It should be axiomatic that no prudent art collector would buy an expensive work without establishing credible and lawful title to it. But simply having a title often isn't good enough to secure the right of ownership. A good title can be easily spoiled if it is discovered that there was a theft in the artwork's history (perhaps one of the "forced sales" that occurred during World War II). Art theft victims now have more means than ever to wage disputes, and recent court decisions have returned works of art to former owners even when the statute of limitations has expired. The Internet, meanwhile, offers databases that allow the cross-referencing of art auctions and databases of stolen artworks-tools that make it easier for theft victims to mount court challenges.
Thus the ownership history of artworks has become an increasingly sensitive issue for new buyers. As Lawrence Shindell, the CEO of ARIS Corp., says, "Just because the client bought it doesn't mean the client owns it." A work of art made before 1946 will always have a question mark hovering over it, and buyers of such pieces should be especially diligent before parting with their money. In the hushed and clubby world of art dealing, a persistent inquiry can sometimes seem impolite. But collectors who don't proceed with due diligence can put their art at risk, especially if they sell the artwork to somebody else.
Art collectors have always understood the problems of ownership history, or provenance, and the related but distinct issue of legitimate title when seeking new works. But it was only in 1998 that the Association of Museum Directors issued guidelines for determining ownership history. This was followed a year later by a similar directive from the American Association of Museums. These directives made particular reference to art that had changed hands in the World War II era, when the looting and theft of art reached unprecedented levels. The importance of the issue was underscored in 1998 with the creation of the presidential advisory commission on Holocaust assets, which published its final report in 2000.
Though World War II era artworks are particularly problematic, collectors would be wrong to assume that art created afterward is immune from problems. Of the 300,000 or so stolen, missing or looted artworks listed in the Art Loss Register, an international database, more than 15% were created after 1945. Discoveries can be surprising: an $80,000 painting, for example, was recovered in 2007 at the Palm Beach Fine Arts Fair in Florida after it was found to have been stolen in 1995 from the Buffalo Club in New York State.
It's important to rely on the advice of a trusted art advisor or a reputable dealer, or to buy through a respected auction house. But these are only the first steps and may not be enough by themselves to avoid a claim of defective title against art that a collector thought he had purchased in good faith.
Statistics about art theft are limited. The Art Loss Register has tracked thefts by decade since the 1930s, and surprisingly found that there were a record 60,000 items reported stolen during the 1990s, more than at any other time. (That number would have been easily outpaced during the 1930s, however, had the "forced sales" in that era been reported. Obviously, the ability of the victim to report theft is the key.)While total art theft declined somewhat to just over 40,000 in the past decade, ARIS, as the sole underwriter of title insurance in the art world, has seen a clear increase in the incidence of title-related claims, especially at lower dollar values.
There are several reasons for the rise in the number of art ownership claims, according to Shindell. One is the rising values of art. Another is the increasing financial pressure on galleries and collectors, which often creates liens and other encumbrances on inventory.
When Ownership Is Challenged
For a collector who has acquired a work of art, having the right to ownership disputed can come as both an emotional and financial shock. Even if the collector has secured a warranty of clear legal title from the seller at the time of purchase, he may not be able to rely on it, says Shindell. The upstream seller may no longer be in business, for instance, or may not have assets to stand behind the prior warranty, or may be hard to pursue if he is located in a foreign country where the warranty is hard to enforce.
Meanwhile, if the collector has become a seller of the work and hasn't sought a third-party risk transfer solution, i.e. title insurance, and if the upstream seller isn't around to recover money from, the collector himself can become liable to his or her downstream buyer if the ownership of the work is successfully challenged and the buyer then loses his money. The buyer can then sue the collector for damages, including the price he paid for the work-as well as possible appreciation-and for his legal expenses.
The Chubb Insurance Group has responded with coverage that reimburses legal fees up to $100,000 incurred in a title dispute for scheduled works of art (except in New York). Unfortunately, this benefit does not extend to the actual value of the work if the owner is required by the courts to forfeit the piece. Courts in the U.S. will generally "balance the equities," meaning that the due diligence the buyer performed to avoid possession of stolen art will be measured against the steps the former owner made to recover the art. Nonetheless, the burden of discovery will usually weigh more heavily on the purchaser, who, it is assumed, has the sophistication and resources to authenticate the history of a purchase.
"If you wind up on the losing side of an ownership challenge," says Jonathan Ziss, a partner at the law firm of Margolis Edelstein and a founder of Art Title Advisors, "the result can be perfectly awful: the loss of a valuable asset, the destruction of an estate plan and the loss of a charitable donation or bequest tax deduction, perhaps years after the time for filing an amended [tax] return has timed out."