May 2010 issue

True Art Ownership

Establishing the true ownership of an artwork can be a daunting task, but necessary to guard your client against financial and legal risks.

It should be axiomatic that no prudent art collector would buy an expensive work without establishing credible and lawful title to it. But simply having a title often isn’t good enough to secure the right of ownership. A good title can be easily spoiled if it is covered that there was a theft in the artwork’s history (perhaps one of the “forced sales” that occurred during World War II). Art theft victims now have more means than ever to wage disputes, and recent court decisions have returned works of art to former owners even when the statute of limitations has expired. The Internet, meanwhile, offers databases that allow the cross-referencing of art auctions and data bases of stolen artworks—tools that make it easier for theft victims to mount court challenges.

Thus the ownership history of artworks has become an increasingly sensitive issue for new buyers. As Lawrence Shindell, the CEO of ARIS Corp., says, “Just because the client bought it doesn’t mean the client owns it.” A work of art made before 1946 will always have a question mark hovering over it, and buyers of such pieces should be especially diligent before parting with their money. In the hushed and clubby world of art dealing, a persistent inquiry can sometimes seem impolite. But collectors who don’t proceed with due diligence can put their art at risk, especially if they sell the artwork to somebody else.

Art collectors have always understood the problems of ownership history, or provenance, and the related but distinct issue of legitimate title when seeking new works. But it was only in 19 98 that the Association of Museum Directors issued guidelines for determining ownership history. This was followed a year later by a similar directive from the American Association of Museums. These directives made particular reference to art that had changed hands in the World War II era, when the looting and theft of art reached unprecedented levels. The importance of the issue was underscored in 1998 with the creation of the presidential advisory commission on Holocaust assets, which published its final report in 2000.

Though World War II era artworks are particularly problematic , collectors would be wrong to assume that art created afterward is immune from problems. Of the 300,000 or so stolen , missing or looted artworks listed in the Art Loss Register, an international database, more than 15% were created after 1945. Discoveries can be surprising: an $80,000 painting, for example, was recovered in 2007 at the Palm Beach Fine Arts Fa ir in Florida after it was found to have been stolen in 1995 from the Buffalo Club in New York State.

It’s important to rely on the advice of a trusted art advisor or a reputable dealer, or to buy through a respected auction hous
e.But these are only the first steps and may not be enough by them selves to avoid a claim of defective title against art that a
collector thought he had purchased in good faith.
Statistics about art theft are limited. The Art Loss Register has tracked thefts by decade since the 1930s, and surprisingly found that there were a record 60,000 items reported stolen during the 1990s, more than at any other time. (That number would have been easily outpaced during the 1930s, however, had the “forced sales” in that era been reported. Obviously, the ability of the victim to report theft is the key.)While total art theft declined somewhat to just over 40,000 in the past decade, ARIS, as the sole underwriter of title insurance in the art world, has seen a clear increase in the incidence of title-related claims, especially at lower dollar values.

There are several reasons for the rise in the number of art ownership claims, according to Shindell. One is the rising values of
art. Another is the increasing financial pressure on galleries and collectors, which often creates liens and other encumbrances on inventory.

When Ownership Is Challenged
For a collector who has acquired a work of art, having the right to ownership disputed can come as both an emotional and financial shock. Even if the collector has secured a warranty of clear legal title from the seller at the time of purchase, he may not be able to rely on it, says Shindell. The upstream seller may no longer be in business, for instance, or may not have assets to stand behind the prior warranty, or may be hard to pursue if he is located in a foreign country where the warranty is hard to enforce.

Meanwhile, if the collector has become a seller of the work an d hasn’t sought a third-party risk transfer solution, i.e. title insurance, and if the upstream seller isn’t around to recover money from, the collector himself can become liable to his or her downstream buyer if the ownership of the work is successfully challenged and the buyer then loses his money. The buyer can then sue the collector for damages, including the price he paid for the work—as well as possible appreciation—and for his legal expenses.

The Chubb Insurance Group has responded with coverage that reimburses legal fees up to $100,000 incurred in a title dispute for scheduled works of art (except in New York). Unfortunately, this benefit does not extend to the actual value of the work if the owner is required by the courts to forfeit the piece. Courts in the U.S. will generally “balance the equities,” meaning that the due diligence the buyer performed to avoid possession of stolen art will be measured against the steps the former owner made to recover the art. Nonetheless, the burden of discovery will usually weigh more heavily on the purchaser, who, it is assumed, has the sophistication and resources to authentica te the history of a purchase.

“If you wind up on the losing side of an ownership challenge,” says Jonathan Ziss, a partner at the law firm of Margolis Edelstein and a founder of Art Title Advisors, “the result can be perfectly awful: the loss of a valuable asset, the destruction of an estate plan and the loss of a charitable donation or bequest tax deduction, perhaps years after the time for filing anamended [tax] return has timed out.”

Provenance, Title And The Private Collector
Happily, there are resources available to help private collectors with their investigations into an artwork’s provenance.

UCC Filings: Overall, sales of art are governed by the Uniform Commercial Code (UCC) which most states have enacted as their law. A UCC filing provides notice of a security interest (for example, a lien) that some person or entity holds in a specific item. Not all stolen works of art have UCC filings, and the filing search must be done state by state because there is not a national UCC database. UCC filings will identify most security interests, but they are not a means of detecting historic theft. Perfected UCC security interests only create a priority of right among creditors competing for satisfaction of interests from the secured asset.

Art Loss Register and Interpol: The Art Loss Register (www.artloss.com) enables owners to register lost or stolen items and list possession of items in the pre-loss database. Potential buyers may search to see if an item has been entered as lost or stolen. The fees are generally $75 each and $760 for every 25 searches. The Art Loss Register’s services include negotiation and the mediation of art title disputes to ensure that stolen artwork is returned to the proper title holder. There are also additional services offered such as World War II registrations and provenance research.

Interpol (www.interpol.int), the world’s largest international police organization, maintains a database of 34,000 stolen art
works. There is no charge for searches, but users must submit an application for approval to receive a password.

Art Title Advisors: For a fee, this firm (www.arttitleadvisors.com) will produce an ownership rights protection report that describes the results of its investigations into a title. The firm checks both public and private databases as well as its extensive network of dealers and museums. The reports provide collectors with a documented record of due diligence structured to help defeat competing ownership claims. Fees for artworks under $250,000 are usually between $750 and $1,000. For art valued between $250,000 and $10 million, the fees range from $2,500 to $3,500.

ARIS Art Title Insurance: The ARIS Corporation (www.aris-corporation.com) offers art title insurance, a form of title insurance similar to that used in real estate transactions. For a premium that generally is 1% to 5% of the fair market value of the work at the time of policy issuance, ARIS provides title insurance that typically covers losses due to defective title from past provenance risks, export and import defects and also “classic” title risks such as liens and security interests and authority-to sell issues. (Premiums can be higher for World War II era provenance gaps.)
Notwithstanding the array of resources available to the collector for establishing and protecting lawful provenance, Christopher Marinello, general counsel to the Art Loss Register, believes that “there remains an underlying moral obligation to avoid the purchase of art which does not have good title and to see that the work is ultimately restituted to the theft victim.  In their understandable enthusiasm to acquire beautiful works of art, collectors should not lose sight of this sometimes challenging, but fundamental imperative.

Rebecca Korach Woan is a principal and founder of Chartwell Insurance Services in Chicago. She regularly comments on insurance matters for national and local publications, including the Wall Street Journal, Art and Antiques, AP Newswire, the Chicago Tribune, the Chicago Sun-Times, and North Shore Magazine