismiss, and that the plaintiff adequately alleged an antitrust injury. 

In addition, the District Court also denied the motion to dismiss with respect to  plaintiff’s claim that he Board “fraudulently denied the authenticity” of a Warhol painting known as Double Denied, which the plaintiff had originally purchased for $195,000.

On or about June 23, 2009, the parties filed an Amended Joint Preliminary Pre-Trial Statement which would indicate, at a minimum, that any settlement of the claims has not been finalized and the case may go to trial.  The matter has been assigned to Judge Laura Taylor Swain.  

More information about the case can be found in this 2007 article from the New York Times.

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The Los Angeles Times has apparently unmasked the artist who created a poster featuring President Obama portrayed as "The Joker" from "The Dark Night" of the Batman movie series. The poster included the word "socialism" underneath the rendering of Obama.

The artist is not a right-leaning conservative as one might expect.  The artist, now “revealed” to be Firas Alkhateeb, is a 20-year-old college student from Chicago and is apparently a supporter of the liberal Congressman and former presidential candidate Dennis Kucinich.  Even in light of his support for the liberal Congressman, Alkhateeb says he did not vote in the 2008 presidential election.

After initially posting the picture on Flickr, Alkhateeb was concerned that he might be sued for copyright infringement.  According to the article in the LA Times, however, the Electronic Frontier Foundation, a nonprofit organization that defends digital rights, pointed out that Alkhateeb has a strong fair-use defense if he were to be sued. 

As some of this blog’s readers may be aware, the doctrine of fair use essentially allows limited use of copyrighted material without requiring permission from the copyright holders in certain circumstances such as scholarship or a critical review of the copyrighted materials.  Beyond the scope of this entry is the issue of whether political commentary included in a visual artwork such as the “Joker” poster would be, in fact, likely to receive the protections of fair use under the copyright laws.

The LA Times article can be found in its entirety here.

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