Liquidating Assets When the Asset is an Andy Warhol
May 4, 2013
Andy Warhol, Portrait of Dolly Parton, from Christie’s May 2012
Post-War and Contemporary Art Morning Session. The
provenance lists that the Andy Warhol Foundation sold it to a
private collector (now known as Chris Schoen).
Bank of America has filed a complaint against real estate developers Chris Schoen and Hal Barry in Atlanta after they defaulted on their $4.5 million loan. They are requiring Schoen and Barry to liquidate assets—these assets include four paintings owned by Schoen appraised by Christie’s at $3.1 million. In addition, the bank is calling foul: at the May 2012 Christie’s Contemporary Art Sale Schoen sold his Portrait of Dolly Parton by Andy Warhol for $626,500 (Sale 2558, Lot 158) and failed to report the income to the bank. Bank of America is seeking Schoen’s four remaining paintings, the $626,500 profit from the Warhol sale, attorney’s fees, interest of $424 per day, and complete repayment. The lawsuit filed in the Northern District of Georgia Atlanta Division on April 22, 2013, Bank of America v. Barry Real Estate Companies, Inc., Bstwenty, LLC, Christian B. Shoen and Harold V. Barry, states:
“Plaintiff desires to repossess and sell the Artwork and is entitled to take possession of the Artwork and any proceeds from the sale of Artwork, possession of which has been wrongfully withheld from Plaintiff by Schoen. Schoen has advised Plaintiff that he will not sell or turnover the remaining Artwork in his possession, custody or control and has failed to turn over the $555,000.00 (net) generated from the May 2012 sale of the Portrait of Dolly Parton…. Schoen’s failure and/or refusal to relinquish control and possession of the Artwork and proceeds therefore is in bad faith, constitutes stubborn litigiousness, and has caused Plaintiff unnecessary trouble and expense thereby entitling Plaintiff to recover its expenses of litigation, including reasonable attorney’s fees and costs pursuant to O.C.G.A § 13-6-11.”
Hal Barry celebrating the opening of his helipad in Atlanta.
When Schoen and Barry applied for the loan in 2007, they used the paintings as collateral–promising the artwork and its sale proceeds to cover the loan in the event of default.
The use of artwork as collateral is becoming more common—both banks and auction houses have special departments to appraise artwork and special requirements to define artwork as collateral on loan applications.The art as collateral business has boomed with the recent economic downturn. Where individuals seeking a loan would have previously used a house or property as a guarantee, now use artwork. In some cases, artwork can be the only valuable asset remaining.
However, the risks and results of art based loans have proven to be disastrous for many borrowers. These include:
High interests rates that can range from 9% to 25%
Borrowers can only lend 40% of the artwork’s value
Borrowers must personally guarantee each art loan, which is not the case in mortgages
The value of art work changes with the seasons and popular taste very quickly- therefore when borrowers default on loans they are forced to sell their artwork at a time when the market may be poor and end up selling them below market value
Banking practices in this area are unregulated and highly litigious: Marc Porter of Christie’s told The New York Times, “It’s a rough-and-tumble corner of the business.”
The fable of such a disastrous outcome is Annie Leibovitz highly publicized default. Leibovitz took out a loan from the Art Capital Group in 2008, using her New York City properties, existing photographs, and future photographs– including their copyright as a guarantee. She defaulted and the Art Capital Group sued for breach of contract on July 28, 2009. Leibovitz was able to settle by selling portions of her real estate and a small amount of photographs– all when the art and real estate markets were low. The original loan was for $24 million. During refinancing Leibovitz continued to pay 44% interest, totally $16 million over the course of 18 months.
Annie Leibovitz in front of her portrait of Demi Moore.
Some banks, however, argue that using artwork as collateral opens new doors to clients who would not normally be granted a loan. For example, banks advertise that by using artwork as collateral museums (with their boards permission) can use loans to bridge budget gaps and make large purchases to expand their collections. At a time when most museums are struggling financially and not able to sell artworks to cover overhead, loans guaranteed with artwork can be a viable solution. Many banks believe that they are providing a service to museums in need- the knights in shining armor with a hidden agenda. According to Gerald Peters, a collector himself, “The game they have to play is rough. But the service they are providing is real, and there’s demand for it.”
Art based loans are also becoming increasingly popular as tools for art speculation. The art saavy are trading art like hedge funds with the hope of quick profit. Most art advisors discourage these practices because of the high risk. Constanze Kubern, a London based art advisor, stated:
“It’s a commonly used fund management tool; if you know a market is going up, and you can get a lending rate that is below that percentage, then you take on leverage [ie: a loan] to make a profit. Unfortunately, you cannot pin down the value of a piece of art as precisely as that of a daily traded commodity, and therefore [borrowing] can prove quite difficult when it comes to managing an art collection.”
Chris Shoen
Many banks are aggressive in pursuing repayment of art based loans, and it is not surprising that Barry and Schoen are now on Bank of America’s radar.Barry and Schoen hardly have a leg to stand on since they signed the Pledge Agreement using artwork as the security. When loans default, lawsuits follow; when the collateral is artwork, the asset is liquidated like any other property Bank of America, the attorneys of Hall Barry and Chris Schoen, and Christie’s have all refused to comment on the lawsuit.
Sources: “Bank of America Sues Atlanta Developer, Eyes Dolly Parton Portrait Proceeds,” Atlanta Business Chonicle, April 24, 2013; “Companies Default on Loans, Bank of America Goes After its Artwork,” ABC news, April 26, 2013; “Need a loan? Use Your Art,” The Art Newspaper, September, 28, 2012; “Photographer Annie Leibovitz Must Repay $24 Million Loan by Tuesday,” The Huffington Post, September 6, 2009; Christie’s Sale Results, Sale 2558, Lot 158; “That Old Master? It’s at the Pawn Shop,” The New York Times, February 23, 2009; “Art Capital Made at Least $16 Million Off Annie Leibovitz,” Reuters, April 6, 2010.
