A Primer for California Art Collectors

• Jurisdiction: California,United States
• Author: By Joan M. Cotkin, Esq., Michael Heumann, Esq.,
• Publication year: 2015
• Citation: Vol. 21 No. 2

A PRIMER FOR CALIFORNIA ART COLLECTORS

By Joan M. Cotkin, Esq.,^* Michael Heumann, Esq.,^*

Elizabeth T. Pierson, Esq.,^**and Douglas W. Schwartz, Esq.^*1

Even non-art collectors have heard of Herbert and Dorothy Vogel. Herbert, a postal clerk, and Dorothy, a librarian, lived frugally in a one-bedroom New York City apartment and bought their first piece of art in 1962. By the time Herbert died fifty years later, the couple had gathered almost 5,000 pieces of modern art. They bequeathed their collection to the National Gallery of Art, and experts consider their collection one of the most significant of modern times.²

The Vogels' passion resonates with collectors, and their "what ifs" resonate with collectors' advisors. Were the Vogels investors for tax purposes? When Christo gave them a collage for cat-sitting,³ did the Vogels treat it as gift, compensation, or purchase? How would their heirs have paid estate taxes had the Vogels not bequeathed their collection to charity? How could the Vogels be sure that they got a genuine Roy Lichtenstein or John Chamberlain?

Collectors and advisors ask these questions more often because art collecting has become big business. At one Christie's auction in May, 2015, Picasso's Women of Algiers became the most expensive painting to sell at auction, going for $179.4 million, and Alberto Giacometti's Pointing Man became the most expensive sculpture sold at auction, going for $141.3 million.⁴ The art market has taken off for many reasons. Low interest rates and equity market volatility have prompted collectors to look to art to bolster their portfolios and chase after a finite supply of top-tier pieces.⁵ Once-sealed art markets, like Cuba, are opening.⁶ Social media and the internet have democratized art buying from the purview of auction houses and high-end galleries.⁷ Financial and entertainment outlets highlight famous collectors—Hollywood celebrities, corporate executives, and philanthropists—and the ballooning values of their collections.⁸ Recent stories (and feature films) about Nazi-looted art have brought issues of provenance, cultural patrimony, and plunder to the forefront.⁹

Any serious collector knows to retain art experts and brokers, but collectors also need to retain accountants and tax lawyers for tax planning and reporting, business lawyers for purchase and sale contract review, insurance lawyers for coverage review and negotiating, and estate planners for the ultimate disposition of the collection. This article discusses the legal issues that typically arise for art collectors in general and California collectors in particular, with a view to the collector and his or her advisors working seamlessly to protect both the collector and the collection. This article will proceed stage by stage, from acquiring art, through holding art, to disposing of the collection by sale, bequest or other means.

I. ACQUIRING ART: GENERAL CONSIDERATIONS

A. "Buyer Beware, Seller Beware"

Though many aspects of the art market remain unregulated, the collector must be aware of the complex regulations that do apply to art transactions. In the past, buyer and seller often closed major art transactions on a "hand shake" basis. Though that practice sometimes continues, collectors should be cautious about such informal and undocumented transactions.

Many parts of the art market might best be described as "buyer beware, seller beware." The buyer dreams of obtaining the unrecognized "steal," whereas the seller celebrates the good sale, sometimes with mendacious salesmanship and an exorbitant price. Purchases and sales of art are often wonderful experiences for the collector, but they sometimes lead to disappointment or a sense of violation, sometimes years or decades later when new information emerges. While collectors and sellers of art often form lasting friendships, art transactions also can damage relationships, cause hard feelings, damage reputations and, in the worst case, result in lawsuits.

B. Title

The collector has just purchased an exciting work of art, but has he or she obtained good title? How might the collector's title be limited? What title did the seller hold? Sellers frequently are loath to disclose the history of the objects they are selling and want to protect their sources from end-run purchasing. Usually, the seller assumes that he or she holds good title, but sometimes the seller is wrong.

1. Provenance and Chain of Title

Ideally a collector can ascertain and document the full provenance of a piece of art before a purchase—that is, trace the chain of title back from its current owner through each previous owner to its creator, while also identifying loans, exhibitions, publications, and conservation of the art. Other than with purchases directly from the artist or from a dealer known to be making a first sale of the art for the artist, it is rarely possible to obtain a full and completely reliable chain of title.

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Art often passes through the hands of many persons— and sometimes through several dealers within short periods— before it reaches the first collector. The art eventually may even return to the dealer who first sold the art on behalf of the artist. At each change of possession, title may or may not have passed. Sometimes art may pass through the hands of various "owners" who believe in complete good faith they hold title, before a third party asserts a claim of title based on earlier history which may or may not have merit.

The fullest possible pre-purchase investigation of title drives down the likelihood of a later title dispute. This investigation should involve asking the seller all that he or she knows regarding the title, weighing the apparent knowledge and credibility of the seller, independently researching the literature to uncover prior ownership of the art, checking with stolen art registries, and asking others active in the art world about the art's prior ownership history and any controversy relating to it.

2. Theft: "A Thief Can't Pass Title"

Consider the experience of the Southwest Museum several decades ago. Its director, Patrick Houlihan, was convicted in 1993 of seven counts of embezzlement and grand theft for secretly and unlawfully trading and selling exceptional paintings and ethnographic objects out of the Museum's collection.¹⁰ The FBI ultimately seized over two dozen of the objects from high-end collectors, a number of whom were well-known public names. After several years of litigation and settlements, all of the objects recovered by the FBI were ultimately returned to the Southwest Museum. Most of the objects passed from Houlihan's outlets through several hands before they were bought by completely unsuspecting purchasers. When the ultimate buyers sought recourse for their forfeited art, some of the sellers were out of business, insolvent, or deceased.

A thief cannot pass title in California or any other American jurisdiction. This concept arises out of English common law. In California, the statute of limitations to bring an action to recover stolen art does not begin to run until the claimant discovers facts specified in Code of Civil Procedure section 338, including the whereabouts of the stolen art.

Several stolen art registries are available to the collector to investigate whether a particular potential purchase might be publicly listed as stolen. The Art Loss Register (http://www. artloss.com) is the largest private data base of lost and stolen art, antiquities and collectibles. Established in 1990, it grew out of the International Foundation for Art Research ("IFAR") which established an art theft archive in 1976 and began

publishing the "Stolen Art Alert." Other significant registries include the FBI National Stolen Art File (http://www.fbi. gov/about-us/investigate/vc_majorthefts/arttheft/national-stolen-art-file) and those listed under "Stolen Art Register" at http://www.artwis.com/stolen-art-register.

3. Cultural Patrimony

Many are aware of Nazi plunder issues popularized in recent years by movies such as The Monuments Men (Columbia Pictures 2014) and Woman in Gold (BBC Films 2015), as well as current reporting of ongoing legal cases. These include Maria Altmann's recovery of five Gustav Klimt paintings from the Austrian Gallery, the recent discovery of almost 1,300 Nazi-looted paintings in Cornelius Gurlitt's apartment in Germany, Lucas Cranach the Elder's Adam and Eve paintings at the Norton Simon Museum (which were allegedly unlawfully seized once by the Bolsheviks and later by the Nazis), and worldwide attempts by Greece, Italy, Cambodia, Mexico, Guatemala, Peru and other countries to recover their antiquities. Certain countries, including the United Kingdom, can impose a right of first refusal to purchase the art instead of allowing its export.¹¹Art unlawfully imported into the United States may be seized by federal authorities or subject to later repatriation.¹²

4. Liens and Lienholders

Another title issue involves acquiring art objects subject to liens, which may be secured by UCC-1 filings with the California Secretary of State or perfected outside of California. In this age of investment by multiple partners in art and lending on art by many major banks, it is prudent to engage in due diligence to verify that a purchase is not subject to third party liens.

Prudent art purchasers also can protect their investment by purchasing title insurance and obtaining written seller warranties and representations. The latter, of course, are only as good as the seller's ability to pay damages if an issue emerges.

5. Copyright

Copyright issues also affect art title. The Copyright Act¹³ provides for a "bundle" of rights for the author of a copyrightable work, which include the right to reproduce (copy), make adaptations and derivative works, distribute, publicly perform or display, and certain so-called "moral rights" (droit rights). Generally, a purchaser receives only the right to own and display his or her lawfully made copy of a work unless the...