When dealers go bust, what happens to the art they hold?


It was a busy summer for the art professionals tasked with sorting through the fallout of discredited dealers and intermediaries. August saw multiple court filings advance the case of the New York-based adviser Lisa Schiff and her now-shuttered companies, Schiff Fine Art and SFA Advisory, whose works of art are being liquidated to satisfy creditors amid two civil lawsuits seeking at least $1.8m. Schiff is also cooperating with an ongoing investigation into her business practices by the US Attorney’s Office.

In the same month, liquidation firm ThreeSixty Asset Advisors opened an online auction offering nearly 300 pieces of art and ephemera comprising the last remaining inventory of the Los Angeles-based Ace Gallery. Sales proceeds from the lots, which together carried an estimated minimum value of $230,000, went to repaying debts incurred by the gallery ahead of its 2013 bankruptcy. (Ace’s founder, Douglas Chrismas, is also awaiting trial on federal charges of embezzling more than $260,000 from the gallery’s bankruptcy estate; he maintains his innocence.)

Although there are important differences in the legal circumstances of Schiff’s companies and Ace Gallery, both cases could only progress thanks to the undersung work of appraisers and advisers, whose role in such inquiries includes determining which works are (and are not) in a debtor’s possession; how much (or how little) value the works have in their present state; and whether any outside parties have a legitimate ownership claim to any of them.

Picking apart the status, value and condition of works of art is far from straightforward when alleged deceptions and substantial debt collide in the US art market. So how are pieces identified and assessed within such complex situations?

“It’s fundamentally a role of ‘putting the pieces together’,” says Caroline Sayan, the president and chief executive of international advisory firm Cadell. “Compiling a picture of the works and their value is never going to be a perfect science, and there will always be different perspectives, but it will, at least, enable the process to move forwards.”

The neutrality doctrine

Within liquidations of art holdings, appraisers are appointed relatively early by the party overseeing the process, as part of their broader goal of recovering as many assets from the debtor entity as possible, deducting a fee and paying dividends to parties able to demonstrate ownership of property or creditor status. Debts are paid off in a particular order, with secured creditors (who disbursed loans or credit agreements backed by an asset) and employees typically prioritised. When dealers face insolvency, artists most often become secured creditors by virtue of consignment agreements for unsold work or unpaid invoices for proceeds from sales.

Although Schiff initiated a bankruptcy alternative called an “assignment for the benefit of creditors”, the process still broadly resembles bankruptcy in that her companies’ assets were transferred to a trust to be liquidated by an independent third party.

In insolvency cases, often-complex investigations are needed to confirm who has ownership of works and how much they are worth Alexander Grey/Unsplash

Bankruptcy and business lawyer Douglas J. Pick, the assignee in Schiff’s case as of August, commissioned Winston Art Group (described in court papers as “a well-known and highly respected art advisory”) to counsel him in “identifying, marketing and ultimately liquidating the Art Property” of Schiff Fine Art, in addition to “soliciting interest in the Art Property for purchase”.

Part of the liquidation process also involves determining when a debtor may lack clear title to a work in its possession. Potential third-party ownership claims hovered over certain pieces in Schiff Fine Art’s inventory, as outlined in an 11 August court filing, and over certain works in the auction of Ace Gallery’s holdings. A further 23 lots in the latter were by artists who could not be identified.

In both civil and criminal lawsuits, lawyers may also pull on a range of expertise to develop their case. “There is often a race to find the best appraiser or expert,” says Fred Clark, a senior associate of corporate and commercial law at London-based firm Boodle Hatfield. “Sometimes the appraiser is appointed by a party before court applications are made as part of the pre-action correspondence. However, it is common for a court to order that X number of opinions are sought. The parties will usually try to agree upon the appointments, but if that fails the presiding judge will decide for them.”

No matter how an appraiser is chosen, assuring the neutrality of their advice is paramount. Although in the US there are Congressionally approved frameworks for the trade, such as the Uniform Standards in Professional Appraisal Practice (USPAP), there is no business license for art appraisers. Professional bodies such as the Appraisers Association of America and the International Society of Appraisers provide guidance on reputable service providers; the former organisation includes more than 900 independent appraisers and affiliated professionals who have passed an entry exam and agreed to amass at least 70 continuing education credits in the field every five years.

Similarly, where an art historical opinion is sought regarding a work’s authenticity, investigators and legal teams must navigate the dealers, auction-house specialists and art historians with specific expertise to determine the most qualified opinion or set of opinions.

In legal proceedings over ownership, parties often involve the Art Loss Register, an international database of missing objects, to document works as “in dispute” to prevent further resales, encourage settlement or provide factual evidence, such as who searched for an item when or what provenance was provided.

Valuation variables

In addition to authenticity, provenance and title issues, appraisers and advisers also face the challenge of properly valuing the work or collection being liquidated. Although pre-existing inventories or appraisals may exist, an up-to-date assessment is crucial given the fast-paced nature of today’s market, changing tastes and the increasingly rigorous obligations around provenance and due diligence. Different appraisals are also prepared for different purposes: for example, a value assessed for an insurance policy is not necessarily appropriate or acceptable for estate planning.

The most typical appraisal concerns “fair market value”, which presumes an open and willing market for the works being considered. In Schiff’s case, Winston Art Group concluded in early August that Schiff Fine Art still held 894 works with a fair market value of more than $3.1m, including examples by Michael Craig-Martin, Damien Hirst and Chris Ofili. The firm also verified each work’s respective location, with Bortolami gallery and Phillips auction house among the sites. A further 108 works with a fair market value of more than $1.1m were deemed “missing”.

Conversely, appraisers can also assign a “liquidation value”, which estimates the amount the works would fetch if released onto the market immediately. This appraisal incorporates factors such as the reputational damage to any works caught in ongoing legal disputes and the resulting level of market saturation if a collection of comparable works were offered simultaneously.

As a reference point, consider the 2018 sale of Arab, Iranian and South Asian art collected by the liquidated Abraaj Group, a Dubai-based private-equity firm. Many of the 200 items were offered without a reserve price, and presale estimates reflected deep discounts. For instance, Iranian sculptor Parviz Tanavoli’s Poet and Bird (2006), which was expected to fetch between £50,000 and £100,000 ($66,500 and $113,000), previously sold for $480,000 (with fees) at a Bonhams auction in Dubai a decade earlier.

Other art liquidations have proven more lucrative, such as Sotheby’s multipart sale of digital works from the collection of Three Arrows Capital, an insolvent cryptocurrency hedge fund, this year. Each of the first 44 NFTs offered across two live auctions in New York exceeded its high estimate, with the trove bringing around $13.4m in total (with fees).

Yet the Ace Gallery auction, which closed 12 September, ultimately delivered a hammer total of less than $200,000, short of its $230,000 aggregate low estimate. That result and the company’s decade-long bankruptcy should remind the trade that, when it comes to Lisa Schiff and her defunct businesses, August’s appraisal of the works to be liquidated could mean resolution is still years away—and full repayment to creditors will probably never arrive.


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