As summer is here and the art-world halts briefly in the busy cycle of auctions and art fairs, we’d like to share some thoughts about the developments below. These typify the kind of sophisticated matters that we handle, which include transactions, disputes and regulatory issues affecting broad segments of the art market.

PML Wins Another Authenticity Dispute

In June 2019, Pearlstein, McCullough & Lederman secured a substantial settlement in an authenticity dispute for a client against Chiang’s Art Gallery in Los Angeles, California.

PML’s partner, Michael McCullough filed suit against the gallery after the client spent over $500,000 on a group of Chinese sculptures and jewelry, most of which were later deemed to be fakes. PML brought top experts in Chinese works of art and jewelry into the case to prove the authenticity claim. The firm also identified several other legal issues on which to base its claims.

This significant win was the culmination of a string of successful victories for PML in authenticity cases. In 2015, PML obtained a full settlement from a New England auctioneer concerning the authenticity of a Giacometti table that was purportedly sold at Christie’s but was later found to be a fake. In 2016, PML successfully defended a NY gallery against a claim that a valuable bronze and ivory figure by Demetre Chiparus was a fake.

The PML team included Michael McCullough, Anju Uchima, and local counsel Terry Higham of Barton, Klugman & Oetting in Los Angeles.

Criminal Complaint against Subash Kapoor: Our Continuing Role in High Profile Investigations

In July 2019 the New York County District Attorney’s Office filed a sprawling 185-page criminal complaint charging Indian antiquities dealer Subhash Kapoor with 86 counts of grand larceny, criminal possession of stolen property, conspiracy, and scheme to defraud. The complaint alleges that Mr. Kapoor led a massive smuggling ring that he had operated through Art of the Past, his gallery in New York, and stole thousands of antiquities valued at more than $145 million from Afghanistan, Cambodia, India, Pakistan, and other nations, and then illegally imported those objects into the United States.

Mr. Kapoor, who has been incarcerated in India for nearly eight years, was tried there on charges whose underlying criminal conduct mirrors that of the charges filed in the New York complaint. Following the conclusion of the trial in India, the District Attorney’s Office will move to extradite Mr. Kapoor, a process that may take up to one year, to stand trial in New York.

PML’s partner, Georges Lederman represents Mr. Kapoor in the extradition process as well as in the future criminal proceedings in New York. We look forward to presenting a robust defense of our client in a case that will raise many complex procedural and substantive issues.

New EU Customs Regulations on Import of Cultural Goods

In April 2019 the EU adopted new Regulations on the importation of cultural goods. The Regulations affect imports into the EU of antiquities and other art and collectibles (predating 1819 and worth €18,000) of non-EU origin, such as material from Asia, Africa, Near East, East Europe, North America and South America.

We are concerned that the art market has not yet come to grips with the difficulty of complying with the Regulations. In particular, the burden of proving “legal export” is not just matter of “due diligence” but will require determining an object’s country origin or discovery and analyzing the laws of the applicable country of export. Certifying whether an object has been legally exported from a country (such as Peru, Niger, India or Egypt) is a different and potentially more difficult exercise than simply getting comfortable with provenance or the absence of “red flags.”

We would urge the important dealer groups in the US and EU to use the transition period to engage in dialogue with customs authorities in the major EU market nations (such as France, Holland, Belgium and Germany) to reach a working accommodation on how the Regulations will be interpreted, administered and enforced. Otherwise, there will be chaos, a heavy-handed enforcement of the Regulations and a shrunken market when the transition period is over. We have summarized our principal questions and concerns with the new Regulations and will be glad to share our summary with clients and other interested parties.

Structuring the Role of Agents and Intermediaries in Private Sales

We often represent agents and intermediaries in private sales of “blue chip” paintings. These transactions are arranged by third parties who introduce the buyer and seller and take a fee on closing. The dynamic in these private sales is different from that of a consignment to an auction house or dealer. The fundamental issue for the intermediary is whether to structure its role as an agent for the buyer or seller or as a finder or introducer. Defining the intermediary’s role at the outset of a deal is of critical importance to minimizing the intermediary’s legal exposure and maximizing its ability to control the flow of funds and ensure timely payment. We can also suggest mechanisms to preserve the anonymity of the parties pending closing.

Title Claims Against Foreign Sovereigns: The Commercial Activity Exception under the FSIA

Over the years, US federal courts have entertained a number of suits over title to disputed antiquities by foreign governments against US auction houses, museums, dealers and collectors. Typically, the foreign claimant spots the object at a museum or art fair or in an auction or dealer’s catalog and sues to stop the sale and claim title. The holder then defends by challenging the legal basis for the claim of theft and asserting defenses such as laches and statute of limitations. Recently, US holders have turned the tables and initiated declaratory judgment actions for title in US courts. To succeed, the plaintiff must first persuade the court to accept jurisdiction. The Foreign Sovereign Immunity Act generally shields foreign governments from suit unless they engage in “commercial activity” in the US. The US District Court for the Southern District of New York recently held that Greece’s demand for restitution against Sotheby’s and the consignor of an ancient horse figure constituted “commercial activity.” Greece may file an interlocutory appeal. In other pending actions, where US collectors have sued Switzerland in the SDNY for wrongful seizure of material held by a gallery in Geneva, the plaintiffs have alleged that the defendants’ various activities in the US constitute commercial activity. Declaratory judgment actions provide a critical mechanism for collectors to clear title to under-provenanced antiquities or other disputed artworks. We urge interested parties to consider filing “friend of the court” amicus briefs in these matters, especially if Greece appeals to the 2d Circuit Court of Appeals.

Opportunity Zones: An Opportunity for Art Investment Funds?

There’s been a lot of buzz in the art world about using the new Opportunity Zone legislation to roll-over capital gains from art sales into funds investing in real estate development projects. A client asked us if the OZ legislation could be used as a “1031 like-kind-exchange substitute.” We think the answer is, “yes” and that the statute permits direct roll-over of capital gains from art sales into other art investments. Curious? Call us to inquire.