Tom Fawell Art sales and finance in good times and bad

My name is Tom Faywell. I'm a partner at Ramone Law. I'm also a co-founder and general counsel for a hedge fund called GenEquity that focus on GenEquity and its affiliate, Genwood Musee, is strictly in art, art finance, and creating value in art. Tim is on our board, is on the board of GenEquity, and a storied career, educated at Oxford, formerly with pretty much everybody, Christie's, Gershon, Sotheby's, a director at Christie's for 16 years. Did I get all that right, Tim?

That's right, that's right, Tom.

More importantly, when he ran Falcon Art, which was the prestige funder in the art business, he was what we call the man with the pen. If you needed money, and Tim's— Tim had the life choice of life or death in his hands. So with that, let us get on. What we intend to do today is not give a comprehensive concept of what art and art finance is, because that takes much longer than an hour. What we'll be doing is just going over the agenda, then we'll click out our videos so we don't distract the conversation by having been introduced. But what we'll be going through is a few market observations, overview on art lending. Tim will do a deep dive into due diligence. Then we will deal with art sales and transactions, particular tax issues in art and money laundering. The concept of what we'll— the best way, and I think it's useful to think of— I got the wrong slide. It's useful to think of art lending as a concept of the haves and the have-everythings. The whole idea of art lending is it's divided into 2 really basic groups. The first is a group that you might see with the major banks. Bank of America is the primary one, Northern Trust, Goldman Sachs, and they will typically lend you as much as you can prove that you have liquidity to pay without diving into and foreclosing on the asset. Those typical rates will be prime plus 1 or 2, always non-recourse, but none of those institutions make any money on that. So the other little trap that they have is if you can't be cross-sold to other additional bank services, you're probably not a candidate for the Bank of America or Goldman Sachs of this world. They also deal with a number of bank compliance issues. So whereas most non-bank lenders will be strictly concerns of asset value and of course anti-money laundering concerns. Bank compliance issues require a much, and sometimes traditional, much deeper dive into your own personal assets that some of your clients will find intrusive. Insurance costs and coverage, Usually 10 to 20 basis points. If you choose to keep it in your home, which the institutions will let you do, the nonbanks typically will not, then you pay a bigger premium for that. And that's just a general oversight. Nonbanks will give you stated rates of 12 to 16, and effective rates then end up being more in the 16 to 20% range. They are typically non-recourse with bad boy carve-outs, not really any cross-selling or compliance issues between what we mentioned. The insurance is pretty much identical between the two. Tim, do you, before we dive into ART, due diligence, do you have any other comments on the industry as a whole?

Yes, I think I would say that it's a lot more developed in the States than it is in Europe and Asia for that matter as well. In the United States, there are many banks that perform art lending services that don't exist in Europe, where we tend to have smaller sort of smaller firms, specialized firms that do it. But it's a market that's evolving over here and it's following what's happening in the States. That's what I would add to that.

I agree, and one of the biggest reasons for that is that we will be getting into is in the US we have that very developed concept of the Uniform Commercial Code, which has some limited efforts that really haven't grabbed hold with lenders in Europe. But nonetheless, as we will find out in this, Tim will show in our due diligence, I think a useful metaphor in considering our transactions is the perhaps ethos of Dodge City in the 1880s, except people in the art world have much, much nicer suits, but the stories and the chicanery is just as entertaining. So with that, Tim, why don't we go into art due diligence?

Sure. Well, art— so hello from London, everybody, first of all, I should say. Art presents particular challenges to lenders who would like to use art as collateral, and these challenges differ from the sort of normal problems you get with assets that are used for collateral. So the due diligence process is there to minimize as much as possible—you can't ever eliminate them altogether—but you try and minimize these various risks that you have with artworks. Now, I'm sure some of you will be familiar with some of these issues, but you may not be familiar with all of them, because art is a sort of very specialized area when it comes to collateralized lending. The first area that we need to talk about really is authenticity and attribution, and that goes to the very heart of the whole subject. I mean, how do you know that the Picasso that you've loaned money against is actually by Picasso? You know, who says it's by Picasso? So there are a number of things that one does when one is presented with a picture of this sort, or an artwork of this sort. The first thing to do is to look at the publication history of the artwork. So whether it's been included in the most up-to-date and reliable catalogue raisonné would be important. Has it been published elsewhere, in a monograph on the artist? You know, is it a known work? Now, not every published source is reliable. That's the first problem one needs to grapple with. Not all catalogues raisonnés are highly regarded, and you have to know the difference between the two. I mean, an artist like Modigliani, for example, who was painting in Paris at the turn of the century, in Bohemian Paris. He died very young, and there are a lot of copies of his works that were made around that time. And there are a number of scholars who have written books, various books on Modigliani, most of which are not accepted by the sort of art, you know, art world. In general, they're not highly regarded. So one needs to look at the correct catalog raisonné. Actually, in Modigliani's case, that's a book by Ciaroni, which was written in the 1970s, so it's very old now. And that's quite an exceptional situation. But not all catalog raisonnés are, you know, as I say, accepted. If for many artists there is no catalog raisonné, and this presents other problems. So, you know, how do you, how do you look it up? How do you find it? I mean, sometimes there's a— you need to go to an expert to find, to get a proper attribution, sometimes several experts. There may be a committee or a foundation that sits to authenticate works, and one needs to know that. I mean, the example of Monet or Renoir are quite well known. The Wildenstein Committee sitting in Paris decides on all, you know, Monets and Renoirs, for example. So you— if they're not published, you present the work, they have a look at it, they examine it and research it, and they decide whether it's by Monet or Renoir or not, and their word is final. With other artists, sometimes you need to seek scholarly opinion from curators in various institutions, and that can take a lot of time, and you need to know the right people to go to. The other thing that you can do is, obviously, in terms of authenticity and attribution, is to research the provenance and the exhibition history of a work. Obviously, if it's been exhibited in major exhibitions around the world and it's been exposed to scholarly discussion, that's obviously a good sign. And provenance, which I will come back to in some of these other topics is crucially important because this establishes the history of the ownership of the artwork, and the further back the history goes and the more distinguished the provenance, if I can put it that way, the more likely it is that the artwork is fully attributed or authentic. Now, a lot of these this research takes place with, you know, published sources, but sometimes you need to look at other resources that are available, such as the Witt Library in the Courtauld Institute, or the Frick also has a photograph library in New York, and one needs to search through these sort of archives to find evidence of former exhibitions and provenance and such, so on and so forth. It can be very time-consuming, this work, but it's necessary in order to fully authenticate an artwork. Sometimes this has been done for you by the clients or the client advisor when they come to present the artwork for collateral. Other times it hasn't, and one needs to either find someone that can do this, or you can do it yourself. Now, The next topic I wanted to sort of discuss going down the list is good title and ownership, and this is a topic that I'm sure you, being lawyers, will all have a view on and actually know quite well. And it's surprisingly little— when I used to work at Christie's, this was an area that was actually surprisingly badly covered. I mean, we didn't actually do that much to try and work out whether the person that said they owned the artwork actually owned it and had the right to sell it. We asked them to sign a consignment agreement where it said that, you know, that this was the case. But when you're lending money against artworks, it's much more advisable to actually get proper proof of ownership. Now, this can obviously, as you know, take the form of invoices, sometimes accompanied by proof of payment, a receipt of purchase. Sometimes these take the form of deeds of transfer, bills of sale, and in some situations, when something's been inherited, you might need to see a will or a bequest to ascertain that the owner is actually the owner. Now, in art, with artwork, the ownership of artwork can be a private individual, but also you need to understand that artwork might be owned by a corporation, by a company, quite often by a charity, or indeed a trust. Quite often artworks are held by trusts set up by, you know, beneficial owners. These all need to be verified, and in particular, one needs to find out if it's owned by a company or a trust, for example, whether the trust or the company has the ability to sell the artwork, because any artwork that's been used as collateral for a loan has to be able to be sold. It may not be sold, but it has to— the whole point of collateral is that at the bottom line is if the client can't pay the money back, you need to sell the artwork. If it can't be sold, then it is not much use as collateral, and this is something that needs to be worked out very quickly early on in the whole process. Now, when I alluded to the fact that the market for art lending is much more sophisticated and developed in the USA, Tom mentioned the UCC filing possibilities there, and that's one of the major reasons why the United States is ahead of the rest of the world in this area, because it's very useful in the United States to be able to register your loan, your lien over the artwork, in a UCC listing. That is not available in the same way in European countries. Each country in Europe has a different sort of way of dealing with these issues, but there's no single register in these countries where you can perfect your loan. And that's a problem for art lenders, obviously. And one needs to think of solutions to that problem. I'd like to say something a bit about fakes and forgeries. I mean, this gets a lot of publicity in the press. Everyone loves stories about fake artworks that appear in museums or being sold by auction houses. Actually, fakes and forgeries is not as— well, it's a big problem in the art market, but it's not quite as prevalent as these news stories might lead you to believe. It's obviously part of authenticating an artwork is to try and establish that it's not a fake or a forgery. And whereas when I was talking about authenticity, I was talking about the publication history, the provenance, the exhibition history of the artwork, when it comes to forgeries, we tend to rely more on the scientific analysis of artworks. This is a huge field, a burgeoning field, where you can go to restorers and technicians, and they can perform various tests on paints, on paint analysis, dendrochronological tests on the— if it's on a panel, you can actually look at the tree rings on a panel to ascertain how old the panel is. Radiography, microscopic examination, these all have a part to play in uncovering modern fakes and forgeries, which are designed to fool the eye and make you think that something is what it's not. I would say this is different from an attributional issue, where an attribution, you might— the picture might be old and you might be just discussing whether it's by Rubens or whether it's by the studio of Rubens. That's an attributional issue. A forgery would be a modern fake that's designed to convince you that it's actually by Rubens, and scientific technology is the best the best way to uncover that. Now, it's not always clear-cut, but it is something that is advisable if you're in any doubt. You should have a— a qualified restorer should look at the painting or the artwork and advise on the suitable tests that can be carried out to ascertain whether the piece is old. What I often say is that with— it's a two— It's a two-pronged thing, this. You can— the science can tell you whether the artwork is old, but it can't tell you that Rembrandt painted it. That needs to be a combination of science and connoisseurship before you get to that state. But the science is important in uncovering out-and-out fakes. Then we come on to the valuation of the artwork. This is also an absolutely crucial crucial for any lender to know exactly what the artwork is worth before they lend money on it. Now, it seems such a simple, straightforward thing, but in the art world, valuations come in all shapes and sizes, and what might be suitable for one type of transaction might not be suitable for art lending. So, for example, I often used to get shown artworks that come already with a valuation, often an insurance valuation, from the client, and was told this is the sort of level they want to finance it at. Well, of course, insurance valuations are at the high end of the value spectrum, and they are totally unsuitable for the sort of transaction you're making when you're trying to lend against art as collateral. What you really need is a fair market value valuation or appraisal. And what is a fair market value appraisal? Well, I quite like the IRS's definition of fair market value. I've always found this quite pithy and quite good, and I'll read it to you. You may well know it already. It's the price price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell, and both having a reasonable knowledge of the relevant facts. So that's what the IRS regard as a fair market valuation. In a technical advisory memorandum, they further suggested that the buyer's premium in the case of an auction situation could be added to the fair market value. Now, from a lender's perspective, you may not want to add the buyer's premium, because from a lender's perspective, if you have to sell the artwork to recover the loan, you're going to get the— at an auction, at least— you're going to get the hammer price minus the commission. You're not going to get the buyer's premium on top of that. So the fair market value might need to be fine-tuned slightly from a lender's perspective. But what you're really aiming at is to try and find out what the market value of the artwork is. When auction houses give their market, their best idea of market value, they give two figures. They give a high figure and a low figure, which is what you see as an auction estimate. Well, two figures don't really work for art lenders. They need one figure. And you need to decide when you're looking into this whether the figure should be at the lower end of the auction range or at the mid-estimate, which, you know, it could be either. But you need to have that discussion, have that— make that decision. From that, you will then base on whatever the valuation is, then you work out what the loan-to-value, the LTV, of the transaction will be. Now, normally lenders will understand that you need more than one independent valuation done. I mean, valuers sometimes disagree over the value of an artwork. Art is, it's a unique item, and so there are various different levels and different opinions when it comes to evaluation of an artwork. Sometimes, you know, valuers disagree over their values, and so you would then normally take, say, 2 or 3 valuations and take the median of those 3 for your figure. It's very important you use a reputable and experienced art appraiser, and appraisers normally specialize in a particular area or or you would rather hope they do. So it could be Old Masters, it could be 19th century or Impressionist art, it could be post-war, it could be contemporary art. Now, it's very unusual for a valuer, an appraiser, to be extremely competent in all those different areas. So you really need to choose the valuer very carefully and match the artwork with their area of expertise. The appraiser should, of course, carry out a physical examination of the artwork, and they present a report that should include a justification of the valuation with concrete examples of comparable works that have been sold recently in the market. In the USA, most appraisers are USPAP compliant. USPAP is the Uniform Standards for Professional Appraisals. Appraisers. And in fact, I just, I recently just updated my USPAP qualification, so I know all about USPAP. We don't have this qualification in the United Kingdom or indeed in the rest of Europe. There is no sort of centralized appraisal common practices that you take, take an exam and then, and you're, you're, there you have, you have that against your name. So you have to be very careful in choosing your appraisers and valuers in this area, and you need quite a lot of experience in the marketplace to know who you can trust and who you can't trust. So often I was presented with a sort of dossier, an item, an artwork for a loan, and it came with a huge number of, you know, a folder of expertise and valuations And at first glance it all looks sort of fine, and you know, but you look into it further and you realize that the authenticity letters are written by people who are not regarded in the marketplace or have long since, you know, died, and so these are old and out of date, and the appraisals have been done by people one's never heard of, and one suddenly becomes a bit suspicious in these circumstances and delves a bit deeper, and they almost always turn out to be spurious, these ones. So you've got to be very careful when it comes to accepting valuations for artworks when it comes to collateral. Exportation and importation is another crucial area that is often overlooked or not sort of thought about too much, but it's very important. So while you're researching the provenance of an artwork, it will become clear to you whether the artwork has ever been moved across international borders. Now, each country sets its own rules governing the exportation and importation of artworks, and it's extremely important that all the instances, particularly in recent years, say post-1970, I would say, are properly researched, and where possible, a valid export license or import documents are provided along with the artworks. Now, this is not always possible, Clients have a habit of mislaying or otherwise not seeming to be able to find export documents. I know this from my days when I was at Christie's, and this is very important. For example, when you're dealing with artworks that come out of Italy, it's extremely important that they have the correct documentation, because if they don't and they come up for sale and they've been illegally exported, or incorrectly exported, the Italian government can claim that the sale should not go ahead and that the piece should be returned to Italy where it can be properly assessed and given an export license or not, as the case may be. And this is true of lots of different countries. It's particularly a problem when it comes to antiquities where countries are extremely, I would say, aggressive in in pushing for their rights over the excavation of certain types of antiquities, and they may well make claims when pieces don't have the correct documentation. But this is also true of artworks in general, modern artworks. I was told when I was at Falcon, when we were financing all sorts of people's artworks to be particularly careful— my lawyers told me this— particularly careful of artworks that are on yachts, because yachts have a habit of being in Cannes one moment and then in the Caribbean a few weeks later, and it's highly likely in those situations that the owners of these nice artworks on these very beautiful yachts don't follow the correct rules when it comes to import and export. And you've got to be very careful of that. So be careful of artwork on yachts, but in general, one should be careful of all artworks when it comes to import and export. Another area that you can come a cropper in is restitution issues. Now, restitution, as I'm sure you're all aware, concerns artworks that were seized or forcibly sold during the period of 1933 to '48. '48, just after the war in fact, when the Nazi regime in Germany forcibly and systematically stole or forcibly bought large amounts of artworks all around Europe. And this has led to many, many years later to heirs of people who had been whose artwork had been stolen in this way to make claims against whoever owns the artwork now and say those artworks are rightfully mine. Now, this is an area that has received a lot of publicity over the years, and there have been some very high-profile cases. And one has to be very careful when studying the artwork that is there for collateral to examine the provenance and ascertain where the picture was or the artwork was during this period. Now, if you can't tell, I mean, sometimes provenance is patchy at best, and you may not know exactly where the artwork was during the war. Well, this will raise an alarm bell, and one needs to do further research on this matter. At the very least, you should check the Art Loss Register, which is the industry standard for giving an artwork a clean bill of health, its provenance perspective. Now, the Art Loss Register will run certain checks for your artwork against various databases, and any significant or sensitive names that appear in the provenance will be researched, and it will be looked into, and hopefully they will find out that your artwork is fine and is unlikely to be, you know, come up in a restitution case. But the artist register only do a sort of minimum amount of work, and sometimes for very important works where there is some doubt during the war years, one needs to do even more research, and there are various specialized researchers that will, for a fee obviously, do this extra high-level due diligence research on restitution issues. Finally, I wanna say a little bit about condition. Because condition is a tricky subject that is often misunderstood in the art world. Artworks obviously are fragile and their condition is variable, and condition has a huge impact, or can have a huge impact, on the value of the work. Now, some restoration on paintings, for example, can be acceptable. I mean, some paintings are very old. I mean, they can date back to the 15th century, and, you know, over hundreds of years, it's highly likely that a painting has undergone some restoration. So for a 15th century picture, we are more, if you like, you know, we can accept a certain degree of restoration, which would not be acceptable on a 19th or 20th century picture. So one needs to sort of take into account the age and the rarity of the artwork. Also, one needs to look at the materials that are being used. I mean, some contemporary artworks which appear to be in pristine, perfect condition because they've just— they've recently been made, they might deteriorate because some modern artists use very fugitive materials when they create these artworks, and so that can also cause a problem. So one needs to take this very seriously. Some appraisers are very good when it comes to looking at condition, others are not. So really, one needs to employ a qualified restorer to assess the artwork, probably prior to the appraisals being done, because the appraisers will need to see the condition report to formulate their conclusions. And the artwork needs to be assessed in that way. Equally, it's important to remember that you need to examine the artwork during the financing period as well, because condition can deteriorate, and it needs to be— you need to have this in mind when you're storing it. Where it is stored and how it is stored is important, because condition can deteriorate during the financing period, which would also be a problem for a lender. Hopefully that doesn't happen and it's stored in a professional way and condition remains the same. But nevertheless, some paintings and artworks do require specialist treatment, and restoration can in fact improve their value, not necessarily decrease their value. But condition is a big issue, and that's one that lenders often don't know much about because that's not their specialty. I've been asked just one question in the chat room, I see. Is Professor Maurizio Saraceni, Florence, in Italy, in good standing in the art world, in particular when it comes to Modigliani? Saraceni, yes, well, I know Saraceni. It's— Modigliani is such a fraught issue. At the moment, the auction houses, both Sotheby's and Christie's, only will offer a Modigliani that has been authenticated and is in Ceroni's old catalogue raisonné. So if a new one appears and it's not in Ceroni, they will generally not auction it. It's not auctionable. It may be by Modigliani because Ceroni didn't sort of— it's well known that he didn't see every single Modigliani, and it's quite possible that he missed several, but it would— the picture would have to have an amazing provenance and early exhibition history for it to be accepted. Various people are trying to put together a committee that will be acceptable to all different parties on Modigliani, but it hasn't happened yet. So Sarah Cheney is part of that, that drive to produce a new committee, and I don't know the latest on it. I mean, I've been following this story for many years, but I don't think there's a committee that's up and running yet that's fully accepted. But we are, all the art world want this Modigliani issue to be solved because Modigliani, you know, the record that Christie's broke recently, they had a Modigliani that made $150 million and they regularly make tens of millions of dollars. So, you know, it's a really important area that we need to get right. Modigliani is not the only artist that suffers in this way. There are others, but he's a sort of high-profile case that is a good one to use. That's all I wanted to say on the art due diligence. Obviously, it's a very complex subject. I want to talk on about it for even much longer, but I hope that gives you a sort of glimpse into the sort of things that we do when we are confronted with an artwork and asked to make a loan against it. And these are the sort of, this is exactly the sort of due diligence checklist that you need in order to make sense of this tricky and interesting world of art lending. So I'll hand back to Tom now. Well, thank you very much, Tim.

That was, I've heard you go longer, but that was extremely thorough and thoughtful. We're watching the clock, we're well aware of that, so let me just start in some of the just meat and potatoes of the art world. The non-mysterious part is art sales and arts transactions in the US are governed almost exclusively by the Uniform Commercial Code with some exceptions, and the base rules that you learn about here and listen to are the same ones you listen to in law school, subject to amendments that from time to time change. What makes it interesting is The imagination that's applied in trying to get out of or get into a particular transaction is as creative as the art itself. So, the first thing when you're in— there's a particular applicability here in our COVID period of time because everybody not a day out of school is expecting a number of galleries to file bankruptcy. So, the Article 9 application is particularly important now. And given the time, we'll go through this quickly, but the methods of perfecting a security interest are well known: filing, possession, control, which usually deals with securities, and that which is automatic. So let me just deal with each of these. In art lending, there is always a filing, that is a UCC-1. Usually that's accompanied with possession. Possession can be actual holding of the art. Lenders uniformly will say our possession's going to be stored in an art vault where the assignment is made over to them, and under the UCC, that's perfectly acceptable, considered possession. The bigger banks, as I earlier mentioned, Bank of America, may allow a wealthy enough client to keep the art in his home, but then it gets to an issue of how much do you appreciate that? Because you will pay likely a higher insurance premium, and places like B of A and Northern will lower the loan-to-value. So instead of getting their standard 50%, you may be getting something more in the 25 to 30% loan-to-value. With a higher insurance premium, all for the joy of having it sit in your living room. So rule is you better like the art. Where this applies, particularly in lending or in sales, I'll just mention two quick areas. One is the automatic provision. UCC provides a 20-day automatic security interest. For example, if a bank had to, repossess art and then resell it, the loan proceeds, they have 20 days to grab it, and they have a secured interest in that, those sale proceeds immediately afterwards. One that's particularly more important to your clients, and that is giving your art on consignment to a gallery, that's considered a merchant, someone who deals in goods of that kind sold Let's take a horror story and solution. The horror story is that you give your nice piece of art to the gallerist. The gallerist has to file for bankruptcy. Without a UCC-1, you are just a debtor. You've probably lost the art and you stand in line with all the other unsecured creditors. There is some protections in some states. New York gives limited protection if you, under their consignment provisions largely to the artist. Massachusetts is a little more protective, but for the most part, you always want to file a UCC-1. So if the worst happens, you're at least protected in a preferred setting. And that all comes down to what's your priority. Lenders will, and particularly the non-bank lenders, to protect their priority in the event of liquidation, will always take the belt and suspenders route of the UCC-1, as well as possession almost uniformly in one of the art warehouse facilities in New York, Miami, in Los Angeles, Chicago. In a typical concept of art lending, we have what's called a bailment agreement, and that will typically be just a very uniform 1 to 2 page form document that will say, for example, the art may never move if you take it to your lender. It's just, there'll be a bailment agreement from the art warehouse that will have you assigning the possessory interest of that particular locker where the art is placed from the owner over to the lender in conformity with the loan agreements. It gets released when it's done. To quickly go through some of the comparisons that Tim alluded to earlier, and I mentioned in my opening remarks, the reason the U.S. is the prevalent lender is simply because of the UCC. There's the item we were referring to called that's been adopted by several countries, and we've mentioned them here on the screen, France, Belgium, and Spain, is pledges over chattels. And that's had problems for several reasons. One is it's not uniform across the continent. And two, most lenders look at places like France and Spain so heavily pro-creditor and so antithetical to the creditor. I'm not aware of any lenders that will, even with possession taken, allow the collateral to remain in any of those jurisdictions. Of special mention is a very creative approach that was used by Tim when he ran Falcon Art. And that was a little bit of heavy lifting and a little bit circuitous, but it still allowed the owner to keep the art in his flat or home. And that was a sale-leaseback structure. So the title changed to Falcon, subject to a lease, and in that way they were able to achieve the same thing that Bank of America might with a UCC-1 and an extraordinary insurance provision.

So, sorry, just to add there, Tom, that we would register a bill of sale in the High Court. It was a very archaic system. You had to turn up in person between the hours of 9 o'clock and 12 o'clock or something, and you register your bill of sale. And then that's right, the title would pass to Falcon during the financing period and then pass back to the client when they paid off the loan and wanted to keep the artwork. And that was the way we were able to let people keep it on their walls. But otherwise, there's no provision. They keep talking about it in the UK, but there's no UCC-type provision where you can register your loan against an artwork anywhere.

It's a big problem. You have to love the art to go through that heavy lift.

Mm-hmm.

Next is in sales and transactions, the key here is Uniform Commercial Code 2. I think all lawyers listening are familiar with this, and it's principally that if it's more than $500, it has to be in writing. There are a number of exceptions to that, including that we'll get into in some of these cases. And that is whether or not, what is the nature of the sale? And there's a number of defenses that can be raised to that. When you sell a piece of art, one of the first things that emerges is how we're gonna change hands with the money. I know a number of lawyers in some very, very big art sales just assume that the clients on each side are so honorable, they'll just say, "I'll wire the money and you assign whatever's in that locker over to me," and it usually works, but there's enough horror stories where in our practice, we pretty much consider it an act of malpractice not to have an escrow. Because when there's an escrow, then there's no problems, no issues with slow wires, and no one's taking an inordinate risk. The escrow is so simple, I can't imagine why other lawyers don't use it, and we certainly do in our firm. The other problems with sales, we're just getting used to what appears in UCC-2, goes back to what Tim said is title. And this is, as I said in my earlier remarks, the Uniform Commercial Code is quite plain. It's changed and morphed ever since it's been written, but not materially, so it's pretty understandable, but that doesn't mean we don't have some bizarre fact patterns that you need to appreciate when you're looking at art. The picture or the painting you see on the left, a Basquiat, is what I call the Bugsy Siegel syndrome of fine art. We all remember Bugsy Siegel, a gangster after World War II, decided he was going to raise a syndicate to build a Flamingo in Las Vegas. The only problem was he sold about 250% of the company, and Lucky Luciano thought that that was probably about 150% too much, so he met his demise. Well, that game has not changed. And in a matter pending right now in the 11th District Court in Florida, also in New York, parallel cases, and in London, we have a former sort of star gallerist, a fellow only 29 years old, who sold that same painting fractional ownership to 3 different interests equaling about 200%, one of them being the Prince of Saudi Arabia. So we're dealing with some people, at least were assumably advised by certain people. Mr. Filbrick is at points unknown, the cases are pending, his defense attorneys have resigned. And there's a number of morals here. The key issue, if any of you have a client interested in buying a fractional ownership and interest in art, since that's become, everything is now fractionalized, planes, boats, real estate, and even art. Just know that when you take a fractional ownership in art, you're assuming a bigger risk. And I think that there's a particular risk with some of these new companies have come up selling very small fractional ownerships in art, which is a little bit off the beaten path, but, The SEC recognizing those risks, I have sanctioned and throttled them back because what they're really selling when you think about it is the classic secured interest or security as defined in the '33 and '34 Acts. Another particularly imaginative situation is Hoffman v. Boone. This is interesting as our former Attorney General Mike Mukasey was the, judge on this, and this gives a little bit of an idea of what I mentioned when I said imagination. The defense attorney was a former, was my old college roommate, and in the Boone matter, there was a particularly modern artist that the plaintiffs had made a number of offers on. They said they had an oral agreement The defense, of course, said there was no oral agreement. The defense, Mr. Hoffman, said, look, we have promissory estoppel on our side, and under promissory estoppel, that, that obviates what we're dealing with and blocks the Uniform Commercial Code, so we don't have to have our agreement in writing. One of the elements of promissory estoppel was you have to have an unconscionable injury. And here the unconscionable industry was this particular artist being, uh, one of the works of Martin was they weren't able to show their work at an exhibit at the Chicago Museum of Contemporary Art, and Judge Mukasey just cut him short and said, no, I don't think that cuts it, that doesn't matter, we're going to stick pretty close to Uniform Commercial Code. So the moral of the story there is unless you have something that's factually overwhelming, it's pretty hard in most of the cases to do anything other than stick to what the language says plainly on its face. We also have a number of idea— 3 cases I picked out that give you a little flavor of what goes on in this business. The painting you see to the right was also one that Mr. Philbrook sold to multiple parties. Whereabouts unknown, but 3 cases. Watching the Clock is in Chase. The defendants there had a $50 million loan with Chase, and in trying to renegotiate it and extend the loan, Chase sent somebody out to go take a look at the inventory that was in a New York condominium and saw that 4 of the pieces were indeed gone. Upon further inquiry, they had been in a way I can't imagine how it happened, refinanced with ABN Amro. And the moral of the story there is, they, Trace, got temporary restraining order issued and were able to go seize the art. And in the category of the heart of man knows not its limits when to have an imaginative fraud, Lawrence Moskowitz is really the story of Peter Max. The famous artist of the '60s. Tragically, in his older age, Peter Max had a deteriorating mental condition of Alzheimer's. In his early stage, it depends who you're talking to and whose pleadings you're reading, either his insurance advisor, his second wife, or his son, were pulling artists off the street, making mockups and duplicates of Peter Max's paintings, and then having this man who was then quite out of his mind sign his name, passing it off as originals. That house of cards came crashing down quickly. Of particular note is DeSole versus Knoedler. Knoedler was the oldest gallery in New York, founded in 1846. And this is sort of a case of the United Nations. We had a Mexican-American gallerist with a Chinese art student that were creating Rothkos, frauds, Pollock forgeries, and they had gotten away with it and made about $80 million over a 10-year period until one time it was found that one of the Rothkos just didn't quite, meet the, the standard. And within 4 months after being around since 1846, the Nodor Gallery was dissolved in 2011. We get then to void and voidable title. That's governed under UCC 2-401. The kind of granddaddy case on that is Porter versus Wirtz. And the whole principle here is you can pass on voidable title, but we're not going to let that happen if you have a blind eye. And then the Porter versus Wirtz case, a deli waiter was selling masterpieces and the court said, you know what, we don't think just the fact you were buying it from a delicatessen waiter should have been put you on alert that you were buying stolen product. Well, there are two distinctions on that general principle are Davis v. Carroll, and in Davis v. Carroll, Mr. Carroll was a very savvy buyer. He was buying product, certain artworks from the Salander O'Reilly Art Gallery at huge discounts. From the, that were all done by Stuart Davis, the son passing on sending things by consignment. Mr. Davis ultimately sued Mr. Carroll saying, "I want my paintings back." Mr. Carroll raised Uniform Commercial Code Section 2-401, said, "Look, you know, it might've been voidable title, but I bought it in good faith." And the court said, "No, a merchant can pass voidable title." But with someone of your skill set, willful blindness doesn't quite cut it. Now, in comparison to that is the picture to the left. You'll see Norman Rockwell's The Russian Schoolroom, and Mr. Spielberg happened to acquire that and still owns it. The challenge that he had was the original owner actually lost that painting in a theft, and Without getting too deeply in the facts, he sued Mr. Spielberg and said, "I want my painting back. It was stolen. You didn't have, you had void title." And Spielberg countered, "No, I had voidable title." There was enough there that said, "I'm a film producer. I'm not the connoisseur that Mr. Carroll was. I bought this in good faith." And the court said, "Yes, you did, Mr. Spielberg." So you see there the distinctions between The very same defense raised by Mr. Spielberg and Mr. Carroll. It didn't work for Mr. Carroll because of his expertise, and it did work for Mr. Spielberg because art was only his avocation, not specialty. And then moving quickly on taxes, the short version is when the tax code changed in 2017, we see that the real estate industry had much better lobbyists than the art industry. The real estate industry walked away with 1031 exchanges, which those of you who follow that knows that it has a particularly favorable impact when you get down to a stepped-up asset during the closing out of an estate. That's no longer available. The highlight changes here are, is dealers do not get capital gain rates. Investors do, although at a higher rate of 28% versus 20%. Dealers only have ordinary income. The distinction is always, and the argument with the IRS is always, who's a dealer and who's an investor. Sometimes it's just on volume. As you can imagine, there's a gray area here. Sales tax. We put that in just because it shows that old tricks never die. When you sell goods, states always say you're either gonna pay a sales tax or use tax if you're shipping it somewhere else. And many of us will remember the case of Dennis Kozlowski, who bought very valuable art in New York with no sales tax because it was being shipped to his company up in New Hampshire where there was no sales tax or use tax rather, but they only shipped empty boxes. He kept it in for his own personal use. He got caught for evading about $1.5 million in sales tax. Christie's was in the paper just weeks ago in a way that still amazes people. He had gone for about 4 years not charging sales tax in one of their divisions. The only thing more mysterious than that to those of us that read the settlement agreement with the Manhattan District Attorney is why no one was outfitted with an orange jumpsuit since the facts showed that there was clear intentionality to it. In the 3 minutes that we have left, we wanted to spend some time on Art and anti-money laundering. Cleverly, we refer to this the art of laundering money. It's just as creative as anything else. What we've seen is that a couple of the favorites of terrorism is getting old antiquities or antiquities that were uncovered even recently, but documented before any of the restrictions went in. And then selling those stolen antiquities as a way to finance their terrorism. And there's been a number of instances where the same thing has been done with art, and it's all often called the 21st century or 20th century bearer bond. Now, the way the government's responded to that is with the Bank Secrecy Act, which is really the rule that governs most of anti-money laundering rules in this country. Interestingly, we've provided the compliance manual in FinCEN's COVID-19 guidance. The interesting part in that is the burden of proof and the burden that could be placed on art galleries. Jewelers are considered a financial institution, hence they have a much higher scrutiny under the Bank Secrecy Act. Dealers, art dealers were, the Treasury has the authority to incorporate it into their rules. They haven't done that yet, but there's a couple wide open doors that said whether a dealer is a financial institution or not, you cannot go through it blindly. If you see something that looks suspicious, whether you're called a financial institution or not, under the Bank Secrecy Act, there are obligations That's really a whole nother CLE transaction, but the point of it is you can't transact art with and actively engage or even engage sloppily in anti-money laundering. There are obligations if you're going to be in that business. The EU Fifth Directive is even more pointed in this, passed in 2018. It was effective this year, that is in transactions of $10,000 or more, you have to disclose who the ultimate beneficial owner is. If you're particularly curious on this, you can take a look at the AML standards that were set out by the Basel Institute on governance. They're not too terribly different from what Basel is. All of them have this thing in common that is just a rough rule is look at the jurisdictional risk, use common sense, and you always have to find out who the ultimate beneficial owner is. So, with that, it's now 1 hour, so we've made it on time. I apologize for the little rushed speech, but we hope that this gives an overall picture of what art and art finance is like today in this plague-ridden world. And if any of you have questions, we'll be able to take them over the next couple days if you email or make inquiry to us. So, with that, Nick, I think you can close close it out with the summary for everybody.

Yeah, thank you for attending everyone.

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