The Legal Canvas Summer 2012 Summer 2012 Already? In this issue of the Legal Canvas, we have chosen to cover some basics – or at least things that are basic for lawyers but may be matters of mystery for others. In the course of our practice we find that many of our clients have (happily) never been involved in litigation.That’s the good news. The bad news is that when a dispute arises, inexperience with the realities of litigation may affect the abil- ity to make good decisions. We therefore offer a primer on litigation – what it is, how it works, its risks and its benefits, and why it is so expensive. We also find that although many people in the art world owe fiduciary responsibilities to their employers, institutions, or clients, they may not understand the nature of those responsibilities or the potential consequences when they are breached. We discuss the concept of fiduciary duty and look at two cases – one that is currently pending in New York and one that was decided in London in 2010 – that illustrate the sorts of facts that may elicit claims (or findings) of fiduciary breaches. IN On other matters, we review a decision by the European Union about the THIS imposition of VAT and customs duty on works that are imported into the ISSUE EU in component parts. We also report on a federal court decision holding the California Resale Royalties Act to be unconstitutional and a proposal in DEALING IN HIddEN RISK: Congress to institute a national resale royalty scheme. And, we provide AGENCY AND FIDUCIARY updates on new regulations governing deaccessioning by certain museums LIABILITY IN THE DEALER- in New York, and on two restitution cases. SELLER RELATIONSHIP 3 Finally, we look at three different situations that have occurred over the CENSORSHIP: SILENCING ART 7 last couple of years in which artists or their work have been suppressed – QUICK UPDATE - CONSIGNED Ai Weiwei in China, Mustapha Benfodil in Sharjah, and David Wojnarowicz ART AND BANKRUPTCY 11 in the United States. We examine the roles of both technology and the law in shaping the art community’s responses to these sorts of incidents. THINKING ABOUT LITIGATION? THINK TWICE. IT’S ALRIGHT. 12 Which again brings us back to basics, and for lawyers in the United States the basics lie in the Constitution. One can argue that the United States is ARTIST RESALE ROYALTIES behind the curve in terms of artists’ rights. We recognize only a very re- IN AMERICA: CALIFORNIA LAW STRUCK DOWN. NATIONAL stricted form of moral rights; only one state has ever provided for resale LEGISLATION PROPOSED. 17 royalties – a statute that is now in jeopardy. But we have the First Amend- ment. And that is an artists’ right that should be dearly cherished and NEW YORK BOARD OF REGENTS protected. ADOPTS NEW DACCESSIONING RULES 20 Have a good summer. THE WORLD’S MOST EXPENSIVE Hugh Freund Jo Backer Laird John Sare LIGHT BULBS: HOW THE EUROPEAN UNION IS APPLYING VAT TO IMPORTANT WORKS OF ART 22 TIME LIMITS ON HOLOCAUST CLAIMS: NEWS FROM BOTH Experienced art world professionals. COASTS 24 The resources of a full service firm. Cover artwork © 2012 Alice Aycock 2 The Legal Canvas Dealing in Hidden Risk: Agency and Fiduciary Liability in the Dealer-Seller Relationship Last winter, elderly collector Jan Cowles sued Larry Yet, it is safe to say that some art market participants are Gagosian and the Gagosian Gallery in connection with unfamiliar with the word “fiduciary,” the legal scope of the the sale of a work by Roy Lichtenstein. According to the responsibilities that it describes, or the possible conse- complaint, when Gagosian got the work on consignment quences of failing to fulfill those responsibilities. the minimum sales price was established at $3,000,000, of which the Gallery would retain a $500,000 commission. Simply put, a fiduciary must always act in the best interests Gagosian ultimately persuaded Mrs. Cowles’ son, Charles, of his or her “principal,” or client. It is the highest duty that to accept $1,000,000 for the work, attributing the lower one person can have to another. price to condition issues with the picture that the com- Some people are automatically fiduciaries by reason of plaint says did not exist. Gagosian did not tell Charles that he had actually sold the work for $2,000,000 and their profession. Lawyers have a fiduciary responsibility was retaining a commission of $1,000,0000. to their clients. Executors are fiduciaries to the ben- eficiaries of the estates they administer. Other people In a brief filed in the case, Mrs. Cowles’ lawyers quoted acquire fiduciary duties because of the nature of their from an e-mail sent by the Gallery to the prospective relationship with another person. One is more likely to (and ultimate) purchaser: have a fiduciary duty when he is acting on behalf of someone who is significantly less sophisticated and who “Seller now in terrible straits and needs cash. Are is heavily reliant on the advice that he is receiving. you interested in making a cruel and offensive offer? Come on, want to try?” In most of the transactions in which an art dealer en- gages, he is acting as an agent. He is selling work that is The brief goes on to describe the transaction as a “gross” consigned to him either by an artist or collector, or he and “brazen” breach of Gagosian’s fiduciary duty to its is buying work on behalf of a client. By law, an agent has consignor. a fiduciary duty to his principal. This case has not yet been adjudicated, which means An agent’s fiduciary duties. that the facts alleged in the complaint have not yet been proved. They remain mere allegations. If the facts are Generally speaking, an agent has strict fiduciary duties proved to be true, however, it seems likely that the court of loyalty and good faith. In the art dealer context, this will find that they constitute a fiduciary breach. principally means a duty to: What does it mean to be a fiduciary? • Care for and manage the principal’s property prudently; First year law students learn what it means to say that • Deal fairly and honestly with the principal; one person has a “fiduciary duty” to another. It is a fun- damental legal concept. • Account to the principal as to dispositions of the property; and Fiduciary relationships abound in the art market. Auction • Disclose to the principal all information relevant houses and galleries are fiduciaries to their consignors; to the subject matter of the agency. museum directors and trustees are fiduciaries to their institutions; primary dealers are fiduciaries to their artists. Most litigation related to fiduciary breaches by art dealers has 3 involved behavior that is so self-evidently wrong as to require $700,000 as a commission for itself and using the rest little explanation. For example, a dealer who sells a work of art to compensate one of its consultants and the buyer’s but does not notify his consignor of the sale or misrepresents curator. LAL retained $500,000 as a commission the actual sale price cannot be surprised that he is breach- from those proceeds and remitted the remainder to ing his legal obligations to the consignor (in that case, Accidia, who understood that the net sale price (after that probably contractual as well as fiduciary). That sort of commission) was $5,500,000. breach announces itself with neon lights and blaring trumpets that take a conscious act of will to ignore. While Accidia was aware that Dickinson was involved in the sale to the ultimate buyer, it was unaware of the Other fiduciary breaches may be more difficult to recog- actual sales price paid and the approximately $1 million nize, even for the most diligent dealer. For example, it is retained by Dickinson from the initial proceeds. When not uncommon for an art transaction to involve a chain Accidia discovered this fact eight months later, it sued of intermediaries who help to locate prospective sellers Dickinson for the $1 million, asserting that Dickinson or buyers, who negotiate the eventual sale, and who had been Accidia’s agent and had breached its fiduciary each earn a commission on the deal. With each addi- duty by retaining a secret commission—this, despite tional link in the chain, the relationship of any particular the fact that Accidia had no agreement with Dickinson, intermediary with the ultimate principals becomes more had never been in direct contact with Dickinson, and attenuated. The more links there are, the less clear it is had been informed in at least one email from LAL that who is acting on behalf of whom. Dickinson “act[ed] for the buyer.” It was only a matter of time before this kind of fact pattern However, evidence in the case showed that the sales led to lawsuit. contract transferring title to the drawing to the buyer was entered into solely between Dickinson and the buyer, Accidia Foundation v. Simon C. and stated that Dickinson acted “as agent for the Owner” Dickinson Limited. and “on behalf of the Owner.” The Court ultimately con- In 2010, the High Court of Justice, Chancery Divi- cluded that Dickinson, as the party to the sales contract, sion, in London issued a decision in the matter of Ac- had acted as Accidia’s agent and therefore owed strict cidia Foundation v. Simon C. Dickinson Limited. The fiduciary duties to Accidia as principal. As such, accord- decision was based on laws of agency that are ing to the Court, it had a responsibility to assure that fundamentally the same in both the United Kingdom and its $1 million commission was disclosed to Accidia – a the United States.