WYWH: “Inside Auction Houses” [By lawyers for lawyers]

By Laura B. Richardson

On October 26, 2017, the EASL Section hosted a panel discussion, “Inside Auction Houses: The Legal Issues”, at the New York City offices of Arent Fox, LLP. The program was attended by approximately 30 attendees. The panelists included Sherri Cohen (Bonhams), Mari-Claudia Jiménez (Sotheby’s), Jonathan Illari (Phillips Auctioneers), Margaret J. Hoag (Christie’s), and Daniel H. Weiner (Hughes Hubbard & Reed LLP). The discussion, moderated by Lena Saltos and Elizabeth Urstadt, offered experienced insights on the inner workings of auction houses and the legal issues specific to their unique business models, which entails regularly acting as trusted agent of clients looking to sell high-value artwork, objects, or collections to buyers at auction or through private sale. The panelists described the exciting, challenging and varied legal work they do, both as in house counsel at auction houses and in their capacity as external counsel to auction houses.

Mari-Claudia Jiménez, formerly with Herrick, who is now Senior Vice President and Managing Director of Trusts & Estates and Valuations, introduced and explained the auction sale process from consignment to post-sale. She included in her discussion common sources of consigned objects – private collectors, estates of deceased collectors, museums, and dealers – as well as the frequent challenge that auction houses face when collecting sale funds due from successful bidders for their lots. She also explained the procedure an auction house may follow when it does not wish to accept an object or has a conflict of interest, but may wish to refer it to another regional or specialized auction house that would be a more appropriate venue to sell a certain object or price point.

Sherri Cohen, Director of Bonhams’ Trust and Estates Department and an expert on title insurance with years of work at ARIS, laid out the process of obtaining appraisals for purposes including insurance and estate tax liability, as well as how auction houses evaluate and use different types of appraisals and valuations, such as insurance valuations, tax valuations, and fair market value appraisals. She also highlighted the difference between appraisals and auction estimates, which unlike a valuation, are given ranges of what an auction house expects property to fetch at auction based on various factors such as dimensions, provenance, past sales history, expected appreciation, comparable sales, and prevailing market conditions. Sherri elaborated on the protocol followed when auction houses receive or realize they have a fake offered for sale. There is an expectation of extensive due diligence and research on provenance that the auction houses undertake to mitigate any sort of risk or liability from these threats of in-authenticity. She also described the terms regarding rescission included in buyers’ conditions of sale. For example, one term reads:

“If within one year from the date of sale, the original purchaser (a) gives written notice to us alleging that the identification of Authorship of such lot as set forth in the… catalog description of such lot…is not substantially correct based on a fair reading of the catalog, and (b) within 10 days after such notice returns the lot to us in the same condition as at the time of sale, and (c) establishes the allegation in the notice to our satisfaction (including by providing one or more written opinions by recognized experts in the field, as we may reasonably require), then the sale of such lot will be rescinded and, unless we have already paid to the consignor monies owed him in connection with the sale, the original purchase price will be refunded.” (Bonhams Conditions of Sale, Limited Right of Rescission)

To illustrate how seriously auction houses take safeguarding against fraud, Mari-Claudia Jiménez noted that Sotheby’s even employs scientific forensic testing for purposes of art authentication.

Jonathan Illari, who has worked with both brick and mortar auction houses (Bonhams and Phillips) as well as online auctions, described common financial and legal consignment terms found in the industry. For example, the auction house (as consignee) agrees to take possession of the property and act as agent of the consignor in the sale of the property; the consignor must warrant that he is the sole owner of the property, that there are no other encumbrances on the property, and that the property is genuine and as described in the agreement; the consignor will agree to pay a seller’s fee that can be calculated in a number of different ways; a reserve amount may be specified, under which the consignee may not sell the property; while the property is in the consignee’s possession, it will be insured (at consignee’s expense) for the estimated value listed in the agreement; the consignee will obtain the right to market and promote the property for sale. He also examined how online sales have altered the auction house business, which pieces are better suited to online sales (such as lower value items, or pieces such as rare or fine wine, or watches), and how he thinks in certain situations online auctions allow a wider reach to a broader audience of potential buyers while taking in a broader range of property. He also discussed the ad-hoc determinations auction houses make to broker a private sale of high-value pieces as opposed to selling an object at public auction. Some considerations include the wishes of the seller, whether that be privacy, urgent liquidity, or to shelter the work from the risk of not selling at auction.

Maggie Hoag described the important application of the laws of agency in the auction house business. Auction houses predominantly play the role of agent of a seller and represent their interests as they endeavor to sell the property. This inevitably creates important considerations of fiduciary duties. This clear agency relationship between auction houses and sellers was contrasted with the uncertain roles art dealers or galleries can at times play in the art world, as Dan H. Weiner commented. He warned of the complexities of having several “middle men” and unknown players involved in art sale transactions, as is common for the art world. Maggie and Dan went on to discuss the challenges of collecting sale proceeds from successful auction bidders, the significance of third party guarantees for auctions, and the steps taken prior to potential litigation.

Auction houses that handle art and fine objects have a special allure, and the legal work that is done on behalf of these businesses connect sellers and buyers of these luxury goods. EASL succeeded in bringing together an array of experiences and experts from the leading auction houses, who were all knowledgeable and experienced on the topic. The time-pressures and competition between auction houses to obtain the best lots for upcoming sales was secondary to the stimulating work attorneys receive at Bonhams, Phillips, Sotheby’s, and Christie’s, as was made apparent through colorful examples and the collegiality shown in the panel setting. Their command of the legal and commercial issues for auction houses allowed for an interesting and informative afternoon of discussion.

Suggested Cases involving auction houses for further reading:

• Mitchel Gray v. Jeff Koons et al. (S.D.N.Y. Docket No. 15-cv-9727)
• Phillips Auctioneers LLC v. Zhang Chang (NY Supreme Court Index No. 652901/2017)
• JP Morgan Chase Bank, N.A. v. Comm’r (In re Estate of Newberger), T.C. Memo 2015-246
• Estate of Kollsman v. Comm’r, T.C. Memo 2017-40