Good Art, Ugly Divorce

January 28, 2020

By Sophie Chung.

In 2019, billionaire Harry Macklowe’s “ugly divorce” put the spotlight on his $700 million art collection and raised the issue of dividing it.^[1] In March, Macklowe hung two 42-foot-high photographic prints of him and his new wife, Patricia Landeau, on one of his buildings on Park Avenue where Linda Macklowe was supposed to purchase an apartment.^[2] In October, it was reported that the ex-spouses agreed to name art dealer Michael Findlay as the receiver who will be in charge of liquidating the art collection, the proceeds of which will be divided between the Macklowes.^[3]

This is a drastic solution to an uncomfortable situation: while most artists or art collectors might consider their art collections as theirs outright because they created or collected them personally, the law may define art in a divorce as marital property, therefore subject to equitable or contractual division between the soon-to-be ex-spouses. Governed by state law, marital property typically includes all property acquired during the marriage, regardless of ownership or who holds the title to it.^[4] By default, art created or purchased before the marriage or after filing of divorce may be treated as non-marital property. This article looks into how collections of art acquired by the spouses during their marriage period are treated during divorce processes.

Community Property Jurisdiction vs. Equitable Division Jurisdiction

How art collections are divided during the divorce process depends on which jurisdiction the divorce filing sits. Each jurisdiction has its own laws on valuing and dividing assets and commonly there are two kinds of marital property regimes: community property laws and equitable distribution laws.

In community property jurisdictions (LA, AZ, CA, TX, WA, ID, NV, NM, WI), community property laws set forth a presumption that all real and personal property acquired during marriage is community property, meaning that the “property” is owned 50% by one spouse and 50% by the other. Unless the presumption of community property can be overcome, all property acquired during the marriage is to be divided equally upon divorce of the parties.

In contrast, equitable division jurisdictions allow couples to agree on the property division on their own and, alternatively, let the court decides how to divide the marital property based on a fair and equitable share basis. New York is one of the equitable division jurisdiction states.^[5] To find a fair and equitable share between the spouses, the court will look at various factors including:

The duration of marriage;
Each spouse’s income and property during and after the marriage;
Each spouse’s contribution to the marriage;
Each spouse’s age and health;
Award of custody;
Each spouse’s potential future financial conditions; and
The liquidity of marital property.

The court will not look at factors such as one spouse’s adultery, domestic violence or involvement in criminal activities as long as these did not affect the couple’s finances.

How Art Collections Should be Divided?

In splitting up art collections between divorcing spouses, couples first need to inventory their collection before figuring out how to divide it.

Was the work of art purchased by the parties during the marriage?

Artworks become marital property depending on whether they were acquired before, after, or during the marriage. Any art acquired during the marriage becomes marital property while any art acquired before marriage is non-marital property. It is noteworthy thatocuments of sales alone, such as invoices that indicate the art was acquired during a marriage, are not necessarily dispositive of ownership of the artwork. In Anonymous v. Anonymous (2017),^[6] the court held that determination of title requires a holistic review of facts and circumstances of acquisition, rather than invoices showing the art was acquired during a marriage. The court defined an invoice as “a mere detailed statement of the nature, quantity, or cost of the goods, or price of the things invoiced” and looked at the terms of prenuptials and the circumstances when the artwork was bought to find it as a separate property.^[7]

Was the work of art inherited by or gifted to one of the parties?

Generally, any gifts, inheritance or property delivered to just one spouse by a third-party during the marriage are non-marital property, i.e. that spouse’s separate property. However, gifts given by one spouse to another spouse are considered marital property subject to the laws of equitable distribution. In W. v. W. (1977),^[8] the court held that a Picasso sculpture at issue was a “gift” to the wife even though paid for by the husband’s funds, thus finding it as marital property.

Has the work increased in value from the time of purchases to the time of the divorce?

When an artwork has increased in value, who contributed any effort or labor for the appreciation matters, particularly in high-worth collections. Now comes the question of evaluating this increase and allocating it to the proper party. In Capasso v. Capasso (1986),^[9] the court found that the wife took a direct interest in and performed essential service for success of her husband’s business, a construction company that substantially grew during the marriage, thus making her “credited” for appreciation in value of the husband’s business. This case was used as a premise by the Appellate Division of the New York Supreme Court in the Macklowe divorce:

Given the rare and unique character of the parties’ art collection […] simply averaging the valuations was not an appropriate solution, because it could “well result in a speculative valuation that is not founded in economic reality.”
Macklowe v. Macklowe, 2019 NY Slip Op 07331, ¶ 1, 176 A.D.3d 470, 112 N.Y.S.3d 95 (App. Div.) (emphasis added).

If any pieces have been sold since the couple’s separation, the price of liquidation is paramount information. For works that have not been sold, these cannot be loaned, sold, or destroyed without the other spouse’s consent and should be appraised.

Valuations of the Artwork and Treatment of Any Future Proceeds

Once divorce has been filed, the first thing a court would look at in evaluation of marital property is any existing agreement between parties, whether it be pre- or post-nuptial. When there is no agreement, parties may hire separate appraisers to value the same artwork. Then the court equitably splits up their fair share of the works according to the Fair Market Value (“FMV”) of the works. FMV is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.”^[10] While art valuation by appraisers is based on the Uniform Standards of Professional Appraisal Practice (“USPAP”) and non-binding IRS regulations, the rality is that valuation remains a subjective process, and it has been hotly litigated whether art valuation is the pertinent way to value the artwork.^[11] Documents, such as a certificate of authenticity and records of exhibitions, are significant in evaluating the artwork’s value.^[12] When the parties cannot agree on a value, usually the courts settle the disputes by ordering to sell the property and equitably distribute the proceeds.^[13]

The date of the valuation depends on the art piece itself. If the artwork at issue is classified as “passive marital property,” i.e. an asset that appreciates or depreciates based on market forces alone, it is assigned a value at the point when it is either bought or distributed from the sale. In contrary, the valuation date of “active marital property” is set at the time where marital litigation is filed or commenced. When separate property has transmuted into marital property, the artwork is valued on the date of marriage.

Divorcing Artists: Copyright Matters

When a spouse is an artist, any copyright they acquired during the marriage also becomes marital property. As part of the divorce negotiations, spouses may agree to share the profits from copyright licensing agreements continuing after the divorce.^[14] By way of example, Charles Schulz, creator of the “Peanuts” cartoons, entered into a licensing agreement with United Features during his marriage to Joyce Halverson. In 1972, after 24 years of marriage, their divorce settlement contained a clause for shared revenue from his work over a period of 10 years.^[15] This highlights the value of copyrights and their vulnerability.

The Importance of Prenuptial Agreements

From a marital law perspective, art collections in a divorce become mere “assets” despite a spouse’s attachment to a particular piece. Once it is determined to be marital property, no artwork is guaranteed to be one spouse’s property regardless of who obtained it, who used it, or who loved it more.^[16]

To set out rights and responsibilities for a couple in the event of a divorce, a prenuptial agreement (or “prenup”) may function as a private legal contract. In order to make a prenup valid, it has to meet certain basic criteria under contract law: (1) the agreement must be in writing, (2) free from fraud, and (3) the spouse contesting the agreement must not have been under duress, coerced, or mentally incapacitated when the agreement was signed.^[17] Since it has a power and effect as a legal contract, prenup is important to establish what is marital or separate property. In Foley v. Foley (2017),^[18] the court found accounts held by husband even before the marriage to be marital property because the couple failed to include them in specific accounts list in prenuptial agreement.

Postnuptial agreements are another device to set out ownership of art collection in a divorce. Updating any prenuptial with addendums unequivocally laying out each item belongs to whom is equivalently important as prenups. Detailed records, especially of the method of payment, also help determine ownership. One thing to note is that the court, however, may look at beyond the four corners of the record. For example, even though a bill of sale might indicate one spouse as the buyer, if the check was written from a joint account, then both spouses might have a claim. If the artwork was purchased using non-marital funds (e.g. an inheritance or moneys acquired before the marriage), only the spouse who procured the funds can claim ownership.^[19]

Conclusion

Splitting up in divorce is rarely easy, and there have been lots of discussions on distributing art collection in divorce (as told in our review of 2019 Art Law Events). The key is that, just like a house, a car or a couch, art in divorce is only an asset regardless how sentimental or valuable it is. In this sense, drafting a prenuptial agreement and updating it is crucial, whether it involves an art collector, a dealer, or an artist. Bringing art down to dollar amount for split up often causes lawsuits. However, USPAP and IRS guidelines still leave room for how to determine the value of art. A more concrete and systematized law on art valuation would be a great help for minimizing headaches during the division.

Endnotes:

James Barron, Billionaire’s Ugly Divorce Ignites Battle Over Spectacular Art Trove, The New York Times (Oct. 30, 2019). Here. ↑
Eileen Kinsella, To Settle the Macklowe Divorce, a Court Will Ask a Famed Art Dealer to Sell Off Their $700 Million Art Collection—and Everyone Is Watching, artnet News (Oct. 28, 2019). Here. ↑
Id. ↑
N.Y. Dom. Rel. L. §236(b). ↑
Id. ↑
Anonymous v. Anonymous, 150 A.D. 3d 91 (App. Div. 1st Dept. 2017). ↑
Id. Citing Sturm v. Boker, 150 US 312, 328 (1893). ↑
W. v. W., 89 Misc. 2d 681 (Sup. Ct. Kings Cty. 1977). ↑
Capasso v. Capasso, 119 A.D.2d 268 (App. Div. 1st Dept. 1986). ↑
26 CFR § 1.170A-1 (c)(2). ↑
See Robinson v. Robinson, 133 A.D. 3d 1185 (App. Div 3rd Dept. 2015); Macklowe v. Macklowe, 2019 NY Slip Op 07331 (App. Div. 1st Dept.). ↑
Daniel Grant, id. ↑
Macklowe v. Macklowe, id. ↑
Daniel Grant, For Artists, Divorce Means Splitting Up the (Art) Assets, Huffington Post (March 3, 2015). Here. ↑
See Doty v. Commissioner, 81 T.C. 652 (1983). Here. ↑
See e.g. Anonymous v. Anonymous, 150 A.D. 3d 91 (App. Div. 1st Dept. 2017). ↑
Jeff Landers, Five Reasons Your Prenup Might be Invalid, Forbes (Apr. 2, 2013). Here. ↑
Foley v. Foley, 155 A.D.3d 1506 (App. Div. 3rd Dept. 2017). ↑
Jody Gerber, Divorce and Property Rights, New York City Bar (Jan. 2015, updated Jan. 2019). Here. ↑