Although there are indications that such practices are slowly evolving
to a point where the true identity of a buyer or a seller is often
disclosed, at least to one another, for those who are accustomed to
marketable securities or any other valuable asset commonly used as
collateral, title to art remains an unsettling matter.
the client in this high-risk context, while not scaring
off the lender’s best prospects, i.e., the ones with other
available sources of capital.
This balancing process for the lawyer comes up
with title issues on a regular basis. Because of the art
world’s “handshake culture,” most collectors do not
have perfect paperwork, with bills of sale, invoices and
similar documentation evidencing good title to their art.
It is one thing when you are advising a private bank,
with a billionaire as a guarantor, on how to respond
to these deficiencies, and quite another with a non-
recourse lender client facing the same predicament.
There are other less obvious problems for the lawyer
to the non-recourse art lender. As noted above, some
non-bank art lenders carry a “loan to own” reputation.
This taint is not, however, limited to the lenders who
have earned that reputation. This means, among other
things, that unless the borrower has no other options,
most secondary art lenders will often encounter tough
negotiation of the language in the security agreement
defining events of default and prescribing remedies. It
also means that in responding to a default, the non-
recourse lender and its lawyer must balance not wanting
to appear trigger-happy with the need (because the
lender may well not be dealing with highly credit-worthy
people) to send the message that it will deal harshly
with borrowers that do not keep their promises.
Many non-recourse art lenders have adopted their
own version of CRE’s “bad boy” guaranty, however, the
scope of what constitutes “bad acts” that will trigger full
recourse is often a hotly contested subject, requiring
creative and skilled drafting solutions to bridge the
gap. In addition to these issues, many ABL art lenders
engage in cross-border transactions, requiring an
understanding of foreign laws and practices concerning
secured transactions. Cross-border deals are always
at least somewhat challenging for lawyers, but with an
asset-based or non-recourse loan, the risks inherent in
these legal hurdles are magnified.
For the author, counseling ABL art lenders, particularly the non-recourse variety, has been some of the
most interesting work undertaken in a long career of
representing commercial and private banks, and other
lenders, in CRE loans and in a wide variety of ABL
and other secured financings. For a lawyer to do his or
her job well, it is important to maintain objectivity by
keeping some distance from the client. However, with
this kind of work, the judgment calls on legal subject
matter can be as close as they are important, and that
sometimes means that you have to ask yourself what
you would do if it were your own money. ABFJ
STEPHEN BRODIE is a partner at Herrick Feinstein. He
frequently advises ABL lenders who loan against fine art.
A version of this article originally appeared in Art and
Advocacy, Volume 23.
they are dealing with “loan to own” lenders. This makes closing a
loan difficult because nothing about any deal is easy when there is a
lack of meaningful trust between the parties. Lenders in the second
category are very sure-footed in valuing and selecting their collateral and in disposing of it should there be a serious problem. These
lenders may face similar trust issues as in the first category, and may
or may not do non-recourse lending. Sotheby’s Financial Services
is a prominent ABL lender that does not generally encounter trust
issues with its borrowers, but it does not make non-recourse loans.
Some of these lenders may charge high rates and fees, although
not usually as high as the category one lenders. Category three
has perhaps the most challenging task. These lenders are trying to
succeed at a risky business, charging rates and fees that are at least
a bit more modest than an art dealer or a pawnbroker, but higher
than a bank.
Andrea Danese, CEO of Athena, sees it this way:
Athena’s art lending services are a complement to those
offered by traditional banks, which have been discouraged by new regulation from engaging in true asset-based
lending. For this reason, much of the ‘art lending’ provided
by these institutions are, in fact, quite plain vanilla
financing structures for existing private banking clients tied
to the strength of the client’s creditworthiness, rather than
of their art. Athena provides a different, but complementary
service, allowing its clients to generate credit derived purely
from the value of their art collection. This has the advantage of providing incremental liquidity to clients, above and
beyond what can be garnered from traditional institutions,
adding particular value to clients seeking to allocate greater
amounts of capital into the art market.
In other words, this type of lender serves as an alternative to
private banks, hopefully for private bank-worthy clients seeking
non-recourse art loans.
The Lawyer’s Role
It seems clear that for a lawyer representing an asset-based or non-recourse art lender, the challenges are greater than in representing
private banks in making the same types of loans. And the difficulty
is not limited to assisting the client in navigating the authenticity
and title risks. Non-bank lenders are often making loans to people
who cannot get an art loan from a private bank, thus making the
risk of a default higher than in an ordinary private bank financing.
In drafting and negotiating deals, the lawyer for this type of lender
must balance all of the risks with the client’s business need to close
deals. This calls for imagination and drafting solutions that protect