By PAUL SULLIVAN
Published: September 24, 2010
Even in a sluggish economy, art auctions can be frothy places. But as the fall auction season kicks into high gear, the same emotion that gets buyers to bid up works of art may well lead to a different variation of buyer’s remorse.
The problem is in buying art that has unseen strings attached. The cases associated with Nazi-era art looting are well known. But claims associated with outright theft count for only a quarter of the lawsuits brought against owners of art, according to Judith Pearson, president of Aris, a title insurer specializing in art. The bulk of the claims come from more traditional liens and encumbrances.
“There are all kinds of examples — someone didn’t have the authority to sell the art, the I.R.S. has a lien on all assets for not paying taxes, the art was used as collateral for a loan and the loan wasn’t paid off,” she said.
This weekend’s auction of the Neuberger Berman and Lehman Brothers corporate art collections has several art advisers talking. While no one has suggested any impropriety in the sale, which was approved by a bankruptcy court judge, several advisers discussed other auctions that involved claims against the art. A spokeswoman for Sotheby’s, which is handling the Lehman auction, did not return repeated calls.
Joel Lever, a partner at the law firm Kurzman Eisenberg Corbin & Lever, said a client who had bought art from a bankruptcy auction in Japan ended up being challenged by the firm’s corporate creditors. Another client bought a work of art from a respected Zurich dealer only to learn, when he sought to sell it at auction in the United States, that the piece was a forgery.
“It’s important to generally talk about protecting what a buyer should do,” Mr. Lever said. “There is an arrogance of the buyer, often my client, and the seller, a well-known auction house, that exposes them to risks that they would not take with any other asset class.”
Stories of frauds appeal to our romantic imagination, and the authenticity of any work should be verified. But buyers should concern themselves this auction season with three other things first: value, liens and legal protection.
After the last auctions in the spring, the Mei Moses Fine Art Index showed prices for Impressionist, old master and postwar art had rebounded significantly from lows in 2009. The biggest gains were in postwar art, which increased some 30 percent, according to the index.
That would seem to be good news, but several advisers pointed out that buyers can get caught up in the euphoria in a market heading up. “The minute you buy something, you need to know what your exit strategy is,” said Peter May, an independent wealth consultant in Philadelphia.
Mr. May specializes in advising clients on buying art, and he said all buyers expect their art to increase in value. But that is not always the case. Worse, many buyers do not think about how they may eventually sell the art or handle its transfer to their heirs.
Advisers’ more immediate concern, though, is the client who gets caught up in the moment. Auction catalogs are produced months in advance of the actual sale, which should give buyers plenty of time to assess how much they are willing to pay for a piece of art. Yet buyers too often start bidding and end up paying more than they expected to.
“I have many clients who lose all discipline, like they were at the craps table,” Mr. Lever said.
Regardless of how you buy the piece of art or how much you pay, these advisers agreed that it is important to make sure the piece has no liens against it. “Most people think of fraudulent transactions,” Mr. May said. “But you also have normal business issues, or it’s personal property of your balance sheet and you’re about to be sued.”
This is where Ms. Pearson’s company comes in. After searching liens and claims against the piece of art as well as researching its provenance, the company makes a risk assessment and decides on a one-time premium for the piece.
These rates range from 1 to 5 percent of the value, with the higher premiums going to World War II-era art that could be linked to the Nazi looting. “Just because you paid for a painting, it doesn’t mean you own it,” Ms. Pearson said.
The reality, though, is that title insurance is still not broadly accepted. “It hasn’t been purchased on a widespread basis,” said Paul Funk, executive managing director at Frank Crystal & Company, an insurance brokerage. “We’re dealing with very high net worth clients and we’re not hearing from them that this is coverage they want to buy. We’ve heard it come up more with hedge funds buying art and they have investors behind them.”
Mr. Funk said major carriers do not offer endorsements that protect collectors from buying a piece of art that was fraudulently sold to them.
That is why, the advisers said, you should take your time in negotiating sale contracts and doing due diligence ahead of an auction. “It behooves you to get a third party to inspect and value the authenticity of the art,” Mr. Lever said. “It’s expensive and difficult to do but you should be doing that if you want to protect your claim.”
The advisers also recommended having a contract in place that says what reparations will be paid if the work is found out to be a forgery or to have been fraudulently conveyed. This is what Mr. Lever did on behalf of the client whose art turned out to be a forgery. Because the dealer, widely respected in the Zurich art world, did not want his reputation besmirched, he agreed to settle the claim out of court.
“We ended up settling, and rather quickly,” he said. If he had let his client rush into the transaction, he said, the result might have been quite different.