By Chris Michaels
Collectors looking to leverage their art collection to obtain cash have turned to art financing companies, who specialize in lending using art collection assets as collateral. There are several art financing companies on the market, mostly centered in New York City, that provide various services to their clients. One of the main benefits these companies provide is unlocking the value of an art collection by providing an influx of cash to the client using the client’s artwork as collateral for a loan. While the prospect of putting the value of a collection to use is enticing for many collectors, there can be some risks associated with these kinds of transactions, including that of title, which pose issues for both lender and borrower.
An essential part of the due diligence process for art financing companies includes establishing that the client has the requisite title to the work that he or she is claiming. In fact, there are now companies, such as Aris Title (part of Argo Group), that provide niche insurance policies that insure against title risk. Even with the due diligence that art financing companies undertake, there are still risks associated with this type of transaction illustrated by the facts of a recently filed case out of New York.
Just last week an art financing company instituted a fraud action against the Paul Kasmin Gallery, Inc. (“PKG”), where the Plaintiff, Artemus USA LLC (“Artemus”) alleged that PKG created and back-dated false invoices on which Artemus relied in purchasing an artwork by Frank Stella titled La Scienze della Fiacca (the “Work”). See a copy of the complaint here.
Artemus, created in 2014 by Asher Edelman of The Edelman Companies, David Storper, and the Durst Organization, is an art financing company that provides sale-leaseback services. Sale-leasebacks involve a transaction wherein a client sells all or a portion of his or her collection to Artemus. Artemus subsequently leases the pieces in the collection either back to the client or to another party at an annual rate. Learn more about Artemus here.
In the Complaint, Artemus alleges that PKG falsely claimed it sold the Work to Anatole Shagalov and his gallery, Nature Morte, LLC for $430,000 when, in fact, it only sold Shagalov and Nature More a 60% interest in the Work. In order for title to pass to Shagalov, the Complaint alleges that he had to pay at least another $168,000 to PKG. Artemus claims that because it believed Shagalov and Nature Morte acquired full title based on the duplicitous invoices, it was fraudulently induced into purchasing something considerably less valuable than what was bargained for.
According to the Complaint, in August of 2014, Shagalov bought a 60% interest in the work from PKG under a Consignment and Purchase Agreement. Pursuant to the Agreement, if the work remained unsold by January 1, 2016, Shagalov had the option to acquire full title to the work for an additional $168,000.
Thereafter, in April of 2016, Artemus entered into a Purchase and Sale Agreement with Shagalov and Nature Morte, which included, among other works, the Stella Work at issue. As part of the sale, Artemus requested that Shagalov provide evidence of his full ownership of the work.
PKG then provided to Shagalov an invoice showing his $430,000 payment to PKG, which was then provided to Artemus. According to Artemus, while the invoice appeared normal, it stated that that the total purchase price was $430,000 and that, when paid in full, title for the work passed to Shagalov. However, Artemus alleges, the invoice did not represent the “true state of affairs” of the transaction, i.e., that Shagalov only obtained a 60% interest in the work for his $430,000 payment and that title did not pass to Shagalov.
After reviewing the invoice, Artemus pointed out that it did not have a resale certificate number, and a second invoice was created by PKG, this time made out to both Nature Morte and Shagalov, along with the following statement: “Resale Certificate on file.”
According to Artemus, the inclusion of the resale certificate language put PKG on notice that Shagalov intended to sell the work to a third party. By excluding key facts, including that PKG retained a 40% interest in the Work, PKG “consciously chose to create a phony document rather than jeopardize any such transaction between Shagalov and a third party.”
After reviewing the invoices, Artemus bought the Work and, on the same day, entered into a lease-back agreement with Shagalov and Nature Morte. After the transaction was complete, PKG went after Shagalov for the remaining $168,000 that he owed. In response Shagalov stated that he relied on the invoices provided by PKG, which showed that $430,000 was the full purchase price of the Work and that he had already paid the full price. PKG told Shagalov that the invoices did not reflect the true terms of the sale, which were outlined in the consignment agreement.
PKG filed a UCC-1 financing statement against the Work; Artemus shortly thereafter learned of the statement and was also able to obtain a copy of the consignment agreement between Shagalov and PKG showing the “true terms” of the sale. Artemus informed Shagalov that he was in breach of the warranties in the Lease Agreement and, in September of 2017, Shagalov sued Artemus asserting that neither Shagalov nor Nature Morte breached any aspects of the Lease Agreement. Artemus filed the instant action against PKG alleging fraud and seeking, among other damages, attorney’s fees and other expenses arising from the 2017 suit.
It should be noted that the above set of facts is only the alleged version found in the Artemus Complaint. The Complaint alone, however, highlights the importance of the due diligence process in art financing transactions. A well-documented purchase history is essential for collectors seeking to legitimately use art financing to their benefit.
Chris Michaels is an attorney at Chartwell Law, where he focuses his practice on art law and related transactions. He can be reached at 518-421-7238 or via email at firstname.lastname@example.org and can be found on Twitter @cmichaelsartlaw.