20 Oct Protect Fine Art under State Law to Increase Sales, Convert New Buyers
Americans’ principal assets – their homes and retirements account – enjoy a bevy of preferred treatment and status under the law. The deduction for mortgage interest  now maintains the position of a sacred cow.  A principal residence also enjoys significant protection from creditors.  Wall Street is a beneficiary of numerous laws that have given our common lexicon an alphabet soup-like litany of accounts: the IRA, the 401K, the 529, the 403(b), the SEP-IRA and so on.  All of these offer some tax benefit for the individual opening the account and perhaps even significant creditor protections. 
When I think of all the obstacles that a dollar of an individual investor must go through to enter the art market, I imagine the classic cartoon by Schoolhouse Rock with the bill bouncing around Capitol Hill. The path is treacherous. At every turn, a more sensible, legally-protected or tax-advantaged strategy can snatch the bouncing dollar from the art market and only the most determined dollar makes it there.
At the rarefied top of the market, this would certainly seem like a pedestrian observation. To be sure, Yusaku Maezawa was not choosing between a $110.5 million Basquiat and making his mortgage payment.  And, it is a pedestrian observation for the 200,000 or ultra-high net worth individuals who largely drive the art market. But away from the headlines and the klieg lights is a market that is a little more plodding and mundane than common perception. Half of the postwar and contemporary art auctioned in the United States in 2013 sold for $3,867 or less.  Further, according to an online art trade report published by the insurance company Hiscox that surveyed art buyers, the online market, which grew 24% in 2015, is made primarily of sales under $10,000.  And 92% of those online buyers surveyed said they were likely to return and spend the same amount in the next twelve months. 
At this juncture, proposing any action at the federal level would strain our faculties of imagine and visualization. Instead, this article more modestly calls for a review and update of state level creditor exemptions.
WHAT ARE CREDITOR EXEMPTION LAWS?
Creditor exemption laws exempt certain assets from levy after a judgment. To oversimplify it, there is certain property that a defendant gets to keep, even in bankruptcy or if he or she has lost a massive judgment. Most famously, even though O.J. Simpson lost a $33.5 million wrongful death judgment, his NFL-defined benefit pension plan was beyond reproach.
Art enjoys a varied status under state laws. In California, it is grouped with jewelry and heirlooms and $8,000 is exempt from judgment.  In Utah, a painting of your family is exempt.  A table of the existing exemptions by state is available upon request.
What is clear on first review is that, with a few exceptions, the current amounts are too low to provide any meaningful protected legal status for a collector’s artwork. Some laws are old or have old elements (Minnesota protects a debtor’s phonograph).
This article calls for state laws to be updated to:
i) exempt $25,000 of a defendant’s artwork from judgment;
ii) for the amount to be automatically adjusted upward in connection with inflation or the consumer price index. 
WHY SHOULD THESE EXEMPTIONS BE CHANGED?
First, why not? Other asset classes are represented by industry groups that use sharp elbows to lock-in favored treatment under the law. As a general matter, the art market ought to secure favorable conditions for the benefit of its ecosystem.
Second, more importantly, discussion of creditor exemptions provides an avenue to convert additional buyers to the market. Prudent doctors, business owners and other high-income professionals with exposure to judgments, frequently confer with lawyers, accountants and financial planners regarding protection of their assets. Presently, the exemptions provided under state law would not justify inclusion of art in any serious conversation about asset protection.
Third, once converted to the art market on the basis of prudence, the aforementioned individuals have the possibility of becoming repeat buyers. Indeed, it’s an axiom in business that it’s cheaper to retain existing customers than to acquire new customers. Thus, a first-time collector doing so solely based on the urging of their lawyer is more likely to make later acquisitions than one who has never entered the art market at all.
Finally, creditor exemptions exist so that a person is not wholly deprived of the basics to maintain a household and a life. We strain the notion of the word “basic” by including art, but then again, in those instances of high-net-worth bankruptcies, does society truly benefit by taking so much from the debtor as to break their spirit? Art ownership is a raison d’ être for many and the industry should fight vigorously for laws which recognize this – just in the way that countless states include family Bibles, religious effects and the like in their creditor exemptions.
HOW TO CHANGE EXEMPTIONS?
A broad coalition should support this proposed change in legislation. First, against the backdrop of generous juries and expansive theories of liability, doctors, business owners and their respective industry representatives would seem to be a natural ally. Next, traditional left-leaning groups and universities should be inclined to support legislation benefiting the arts, which this does. Fundamentally the proposed shift in the law would incentivize art ownership and ought to increase the number of households owning art. Certain conservative ideologues of the libertarian bent could be supportive as the proposed change hinders the exercise of government power over individual property. Finally, art dealers, existing collectors and of course artists all benefit from additional funds flowing into the art market and should support the proposed change.
Naturally, we would expect banks to be the most likely opponents to an increase in creditor’s exemptions as it relates to art. This opposition, however, is misplaced. A 2010 study found that approximately 84% of bankruptcies were individuals earning less than $50,000 a year.  Above, we made the admission that creditor exemptions would be too pedestrian for ultra-high net worth individuals – but the converse here is true. Art acquisitions are far too out of reach for working-class households and thus this increased exemption is highly unlikely to play a role in the routine collection efforts of banks.
WHERE TO START?
A state with robust art sales and a relatively weak financial services sector that could serve as a model for later states. Perhaps a state like Minnesota which already contains an inflation adjustment mechanism in its law to increase its exemptions. Perhaps a Southern state like Florida already known for generous creditor exemptions. Perhaps one of the usual suspects for entrepreneurial state business legislation (e.g., Delaware, Wyoming, Nevada).
Where do you think?
#fineart #creditorexemptions #artindustry #assetprotection #art
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About Joe Huser, Esq.
Joe Huser is a California business lawyer, consultant, fixer, confidante and writer. He actively collects contemporary African and black diaspora fine art. Joe can be reached at email@example.com or at 213-271-1520.
§ 163(e)(3)(E) & § 163(e)(4)(E) – (F).
 See 11 U.S.C. § 522(b)(1)(a debtor may exempt from property of the estate property that the debtor holds as a joint tenant or a tenant in the entirety); see also George L. Haskins, Homestead Exemptions, 63 Harv. L. Rev. 1289 (1950)(describing how most jurisdictions in the United States have legislative provisions referred to as homestead laws, designed to protect the family home from the reach of certain classes of creditors and to prevent alienation by the owner without consent of his spouse); see also Qualified Personal Residence Trust 26 CFR 25.2702-5.
 26 U.S.C. § 408; 26 U.S.C. § 401(k); 26 U.S.C. § 529; 26 U.S.C. §403(b); 26 U.S.C. § 408(k).
 See 11 U.S.C. § 522(b)(3)(c)(giving unlimited exemption for retirement assets exempt from taxation under 11 U.S.C. 401(k) from the bankruptcy estate); see also 11 U.S.C. § 522(k)(giving exemption for funds in an IRA up to $1,283,025); see also 11 U.S.C. § 541(b)(6)(provides protection for contributions made to a 529 savings account for certain family members made more than two years before the filing of the bankruptcy petition).
 In Japan, mortgage interest is not deductible. Japan: Individual – Deductions, Worldwide Tax Summaries (2017), http://taxsummaries.pwc.com/uk/taxsummaries/wwts.nsf/ID/Japan-Individual-Deductions (last visited Sep 28, 2017). However, one percent (1%) of the outstanding balance of a mortgage is deducted from a person’s income tax. See Masahiro Kobayashi, The Housing Market and Housing Policies in Japan, Asian Development Bank Institute (2016), https://www.adb.org/sites/default/files/publication/181404/adbi-wp558.pdf, (last visited Sep 28, 2017).
 Cal Code Civ Proc § 704.040; see Cal Code Civ Proc § 703.140(b) for current exemptions after adjustment.
 Utah code 78B-5-505(1)(a)(ix)(A).
 See, e.g., Cal Code Civ Proc § 703.140(b)(mandates that the Judicial Council make adjustments to the artwork exemption every third year in accordance with the California Consumer Price Index).
 Linfield, Leslie E., 2010 Annual Consumer Bankruptcy Demographics Report: A Five Year Perspective of the American Debtor (September 1, 2011). Institute for Financial Literacy, September 2011. Available at SSRN: https://ssrn.com/abstract=1925006