[intro]Just Because a Painting Is In Your Possession Doesn’t Make It Yours[/intro]
Eugene Rome is a business and art lawyer in Los Angeles whose recent art cases include the representation and resolution of an action initiated on behalf of an owner of a notable pop art painting against competing claimants as well as the successful resolution of a claim by a prominent Beverly Hills Gallery against its insurance carrier stemming from damage to a significant work by Pablo Picasso.
How often have you shown your art collection, proudly pointing out a prized Chagall or Warhol, asking: “So what do you think of my painting?” But, have you ever wondered, is this painting really mine? Sure, the Renoir inherited from the great grandfather is yours. And, of course, so is the Schiele acquired at a Sotheby’s sale. But, what about the Miró left with you by a friend as security for the sizable sum you lent him to pay for his daughter’s wedding fifteen years ago. There, the answer may be more complicated, requiring a methodical analysis of the legal principles establishing your rights in the work.
Sure, this friend borrowed the funds for six months. And, yes, he specifically said that you can hold onto the Miró as collateral which, in the event he does not pay you back in full (of course he assured you that would never happen), you can keep or sell. In fact, you have a signed note from him reflecting all of these terms. And, when he did not pay you back on time, you called him and stated that if the funds are not paid back within two weeks you would be keeping the Miró. He disagreed but did not pay you the money. So, you sent him a certified letter stating that the painting is now yours since he has failed to make payment. Fifteen years down the line the painting is no doubt yours … or is it?
There are a few approaches to examining the parties’ respective ownership rights in the painting. The first requires an examination of the process by which the collateral for the loan – the Miró painting – was foreclosed upon, the second inquires into whether the painting may have been acquired through adverse possession and the final query is whether the current holder can argue that the Miró was abandoned.
In typical consumer transactions involving personal property, such as a painting, the terms of the relationship are determined by a contract. When funds are advanced, the agreement typically includes a provision giving the lender a security interest in the work. When the borrower defaults, the lender is entitled to foreclose on or repossess the property, resell it, and then apply the proceeds of the sale toward the loan.
In the Miró hypothetical, where the friend who borrowed the funds defaults, California Commercial Code allows the lender, to “sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.” Yet, these rights are not unfettered. For instance, the same Commercial Code requires that the foreclosure be “commercially reasonable,” meaning, the foreclosure sale must be adequately advertised to ensure ample attendance by legitimate bidders, “so that the highest commercially reasonable price for the collateral [is] obtained.” Any amount collected at auction that exceeds the borrowed sum must then be turned over to the borrower.
Of course, the question remains, what happens where the entire piece was pledged as collateral? Even then, the lender is required to carefully follow the Commercial Code or risk liability for improper disposition. For instance, the seller must give notice of default, act in “good faith,” give adequate notice of the foreclosure sale and conduct the same in a commercially reasonable manner.
What if the lender simply elected to keep the piece of art as his following default? Examining this eventuality triggers the real property doctrine of adverse possession. Adverse possession is a legal principle which allows the possessor of real property to acquire legal title to the property where the possession is (1) actual; (2) open and notorious; (3) adverse and hostile; and (4) continuous for the period prescribed by state law, which in California is five years for real property.
The principles of adverse possession with respect to real property are firmly established in California jurisprudence. However, California Supreme Court has systematically declined to affirm the application of California’s adverse possession statutes to personal property. In January 1992, the Law Revision Commission noted this gray area and issued a Tentative Recommendation proposing that the code be amended to clearly affirm the right to quiet title to personal property as a result of adverse possession.
Still California courts have declined to extend the doctrine of adverse possession to personal property. As recently as 2005, a California court of appeal specifically declined to extend the doctrine of adverse possession to personal property. Thus, while one exercising adverse possession over land or a house in California can expect to bring a successful action to quiet title to the property following the conclusion of a five-year period, the same is not true for personal property, such as art. Thus, in the instance of the possessor of the Miró described above, the doctrine of adverse possession does not pave a clear path to an undisputed ownership interest.
Finally, the holder of the Miró, can claim that the painting was abandoned, thereby vesting the possessor with ownership rights. In California, the doctrine of abandonment requires a showing of two elements by the proponent: 1) the intention to abandon and 2) the external act by which the intention is carried into effect. The Courts have emphasized that the intent to abandon is the first and paramount inquiry. Yet, the Courts cautioned that abandonment requires something more than mere passivity—there must be some clear and unmistakable affirmative act or series of acts indicating an intent to relinquish ownership.
In the instance with the Miró, the arguments would go both ways: on the one hand the borrower did not pay back the borrowed sum or attempt to reclaim the paining through a lawsuit of his own. On the other hand, the borrower did challenge the lender’s assertion that the painting was his as a result of the default and, under California law, mere passivity may not be enough.
The arguments therefore cut both ways.
The above discussion generally addresses some possibilities which may arise where competing rights to a work of art are asserted. This often comes up prior to the auction of the piece when the work’s provenance is being determined or after where a successful high-profile sale brings claimants of the sale price out of the woodwork. Experienced guidance in establishing and perfecting the title to a work of art is always desirable in order to ascertain the holder’s true rights and prevent future rights contests.
Eugene Rome is a commercial litigator whose practice includes representation of art galleries and collectors in various disputes, including title and coverage. He may be contacted at 310-282-0690 or by e-mail.