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June 23, 2006 5:43 pm
The market for “American” art, understood in the trade to mean that for works created in the early part of the 20th century, has always been the genteel trout pool of the art world. The works are well documented so there are rarely problems of attribution. Not many fakes, in other words. There is not the speculative frenzy and sharp-elbowed competition for talent and buyers that characterises contemporary art. And the buyers themselves are almost entirely the conservative, well audited, American rich.
The interesting, highly creative, methods of moving assets from here to there and back again that are part of the international art trade do not have much application here.
Which is why the problems of Berry-Hill, the American dealer on New York’s upper east side, have been so shocking to the art world. Berry-Hill, a family business owned by the Hill family, filed for reorganisation under Chapter 11 of the Bankruptcy Code in December of last year. Unless it completes that reorganisation in a way that is satisfactory to its big creditors by August of this year, it could go into a Chapter 7 liquidation, which could lead to even messier disputes.
This is a very contentious bankruptcy. In a verified complaint filed with the New York State Supreme Court in Manhattan in August 2005, ACG Credit Company, Berry-Hill’s secured lender, alleged that: “[Berry-Hill, the Hills, and a company of theirs] driven by greed . . . entered into a series of disguised financing transactions and dealings that violated the Loan Agreement and double pledged collateral securing the loan made to Berry-Hill.
“Defendants even attempted to auction much of that collateral at a public auction while concealing the fact that Berry-Hill had owned the artwork. This conduct has impaired the collateral, damaged Lender, and resulted in a public fraud since it appears Defendants orchestrated a price-fixing scheme with others to ‘bid up’ the prices for the artwork at the auction.”
The auction referred to was the May 2005 sale at Christie’s, in which Berry-Hill bid for paintings in which it had a financial interest, which is a no-no. Christie’s was told that Berry-Hill, as the consigner, was bidding on the works as a representative of one spouse in a divorcing couple, the exception to the rule against bidding on a lot in which one has an interest.
The Hill family has since maintained Christie’s understood what was going on and that this was all a misunderstanding. The Hills apparently have had many misunderstandings with clients before and after the bankruptcy filing, due in part to their practice of having “oral consignments” from clients.
The clients may say they shipped the works to Berry-Hill to be appraised, the Hills will say they were consigned for sale and, given the lack of documentation, neither side’s position can be corroborated.
Some in the market liked dealing with the Hill family. Lisa Dawn Schneider, a private dealer in American art, says: “They were the guys who had fantastic things, for which they paid fantastic prices. I was always treated well by the Hills, and I was very sad to hear about this. When I have a great picture and I don’t have a client, I could sell it to them.”
Not all the dealers share that sentiment. One American art gallery owner in the Hills’ neighbourhood says: “They were always considered people you really didn’t deal with. Our clients didn’t deal with them. They just borrowed and borrowed and borrowed. Their modus operandi was to get the Dan Terra [a major Chicago collector] – the big client. They were a big showy place and they thought that helped them.”
The Hills did get some big clients. One was James McGlothlin, representative in a number of ways of the typical high-end American client. McGlothlin – of Texas, Virginia, and Florida – has made several hundred million dollars in, among other activities, coal and railways. He and his wife have been assembling an American art collection valued at more than $100m, which they intend to donate to the Virginia Museum of Fine Arts.
“Kids” a painting by George Bellows in which he had a half-interest, wound up trapped in bankruptcy court purgatory for some months, until he was able to buy out Berry-Hill’s interest at a favourable (for him) price.
“It was frustrating to be involved in something where you couldn’t get title to your property,” McGlothlin says. “This has changed the way we deal with all the galleries. It has been a bad thing for everyone.”
While McGlothlin came out better than others, at least in a narrowly construed way, he says: “This has distracted all of us collectors. A year spent in litigation is a year spent away from what you were having so much fun doing. It will be difficult for [the Hills] to come back. You would have a bunch of lawyers looking over any dealings with them.”
McGlothlin, probably not the man you want to see at the other end of a lawsuit, was able to take care of himself. Other creditors are worried about the way the bankruptcy case is consuming the assets of the estate. As one of them says: “Between the Gordian Group, who are the work-out experts, Kramer Levin, the bankruptcy attorneys, as well as the legal fees for the creditors committee and all the other expenses, they have spent more than $3.5m or even $4m. And that is before the real estate brokerage fees from the sale of their gallery.”
Some creditors are concerned about the sales of Berry-Hill’s inventory while the company has been in bankruptcy. The valuation of art objects has a subjective element to it. One creditor says: “Bankruptcy was described to me as a bobsled going 200mph, and we are on the back of the bobsled. We get reports from the court but our ability to question and verify the activities is very limited.”
Bankruptcy courts in New York are rather busy these days and the attention span of the court can be limited.
The case has also highlighted the somewhat less than fully professional due diligence applied by art world business people. There is a certain charm to a business where everything is done on a handshake, secured by one’s word as a gentleman (or lady). Otherwise hard-nosed customers, who in their day jobs would never ship around assets of their own companies without documentation, failed to file what are known as UCC notices (chattel mortgages in the UK) on their property. These would have secured their ownership of the property.
Others doing business with the company apparently failed to check on UCC filings that had been made. “An eight-year-old can turn on an online database which gives liens on owners as well as on individual objects,” complains one creditor who has had to struggle to enforce a claim.
Almost by definition, the Berry Hill bankruptcy showed that the company, and by extension the Hill family, was living above its means. But why? There seems to be so much money going around the art world these days. Couldn’t they make a living with those prices?
The answer illustrates an interesting point about the market. Yes, prices for American art have been high, and getting higher, but it is also getting very hard to find product. “Over the years, this market is getting smaller and smaller,” says one American art gallerist. “Look at the Sotheby’s catalogue for the spring sales. There were very few lots. Christie’s had even fewer. And a lot of those are crap. Five years ago there would have been far more lots in each sale.”
The good news for dealers about a collector such as McGlothlin, and there are others like him, is that he likes the art and can afford to buy it. The bad news is that he is not going to go broke due to overspeculation and high living, and therefore forced to liquidate what he has bought. So no more turnover. Since the pictures he is buying are going to a museum, they will be off the market forever, or at least during the lifetime of today’s dealers.
What art dealers would really thrive on are splashy purchasers, who pass their work on to wastrel heirs, who in turn need to sell everything to pay off huge gambling debts. That is not happening at the rate needed to pay for townhouses next to the Frick.
Furthermore, when American art does come on the market, these days it tends to come from estate sales. Given the choice between selling through a dealer and selling through an auction house, an executor or his lawyer will usually sell through an auction house. That way the executor can be sure there won’t be any second guessing, or lawsuits, by heirs who think the estate could have done better. There may be occasions when a discreet sale through a dealer would be better but a transparent auction is easier to justify in court.
What should the art world learn from the Berry-Hill bankruptcy? One creditor believes: “The art world needs some independent, self-regulating body that has enforcement powers, just as there are in the securities world.” That suggestion might not be greeted with enthusiasm by many dealers.
The suit by ACG was settled by the Hills’ agreeing to a cash collateral agreement under which ACG extends part of its original loan as long as Berry-Hill meets deadlines for payments. The cash is controlled by a chief restructuring officer who reports to the court.
The most important deadline is August 2, by which time Berry-Hill must have paid down the loan to $13m or below or the Chapter 11 is converted into a Chapter 7 liquidation. In that event, or if there is any other default, the lender could go after the Hills under their personal guarantees and might try to recover from others with whom the company has had dealings. So far Berry-Hill has been unable to sell its interest in its building, the firm’s most important asset.
As for the Hills, Frederick Hill, a director of Berry-Hill, maintains: “In short order, these issues will dissipate. We intend to pay off our creditors in short order. We are pursuing various strategies, such as asset sales, or bringing in investors. Anything of interest to ourselves and others that is above board.
“We will do nothing substantively different.”
So the art world is on notice.
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