To Give and Give Not

08/30/2011 09:05 pm ET | Updated Oct 30, 2011

Like many other wealthy (and not so wealthy) people before him, gem dealer Ralph Esmerian became financially overextended, in his case defaulting on a $185.3 million loan, which brought about a lawsuit in 2008 by the loan holder, Merrill Lynch. Looking to raise money to pay off the debt, Esmerian, a collector of American folk art and one of the founders of the American Folk Art Museum in New York City, put up for sale at auction 30 or so artworks from his collection that had been promised to that museum. Many of these artworks were hanging in the museum. How can you give something and then take it back?

The fact is, the artworks were never given -- the museum did not have title to them -- but only promised, "and a promise isn't a binding contract," said New York City arts lawyer Ralph Lerner. "Things happen between the time you promise you'll do something and when you actually do it, and those things may make the promise impossible to keep." He added that even putting the original promise in writing isn't binding on someone, unless the person making the promise has received "consideration" - something in return, such as money.
Breaking a promise -- or changing one's mind, whatever you want to call it -- to donate money or objects to a museum (or any other nonprofit institution) is rare, but it does happen, sometimes in spectacular fashion.

Perhaps the most notable instance was in 2008, when philanthropist and art collector Eli Broad, retracted his promise to donate his entire 2,000-work modern and contemporary art collection to the Los Angeles County Museum of Art, although he did not renege on his pledge (made in 2003) to provide $50 million to the museum to build the new structure that was to house the collection. Broad cushioned his change of heart with a promise to loan hundreds of pieces from his collection to LACMA, but then claimed a new grudge with the museum for exhibiting other artworks than his in that new addition, which had been part of the original agreement.

Another notable instance was a rescinded promise by Carnegie Museum of Art trustee James H. Rich to donate Peter Doig's 2004 painting Red Boat (Imaginary Boys) to the museum. On the invoice from New York's Michael Werner Gallery where Rich purchased the painting in 2004, in fact, was a stipulation that the "artwork, while purchased privately, is done so with the explicit agreement that the work is to be given as an eventual gift to the Carnegie Museum of Art." Rich followed through, making a fractional gift of it in late 2005. (This type of donation allows a museum to take possession of an artwork or other object for a portion of the year while the donor could keep it for the remainder. The donor also is permitted to take deductions based on the value of the artwork over a period of years until the museum's fractional interest grew to full ownership.) However, because of a change in the laws governing charitable gifts of property in 2006, which limited both the length of time that a donor could continue to take deductions for a fractional gift and the amount of the deduction, Rich decided to buy back his 10 percent fractional interest in the painting from the museum in late 2007, paying the institution $150,000, and regaining full ownership, eventually consigning the painting to Christie's, where it sold on June 28th for $9,897,195 -- the estimate had been $2,200,000-2,700,000. (That consignment triggered a lawsuit earlier this year, not by the art museum but by the art gallery for breach of contract, which was settled in late June. The gallery issued a statement, describing its disagreement with the long-time collector "a misunderstanding.")

Museums are loath to sue donors (or, in the case of the Carnegie Museum of Art, one of its trustees), preferring to work with them to maintain a positive relationship that may lead to other gifts of objects and money down the road. Plus, Lerner noted, the museum would give itself a black eye publicly by suing a donor and then lose the lawsuit anyway, because "a promise isn't legally enforceable." The only exception to this is when the recipient of the promise, such as a museum, has expended money -- for instance, to finance an exhibition or an exhibition space for the artwork -- or has agreed to forego purchasing similar objects on the basis of the promise.

In the early 1970s, the Metropolitan Museum brought a lawsuit against the heirs of Joan Whitney Payson to collect more than $3 million that she had promised the museum for the construction of its American Wing but which the heirs chose not to give. The museum won, arguing that "we relied on the money to build the American Wing and had begun building it based on the promise she had made," said Ashton Hawkins, a Manhattan lawyer and then chief counsel to the Metropolitan. In 1997, the Museum of Contemporary Art in Chicago also brought suit against a former board chairman, Paul Oliver-Hoffmann, who had pledged $5 million to help endow and operate the museum before quitting his post in a huff in 1990 over financial management disagreements with then-director Kevin Consey. His widow, Camille Oliver-Hoffmann, settled the lawsuit in 1998, giving the museum not money but two works from her collection, a 1990 painting by Anselm Kiefer and a 1988 portrait of Cindy Sherman by Chuck Close.

According to the American Association of Museums, between 80 and 90 percent of the objects in museum collections are donations, some of which are offered initially as promises and pledges. Over the past few decades, various ways have been devised to allow wealthy individuals to donate tangible objects to museums or other charitable institutions without actually turning the pieces over to them, at least not for a while. Fractional gifts and charitable remainder trusts allow donors to receive tax deductions for donations in which a physical transfer of property may not take place for years. Another popular method is the promised gift, which has no tax benefits but may give the would-be donor prestige and influence over museum decision-making (perhaps, a seat on the board). "Many gifts are left by donors in their wills," said Anita Difanis, director of government affairs for the Association of Art Museum Directors. "The announcement of a promised gift with all the fanfare by the public relations departments of museums lets the donor enjoy the act of giving while still alive."
From time to time, a donor just can't make good on a pledge.

Back in 1999, the Whitney Museum of American Art stood by while an Alexander Calder wood and wire sculpture "Constellation" that had been pledged to the institution by Theodate and Scott Severns back in 1981 was sold at Sotheby's for $1.9 million. Between the time of the announced gift and the sale, the 91 year-old Mrs. Severns had become ill and required round-the-clock care, which she was no longer able to afford. The Whitney decided not to sue, probably for the same reasons that the Los Angeles County Museum of Art, the American Folk Art Museum and the Carnegie Museum of Art chose not to contest the broken promises made to them.