We’ve read about many court cases involving collector cars, but here is a new one — a father and son in a bitter court battle over the ownership of a four-car Lancia Stratos collection. The cars are a 1971 HF, a 1975 HF Silhouette Turbo, a 1975 Stradale street car and a 1975 Safari. After successfully defending himself against criminal charges in Austria and Germany, the son lost the ultimate battle in the London High Court, which ruled that the father was the rightful owner of the Lancias. The disappointed son has vowed to appeal, and to seek redress in other countries if necessary.

Loan or gift?

The four Lancias were part of the collection of Ernst Hrabalek, a resident of Austria and Thailand, who admits that he gave possession of the cars to his now 37-year-old son, Christian, in 2011. But Ernst insisted that he only loaned the cars to Christian so he could display them at the Meilenwerk Classic Car Museum in Berlin and to “boost his reputation” as a car designer. Christian is a well-known car designer and automotive strategy consultant who began his career at Porsche and subsequently worked at Audi, Volkswagen, Lancia, BMW and Skoda. He founded Fenomenon Holistic Design, which conducted business from 2002 to 2011. Christian Hrabalek is one of the world’s leading Lancia Stratos collectors, with a nine-car collection, presumably including these four cars. Christian claimed that Ernst repeatedly promised to give all of his Stratos cars to him as a gift when he graduated from university (which occurred in 2000), and that he simply followed through on that promise when he gave possession of the cars to him in 2000. Ernst admitted that he promised to give the cars to his son “at some stage,” but just never did. He claimed that he couldn’t do that because he was relying upon the cars to be his “old-age pension.” He also claimed he couldn’t bear to part with them, and was especially troubled when his son wanted to sell one of them in order to raise cash to pay his debts.

More to the story

The son’s claims were contradicted (at least in part) by emails between Ernst and Christian in 2007. Most significant was an email involving a request from World Rally Champion Sandro Munari to borrow one of the cars to show at Lake Garda in Italy. The request was directed to Christian, who forwarded it to his father for decision, which arguably shows that he still recognized that Ernst was the owner. Ernst acknowledged that Christian was publicly representing himself as the owner of the cars and that through his silence the “world was sometimes allowed to believe” the cars belonged to his son. The father-son relationship was a good one until Ernst demanded the return of the cars. The deterioration was quick, and in January 2012, Christian sent a text to his father stating that he could have the cars back “providing they never saw each other again.” Father was willing to oblige but claimed Christian reneged on that deal.

He says, he says

Obviously, this was a pure “he says, he says” form of controversy. Each side has a different story, but they are similar in enough respects that some common core is present. Who wins the court argument is usually a matter of witness credibility. On that score, the judge noted that neither of them was “wholly reliable or creditworthy.” She ruled that Ernst had pretty clearly intended to give the cars to Christian at some time during his lifetime, and quite possibly upon Christian’s graduation. However, she ruled that the evidence made it “absolutely clear” that the gift was not actually made. “Ernst did not, in fact, make the gift, and further, Christian knew that the gift had not been made,” the judge said.

U.S. law

Although the case was decided under British law, the result would likely have been the same under U.S. law. As a general legal principle, a promise to make a gift is not legally enforceable by the intended recipient. The rationale is that the intended recipient has not given any consideration to the intended donor, so there is no enforceable contract. There is one possible exception to that rule — a legal principle called “promissory estoppel.” Suppose that father had told son, “If you move back to Vienna so you can be near me, I will give you my four Lancia Stratos cars.” If the son relies upon that and moves back to Vienna, he has acted upon that promise to take actions he did not otherwise intend to take. The law views that as a detriment. It substitutes for the consideration otherwise lacking, and now the son has an enforceable contract. Perhaps this is what Christian’s attorney (Nigel Adams of London’s Goodman Derrick LLP, and a partner of SCM contributor Martin Emmison) was thinking of when he stated: “Chris expended significant time, effort and money over the years, first in helping to assemble the collection of cars and later — when he believed his father had gifted him the collection — in increasing their value by publicizing the cars and by exhibiting them at numerous classic car events.”

What does this mean for me?

This is a very extreme case, and we probably won’t see another one just like it again. It is quite sad that these cars came between a father and son — and resulted in an estrangement that may well last the father’s lifetime. Unfortunately, family conflicts involving money and inheritances have become all too common. As an indicator, our law firm has a booming and rapidly expanding practice involving trust and estate litigation. I have to believe it is the fastest growing area of law practice across the United States. Like it or not, your collector cars can become the focal point of family conflict after your death. Every collector should pay close attention to how his or her collector cars fit into his estate plan. Some — perhaps all — of your children probably have little interest in them. If none of them do, it might not be much of a problem. They all get sold, and the proceeds are then easily divided. All you need to do to help is to educate them about whom to consult with about getting the most money out of them. It quickly gets more complicated when one or some of them want the cars and the others don’t. That can lead to trouble in a variety of ways. Most obvious is the valuation problem. As we all know, two examples of the same car can have very different values. Authenticity, provenance and condition are the key variables, and people can get into huge disagreements over how those variables affect the value. We also know that value is a matter of perception and perspective. Just think about how far apart a seller and buyer can be about what might be a “fair” price for a car. Your children might have that disagreement in spades.

A capital gains minefield

Your estate planning can exacerbate that conflict. Say you’ve transferred ownership of your cars to a family limited partnership or LLC in order to gain valuation discounts for estate tax valuation purposes, perhaps as high as 40% to 50%. (That is, the use of the entity causes the estate tax value to be lower, resulting in a lower estate tax. Quite smart planning, by the way.) Does the discounted value apply for purposes of evening up among your children, or do the pre-discount values apply? Either way, the discounted estate tax value becomes the recipient’s income tax basis. That means when the car is ultimately sold, the difference between the basis and the sales price is the taxable gain on the sale — in effect, the child receiving the cars takes them with a built-in capital gains burden. Should some credit be given to that child to compensate for that?

Are collector cars a good inheritance?

Less obvious is the investment element. If your collector cars represent a sizable portion of your estate, it becomes possible that one child’s share of the estate will be largely composed of collector cars. Is this really a proper financial plan for this child? You also need to consider the estate tax effect of the cars. The federal estate tax rate is 40%. About half the states impose their own estate tax, with top honors going to Washington with its 19% tax rate. The children receiving the cars should bear their allocable estate tax burden, but the tax has to be paid in cash. That can be very difficult when all you have inherited is cars. Things might be most complicated when your children all want the cars. Not only do you have all of the same potential valuation conflicts to consider, but now we have the added dimension of deciding which children get which cars. Equalizing value may not be a complete solution. For example, say you have an Audi R8 and a Porsche 356 of exactly equal value today. Which one would you rather own five years from now? This isn’t very easy, is it? ♦ John Draneas is an attorney in Oregon. His comments are general in nature and are not intended to substitute for consultation with an attorney. He can be reached through www.draneaslaw.com.  

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