Broken pledges, bankrupt donors and sharing works of art
…hot topics from the 2011 Legal Issues in Museums conference
By Martha Lufkin. Museums, Issue 224, May 2011
Published online: 17 May 2011
WASHINGTON, DC. Tight museum finances, the recession and the threat that some policymakers may seek to squeeze a sector they see as elitist and wasteful, set the tone for the annual conference held last month on legal problems in museum administration organised by the American Law Institute-American Bar Association and sponsored by the Smithsonian Institution and the American Association of Museums. Museum leaders and lawyers from museums, government and private firms specialising in tax-exempt organisations were among the 244 attendees. Advice ranged from broken gifts and pledges, the fall-out of Ponzi schemes and artists’ copyright, to the dos and don’ts of renting space and negotiating joint acquisitions.
Museums “need to make the case for cultural institutions as an equal part of the non-profit, tax exempt community”, said Fredric Goldstein, the general counsel for the Los Angeles County Museum of Art, in a session on trend-spotting. Goldstein cited state and federal budget cuts and possible tax law changes that could harm museums, and “loose talk” by some policymakers who propose to allow a lower deduction for gifts to cultural institutions as opposed to non-profits aimed at the poor or needy. A lack of reform of a federal tax law governing deductions for charitable gifts of fractional interests in art “has caused such gifts to dry up”, he added.
Stephen Urice, an associate professor of law at the University of Miami School of Law, urged museums to “be much more active participants in the legislative process”. He cited allegations that museums take part in the market for stolen art.
Museums count on gifts of art, cash and other assets but they need to beware of the thorny issues that can arise between institutions and donors. What can museum directors and trustees do when a donation becomes problematic?
One question arises over the type of gifts a museum wants. Should an art museum accept, for example, a gift of a minority stock interest in a family business, with the rest of the family as co-owners? The museum “could be putting itself in a perilous economic situation”, said John Sare, a New York-based lawyer specialising in charitable giving, if it cannot control such things as compensation to top executives or, for example, if the business is a factory, with liability insurance coverage. “It is a fraught situation,” he added. A solid gift acceptance policy, with a separate committee to evaluate and document decisions about proposed gifts, should clearly state the museum’s rules.
What about a donor who, perhaps due to the recession, cannot fulfil his or her pledge? If the museum lets the donor pay late, it is giving a financial benefit to a private individual, which charities are not allowed to do under US law. An independent committee should make the decision and cite its reasons based on comparable transactions, such as requiring the donor to pay interest. Another possible problem is a donor who gives the museum cash or art but then becomes insolvent. If a gift is made on the eve of bankruptcy it will probably be set aside, said Sare. Since the 2008 downturn, “we as charity advisors have found ourselves exposed to the federal and state asset forfeiture framework,” said David Shevlin, a New York-based lawyer specialising in tax-exempt organisations. Such rules mean that federal and state governments can recover donations made by donors who are later convicted of fraud or other illegalities, such as a Ponzi scheme. In some cases, if the organisation has spent the money it may be possible to negotiate with the government, said Shevlin, adding: “There is a strong statutory framework to seek the return of the funds.”
For example, after Bearingpoint, Inc gave $8.1m to the Yale School of Management on a $30m pledge, it went bankrupt, causing the bankruptcy trustee to seek back the money arguing that the company was insolvent when it made the gift. Litigation continues.
When a museum joins with another institution or individual to buy or co-own a work of art, the arrangement needs careful thought. What rules to follow? The parties should set out the procedures in a written agreement. For example, if one institution cannot raise its share of the needed cash, the other buyer should have the right to terminate the joint agreement and buy the art itself, “or seek an alternate joint buyer”, said Frederick Strober, a lawyer in Philadelphia. When the Philadelphia Museum of Art and the Pennsylvania Academy of the Fine Arts agreed to buy Thomas Eakins’ The Gross Clinic, 1875, from Thomas Jefferson University in 2007, “it was made clear to all donors that if the funds could not be raised, the money would go back to the donors,” said Lawrence Berger, the general counsel for the Philadelphia Museum of Art.
When art is owned with another party, a “tenancy in common” is the most advantageous arrangement, meaning neither party has the automatic right to own the whole if the other co-owner ceases to exist or, in the case of an individual, dies. When negotiating to buy art, the co-owners should carefully draft their joint purchase agreement with the seller so that if one party cannot raise the funds, both museums can exit the sale even if damages must be paid to the dealer. “Avoid any situation where the seller can become a co-owner with the museum,” advised Strober. Museums should also draft a joint ownership agreement to arrange for such questions as conservation (one museum may have superior resources to do this), possible loans to third parties and a schedule of possession. “Take into account that one museum might want to display the art for a special reason such as an exhibition,” said Strober.
Museums must deal with laws protecting artists’ rights, including copyright, moral rights and resale royalties. “Merchandising is a problem,” said Theodore Feder, the president of the Artists Rights Society in New York, the leading copyright, licensing and monitoring organisation for artists in the US. The society negotiates on behalf of artists with museums that want to create catalogues, posters and other exhibition merchandise. Most artists’ estates, Feder said, will not approve reproductions on canvas, gloves or scarves, because such products do not comply with the standard of quality and integrity that artists or their estates wish to be associated with, and fakes on canvas are occasionally passed off on the unwary as the genuine article. “We spend about 40% of our time trying to rid the marketplace of illicit goods,” said Feder.
What about other uses? Feder said the society accepts “the use of thumbnails before, during and after an exhibition.” Under US “fair use” rules, which allows for the reproduction of copyrighted works in certain educational and other circumstances, “we accept as fair use a scholarly publication of under 3,000 copies [but] not a coffee table book,” plus reproductions used in research and news reporting, Feder said. A major change over the past few years is that “almost all museums now accept that the artist retains copyright” in a work even after the museum acquires it, he added. He also said that in the society’s view, “it is time for the US to adopt a resale rights act,” which would let artists participate financially when their original works of art are resold, as in Europe; no such protections exist in the US, except in California.
Russia withholds loans
Stephen Clark, the general counsel for the J. Paul Getty Trust, noted the “profound impact” that a court ruling against the Russian Federation is having on Russian art loans to the US, to the extent that “loans are not coming from Russia”. In July 2010, the Washington, DC federal appeals court granted a default judgment against Russia in a claim for possession of two collections of religious books, manuscripts and archives allegedly stolen from persons associated with the international orthodox Jewish group, Agudas Chasidei Chabad. The court rejected Russia’s argument that it was immune from a lawsuit in the US as a foreign sovereign nation.
Now, Russian authorities fear that any art it lends to the US could be seized to satisfy the judgement. The Metropolitan Museum of Art in New York, the National Gallery of Art in Washington, DC and the J. Paul Getty Museum in Los Angeles have all faced problems in getting Russia to send art for loan shows. The US State Department is working to resolve the problem.
The rules: renting space
The public will pay handsomely to hold weddings and other events at a museum (above, Museum of Contemporary Art Chicago). To avoid legal messes museums should have a sound policy for such events, delegates were reminded. Unlike income related to the museum’s charitable mission, rental income from such events is generally taxable as “unrelated business income”. Rules to insist on? Liability insurance protecting the museum if anything untoward happens, the time when guests and their caterers will leave, keeping down noise, and protecting collections from careless guests. The Phillips Collection in Washington, DC also specifies: no candles, all trays to be carried below shoulder height, champagne to be uncorked in the basement and no Bloody Marys to minimise the risk of stains.
While museums as charities cannot participate or intervene in political campaigns, institutions can rent out space to candidates and political parties for political events, providing the terms are the same as for any other user and no candidate gets preferential treatment, said Farleigh Earhart, the associate general counsel at the Smithsonian Institution.
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