Thursday, August 24, 2017
 

Guest Post: Courts Find “Your Art Dealer is Not Your Friend”: Due Diligence Requirements for Purchasers of Artwork


By Yelena Ambartsumian, Esq.

Reprinted with permission from:  Entertainment, Arts and Sports Law Journal, Summer 2015, Vol. 26, No. 2, published by the New York State Bar Association, One Elk Street, Albany, NY 12207.

Introduction

The largest art scandal of 2015 came unraveled just before the New Year, when Dmitry Rybolovlev was vacationing in St. Barth.  Rybolovlev is a Russian billionaire and, as one might expect, an avid collector of art.  The oligarch is particularly fond of Picasso, Van Gogh, Gauguin, Rothko, and Modigliani.[1]

Last December, while Rybolovlev was mingling with other guests over lunch at the Eden Resort, the polite conversation naturally turned to art.  As the guests discussed the record high prices commanded by the secondary market for art, New York art dealer Sandy Heller blithely remarked that one of his clients had just sold a Modigliani painting to an undisclosed buyer.[2]

It was at this moment that Rybolovlev finally heard something that he had not heard before.  Curious, Rybolovlev asked, “Which Modigliani?” and Heller responded that it was “Nu couché au cossin bleu” – one of Modigliani’s most celebrated erotic portraits of a reclining female nude.

Rybolovlev asked Heller the sale price of this particular Modigliani.  After checking with the seller, Steve Cohen, Heller informed Rybolovlev that the painting had sold for $93 million.[3]

Unbeknownst to Heller, Rybolovlev was actually the “undisclosed” buyer of this very painting.

 

But, Rybolovlev hadal-bulletin paid not $93 million for it.  Instead, he had paid $118 million – a markup of over $22 million – which included a 2% commission of $2.36 million for his art dealer, Yves Bouvier.

Rybolovlev returned to Monaco, where he resides, and filed a complaint against Bouvier, the Swiss art dealer with whom he had a relationship of over a decade.[4]  (Bouvier, also a billionaire, also ran Luxembourg’s Le Freeport until recently.[5]).

The complaint alleges forgery and fraud.  It characterizes Rybolovlev’s relationship with Bouvier as a friendship, within which Bouvier “enjoyed the absolute trust of the buyers and had sole responsibility to carry out the usual verifications, including concerning the price of the work.”  Bouvier denies the charges, claiming that Rybolovlev owes him money for another transaction.  In any event, Bouvier’s attorney clarified that his client and Rybolovlev are certainly not “friends.”[6]

To some degree, Bouvier’s attorney is correct.  At least in New York, art galleries and brokers do not owe a fiduciary duty to collectors, no matter how longstanding or intimate their relationship.

In fact, a recent string of decisions in the state and federal courts of New York demonstrates that collectors must conduct due diligence not just to discern a work’s authenticity[7] but also to determine the market value before making a purchase – even if the purchase is from someone whom they trust.

These decisions illustrate two key points: first, courts are reluctant to get in the middle of a dispute between a collector and his dealer,[8] and; second, just as the “aura” of art is disappearing,[9] so is the willingness of courts to tolerate the gentlemen’s agreements that continue to dominate the notoriously opaque art market.  While galleries owe a fiduciary duty to artists who consign their work to galleries, under the New York Art and Cultural Affairs Law, and may owe a duty to collectors who consign their works when the galleries are acting as agents, no such duty is owed in arm’s-length sales between galleries and collectors.[10] Accordingly, a potential purchaser of artwork must conduct her own inquiry into the authenticity and fair market value of the work.  Moreover, because the art gallery owes no fiduciary duty to a purchaser, it is imperative that any agreement between the two be memorialized in writing.  Indeed, if your decades-old relationship with your art dealer cannot withstand the test of a written agreement, then your art dealer is certainly not your friend.

An Oral Agreement Is Only As Good As The Dealer’s Word

Recently, in McKenzie v. Fishko,[11] Richard F. McKenzie brought suit on behalf of his foundation against his longtime dealer Forum Gallery, run by Robert and Cheryl Fishko, for breach of contract, fraud, and breach of fiduciary duty.  McKenzie claimed that he had purchased more than 100 artworks through Forum Gallery based on two oral agreements: 1) for artists not represented by the gallery, McKenzie paid a 5% commission on purchases “at the best possible price” and 2) for artists represented by the gallery, McKenzie received a 20% discount on purchases where Forum Gallery would act as McKenzie’s agent.

In 2011, McKenzie learned that Forum Gallery had allegedly been inflating the price of the artworks in the latter category, in order to eliminate the 20% discount.  McKenzie also learned from a competitor of Forum Gallery that a Ralph Goings painting which he thought he had purchased from a collector through Forum Gallery had actually been sold to the gallery for much less than “the best possible price” which he was later charged.  Similarly, McKenzie learned that Forum Gallery had paid $1,025,000 for a Norman Rockwell painting that it had purchased on McKenzie’s behalf – though the invoice to McKenzie charged him for almost $200,000 more – with Forum Gallery charging $1,225,000 instead of the purchase price plus 5% commission ($51,250) based on their oral agreement.[12]

In February 2015, a federal judge in the Southern District of New York granted summary judgment to Forum Gallery, dismissing all of McKenzie’s claims.  Specifically, the court found that McKenzie “failed to proffer evidence sufficient to sustain the burden of proof on [his] breach of contract claim,” citing to McKenzie’s vague and inconsistent deposition testimony and his “constantly-shifting conclusory proffers.”[13]  The court also dismissed McKenzie’s general claims sounding in fraud as duplicative of his breach of contract claim.  As for the specific misrepresentations (including the price of the Rockwell painting), the court found McKenzie’s proffers fell short of showing the clear and convincing evidence required to demonstrate fraud, particularly as McKenzie had earlier sworn that the oral agreement as to the 5% commission did not include the Rockwell painting.[14]

Significantly, as for McKenzie’s breach of fiduciary duty claim, to the extent that it was not entirely duplicative of the breach of contract claim, the court found that McKenzie had not proffered sufficient evidence to show that Forum Gallery and its principals owed McKenzie any fiduciary obligations whatsoever.  The court explained that, “‘when parties deal at arms length in a commercial transaction, no relation of confidence or trust sufficient to find the existence of a fiduciary relationship will arise absent extraordinary circumstances.’”[15]  Thus, purchasing over 100 pieces of artwork from someone over the course of two decades – and enough artwork to amass a collection of approximately $200 million housed in a private museum on one’s property[16]  –  does not constitute extraordinary circumstances, no matter how close one feels to his or her art dealer.

Art Purchasers Are Intrinsically Sophisticated Parties – So They Should Consult Equally Sophisticated Attorneys Beforehand

Another recent case illustrates that even where there is a written purchase agreement between a buyer and the art dealer, the buyer may not solely rely on the art dealer’s representations.  In MAFG Art Fund, LLC v. Gagosian,[17] the Supreme Court (Kapnick, J.) granted the Gagosian Gallery’s motion to dismiss the complaint for failure to state a cause of action against it[18] – including breach of contract, breach of implied covenant of good faith and fair dealing, unjust enrichment, and breach of fiduciary duty – but not plaintiffs’ cause of action sounding in fraud, explaining that it could not determine that “plaintiffs’ alleged reliance on defendants’ representations regarding the art market and intrinsic value of particular works of art was per se unreasonable or unjustified.”[19]

The action arose from the plaintiffs’[20] purchase of various sculptures and paintings from defendants Larry Gagosian and the Gagosian Gallery, Inc., including a black granite sculpture titled Popeye by Jeff Koons for a purchase price of $4 million.  At issue were also several “exchange transactions” whereby the plaintiffs acquired artworks from the Gagosian Gallery by paying for the works with a combination of cash and a transfer or consignment to the Gagosian Gallery of other artworks, including the Popeye sculpture.  For example, through the exchange, the plaintiffs acquired Cy Twombly’s Leaving Paphos Ringed With Naves, which they purchased for $10.5 million by paying $250,000 in cash and exchanging four works of art including Popeye, two Willem de Kooning oil paintings, and Roy Lichtenstein’s Brushstrokes in Flight.  In their complaint, however, they alleged that the Gagosian Gallery intentionally suppressed the value of the exchanged works, so that, essentially, the plaintiffs were giving more than they were receiving.

The plaintiffs’ argument as to the suppressed value of Popeye was based on the Gagosian Gallery’s alleged disincentive to resell the sculpture, due to provisions in earlier agreements.  Before Popeye was completed, the parties had entered into a purchase agreement for the anticipated sculpture, whereby plaintiffs were to pay the $4 million purchase price in five installments of $800,000, with the final payment due upon completion of the sculpture.  The plaintiffs certainly knew that the sculpture had not been completed.  What they did not know is that the Gagosian Gallery allegedly did not own the sculpture it was purportedly selling.  Rather, the plaintiffs claimed that “in reality, the Gallery had no rights to the Popeye sculpture at the time the Gallery entered into the MacAndrews Purchase Agreement, as evidenced by a separate but subsequent agreement entered into between the Gallery and Sonnabend Gallery, Inc.”[21]  In this second agreement, Sonnabend represented that Jeff Koons, LLC was “the sole and legal owner of [Popeye]”[22] and that Popeye would be sold to the Gagosian Gallery for a purchase price of $4 million to be paid in five equal payments of $800,000, with the final payment due upon completion.

Most significant, however, was that the Sonnabend Purchase Agreement provided that if Gagosian Gallery sold Popeye for a “Profit” to a third party within two years after the date of the Agreement, then the Gallery would pay Jeff Koons “an amount equal to 70% of such Profit.” The Sonnabend Purchase Agreement defined “Profit” as “the amount by which the Work’s price in a Secondary Sale exceeds the Purchase Price”[23] of $4 million.  If the Gagosian Gallery sold Popeye to a third party and subsequently resold the sculpture within 5 years of its original delivery to such third party, the Gagosian Gallery agreed to pay a 50% resale commission to Jeff Koons, LLC.  The plaintiffs claimed that this effectively destroyed their ability to enjoy any appreciation on Popeye, as Koons’ works typically appreciate immediately after delivery to the first purchaser but the Gagosian Gallery, as Koons’ exclusive dealer, would be unwilling to be involved in any future resale of Popeye while the profit-sharing provisions of the Sonnabend Purchase Agreement were still in effect. Essentially, the plaintiffs argued that Gagosian’s alleged refusal to be involved in any further sales of Popeye suppressed the true value of the sculpture.  Without Gagosian, the plaintiffs would not be able to realize as high of a price on the resale of Popeye.   The motion court found plaintiffs’ argument unavailing, as plaintiffs’ agreement with the Gagosian Gallery contained no such obligation on the Gagosian Gallery to be involved in the future resale of Popeye.  Nor did the purchase agreement represent that plaintiffs had a right and expectation that they could sell Popeye back to the Gagosian Gallery or exchange it for other works of art.

The Appellate Division, First Department, largely agreed with the motion court, but it went one step further, by ruling that the Gagosian Gallery’s motion to dismiss the fraud cause of action should also have been granted, thereby dismissing the entirety of plaintiffs’ complaint. The First Department determined that plaintiffs’ complaint “failed to state a cause of action for fraud because plaintiffs did not allege justifiable reliance . . . As a matter of law, these sophisticated plaintiffs cannot demonstrate reasonable reliance because they conducted no due diligence; for example, they did not ask defendants, ‘Show us your market data’.”[24]  Nor could the plaintiffs rely on the Gagosian Gallery’s alleged misrepresentations as to the value of certain artworks, because “statements about the value of art constitute ‘nonactionable opinion’”[25] and such opinions do not provide a basis for a fraud claim.

The MAFG Art Fund case is significant in that, even despite such purported double-dealing by an art gallery, the courts were not interested in getting involved in the dispute.  Tellingly, the underlying motions were based on plaintiffs’ failure to state a cause of action, and the Appellate Division granted even further relief to the Gagosian Gallery than the motion court did.  Moreover, the case demonstrates that a buyer must conduct her own due diligence to determine the market value of the work and cannot rely on any representations made or implied by the seller.  The First Department highlighted that the plaintiffs were sophisticated purchasers of art, and that, essentially, they should have known better.  Indeed, if a party is spending millions of dollars on a work, that party should spare no expense in protecting itself – by consulting an independent art adviser and/or an attorney to aid in drafting the purchase agreement.

To the extent that the buyer is relying on any unspoken assumptions, she should be certain to include them in a written contract.  In this case, the buyer’s unspoken assumption – and indeed, the likely assumption of the art world – is that the Gagosian Gallery would be involved in the future sale of the multimillion dollar artwork, whose artist it exclusively represents.  And yet, neither court was willing to read such an assumption into the parties’ agreement.

Fair Market Value May Be What You Pay For

Last, in a case of buyer’s remorse, Arthur Properties, S.A. v. ABA Gallery, Inc.,[26] Oleksandr Savchuk acting through Arthur Properties bought eighteen paintings from defendant ABA Gallery, Inc., for a total of $9.58 million – sight unseen.  A few years later, Savchuk brought suit alleging that four of the paintings were not authentic and that ABA Gallery’s principal, Anatoly Bekkerman, had misrepresented the “fair market value” of many of the works.  For example, Savchuk alleged that one of the paintings – Seascape with Peter the Great by Ivan Aivazovsky, the great Armenian master painter during the Russian Empire from the Cimmerian Art School[27] – was worth only $800,000, even though Savchuk paid $4 million for the work.[28]

The ABA Gallery is located in New York and specializes in 19th and 20th century Russian art.  Savchuk claimed that in 2006 and 2007, Bekkermen sought to persuade him to purchase artworks located in the ABA Gallery, over the course of “‘numerous’ but entirely unspecified communications, phone calls and personal visits.”[29]  Savchuk also claimed that while he himself had no expertise in art, Bekkerman allegedly represented to him that he was an honest dealer and expert on Russian art, and that he would never risk the reputation of his daughter, who worked for Sotheby’s, by offering paintings that were inauthentic or sold for more than their fair market value.  Savchuk ultimately trusted Bekkerman and purchased several paintings without even seeing them for $9.58 million.  After taking delivery of the paintings, Savchuk claimed that he discovered that four of them were inauthentic and that the prices he had paid for the other paintings were significantly higher than their market value.

In 2011, the federal court (Kaplan, J.) dismissed Savchuk’s complaint, which alleged breach of contract, unjust enrichment, fraudulent inducement, and negligent misrepresentation, among other claims.  With regard to the breach of contract claims, the court noted that “[b]y definition, the fair market value of an asset such as a work of art, a used car, a piece of real estate, and many other assets is ‘the price that a willing buyer and a willing seller would agree to in an arm’s length transaction.’”[30]  The court noted that Savchuk was under no compulsion to buy the paintings, and thus, the fair market value of the paintings is what Savchuk willingly and voluntarily paid for them.

With regard to the negligent misrepresentation claim, the court determined that Savchuk did not have a special relationship with Bekkerman and the ABA Gallery, despite that the latter two had expertise in and superior knowledge of Russian art.  A negligent misrepresentation claim, under New York law, requires: (1) carelessness in imparting words, (2) upon which others were expected to rely, (3) and upon which they did act or failed to act, (4) to their damage.  Such a claim also requires that a “special relationship” exist between the parties such that a duty of care is imposed on the defendant to accurately convey information to the plaintiff.  Unfortunately for Savchuk, courts in the Southern District of New York have found that “allegations of superior knowledge of expertise in the art field are per se insufficient to establish the existence of a fiduciary relationship.”[31] Thus, no matter how much Bekkerman knew about Russian art and how little Savchuk claimed to know, there did not exist a special relationship between the parties.  Accordingly, the district court dismissed Savchuk’s negligent misrepresentation claim.

Conclusion – The Takeaway for Rybolovlev and Others

Perhaps Swiss courts look more favorably upon millionaires, billionaires, and those sophisticated and rich enough to compete in today’s art market than do the courts in this State.  If Rybolovlev’s claims were governed by New York law, the outcome would not be favorable for him.  From the recent decisions surveyed above, it is clear that New York state and federal courts will not recognize a fiduciary relationship between a collector and her art dealer – no matter how close the relationship has grown or how disproportionate the art dealer’s expertise.  Simply put, if someone is in a position to purchase millions of dollars worth of artwork in New York, then he or she is per se a sophisticated party.  As such, that party should have enough sophistication to also: 1) hire an attorney to review her agreements with the seller; 2) put any provisions, no matter how obvious, in writing, and; 3) conduct due diligence as to a work’s authenticity or market value by enlisting the help of art advisors or appraisers – and of course, she should inspect the paintings in person or hire someone else to do so.  Above all, a purchaser of art must remember that no court in New York State will find that your art dealer is your friend.

Footnotes

1. Rory Mulholland, Monaco FC Owner Rybolovlev among Alleged Victims of Huge Art Scam, The Telegraph, (Feb. 26, 2014, 8:23 PM), http://www.telegraph.co.uk/news/worldnews/europe/monaco/11436640/Swiss-businessman-Yves-Bouvier-arrested-for-art-fraud.html.

2. Robert Frank, A Multimillion-Dollar Markup on a Modigiliani, N.Y. Times (Apr. 4, 2015), http://www.nytimes.com/2015/04/05/business/a-multimillion-dollar-markup-on-a-modigliani.html?_r=0.

3. See supra note 2.

4. Bouvier has sold Rybololev at least forty other “major works.”  The complaint also focuses on the markup of Leonardo Da Vinci’s Salvator Mundi painting, for which Bouvier allegedly pocketed $52.5 million, after purchasing it for $75 million and flipping it to Rybolovlev for $127.5 million including his fees. See Agustino Fontevecchia, Steve Cohen’s Modigiliani in the Middle of an Art Market War: Billionaire Ryvolovlev vs Yves Bouvier, Forbes (Mar. 12, 2015, 11:59 PM), http://www.forbes.com/sites/afontevecchia/2015/03/12/steve-cohens-modigliani-in-the-middle-of-an-art-market-war-billionaire-rybolovlev-vs-yves-bouvier/.

5. Sarah Cascone, Accused of Art Fraud, Yves Bouvier Steps Down from Le Freeport, Artnet (Apr. 13, 2015), https://news.artnet.com/market/yves-bouvier-steps-down-at-le-freeport-287388.

6.  See supra note 2.

7. See, e.g., ACA Galleries, Inc. v. Kinney, 928 F. Supp. 2d 699 (S.D.N.Y. 2013) aff’d, 552 F. App’x 24 (2d Cir. 2014) (determining buyer could not rely on alleged misrepresentations by seller regarding authenticity of a painting by Milton Avery); Foxley v. Sotheby’s Inc., 893 F. Supp. 1224 (S.D.N.Y. 1995).  For an informative discussion of fiduciary duty, authenticity, and price-fixing from an auction house perspective, see Judith B. Prowda, Visual Arts and the Law: A Handbook for Professionals 183-202 (2013).

8. See Amelia K. Brankov, Court Dismisses Art Collector’s Overcharge Complaint, Private Art Investor (Mar. 31, 2015), http://www.privateartinvestor.com/art-law-2/court-dismisses-art-collectors-overcharge-complaint/.

9. Walter Benjamin, The Work of Art in the Mechanical Age (1936), available at https://www.marxists.org/reference/subject/philosophy/works/ge/benjamin.htm

10. New York Art and Cultural Affairs Law § 12.01, available at http://codes.lp.findlaw.com/nycode/ACA/C/12/12.01 states: “Notwithstanding any custom, practice or usage of the trade, any provision of the uniform commercial code or any other law, statute, requirement or rule, or any agreement, note, memorandum or writing to the contrary: (a) Whenever an artist or craftsperson, his heirs or personal representatives, delivers or causes to be delivered a work of fine art, craft or a print of his own creation to an art merchant for the purpose of exhibition and/or sale on a commission, fee or other basis of compensation, the delivery to and acceptance thereof by the art merchant establishes a consignor/consignee relationship as between such artist or craftsperson and such art merchant with respect to the said work, and: (i) such consignee shall thereafter be deemed to be the agent of such consignor with respect to the said work; (ii) such work is trust property in the hands of the consignee for the benefit of the consignor; (iii) any proceeds from the sale of such work are trust funds in the hands of the consignee for the benefit of the consignor; (iv) such work shall remain trust property notwithstanding its purchase by the consignee for his own account until the price is paid in full to the consignor . . . .”

11. No. 12CV7297-LTS-KNF, 2015 WL 685927 (S.D.N.Y. Feb. 13, 2015)

12. Amelia K. Brankov, Court Dismisses Art Collector’s Overcharge Complaint, Private Art Investor (Mar. 31, 2015), http://www.privateartinvestor.com/art-law-2/court-dismisses-art-collectors-overcharge-complaint/.

13. McKenzie v. Fishko, No. 12CV7297-LTS-KNF, 2015 WL 685927, at *7 (S.D.N.Y. Feb. 13, 2015).

14. See id. at *8.

15. Id. at *9 (citing Pan Am Corp v. Delta Air Lines, Inc., 175 B.R. 438, 511 (S.D.N.Y. 1994)). 

16. See id. at *1.

17. 123 A.D.3d 458 (1st Dep’t 2014). 

18. Mafg Art Fund, LLC v. Gagosian, 2014 WL 359341 (Sup. Ct. N.Y. Cnty 2014), aff’d as modified by, 123 A.D.3d 458 (1st Dep’t 2014). 
19. Id.

20. MAFG Art Fund, LLC and MacAndrews & Forbes Group LLC.

21. Mafg Art Fund, LLC v. Gagosian, 2014 WL 359341 (Sup. Ct. N.Y. Cnty 2014), aff’d as modified by, 123 A.D.3d 458 (1st Dep’t 2014).

22. Id.

23. Id.

24. Mafg Art Fund, LLC v. Gagosian, 123 A.D.3d 458, 460 (1st Dep’t 2014) (internal citations omitted).

25. Id.

26. 2011 WL 5910192 (S.D.N.Y. Nov. 28, 2011).

27. Aivazovsky is considered to be one of the greatest Russian marine painters of the 19th century, whose work is housed in dozens of Russian museums and featured prominently (somewhat ironically given the geopolitical history of the 20th century) in the Presidential Palace in Turkey, once owned by the Kassabian merchant family.  See Aivazovsky’s Works on Sea at Naval Museum, Hurriyet Daily News, http://www.hurriyetdailynews.com/aivazovskys-works-on-sea-at-naval-museum.aspx?pageID=238&nID=60235&NewsCatID=385.

28. Julie Zeveloff, New York Art Gallery Sued for Selling 46.5 Million in Phony and Overvalued Russian Art, Business Insider (July 5, 2011, 2:06 PM), http://www.businessinsider.com/art-gallery-sued-over-phony-russian-art-2011-7.

29. Arthur Properties, S.A. v. ABA Gallery, Inc., No. 11 CIV. 4409 LAK, 2011 WL 5910192, at *1 (S.D.N.Y. Nov. 28, 2011).

30. Id. at *3.

31. Id. at *5; see also Granat v. Center Art Galleries—Hawaii Inc., No. 91 CIV. 7252, 1993 WL 403977, at *6 (S.D.N.Y. Oct.6, 1993) (citing Mechigian v. Art Capital Corp., 612 F.Supp. 1421, 1431 (S.D.N.Y.1985)).

*****

Yelena Ambartsumian earned her J.D. from Fordham Law School (2013), cum laude, and her B.A. from Fordham College at Lincoln Center (2010), Honors Program, cum laude with Departmental Honors.  She previously worked as a litigation associate in an appellate boutique in Manhattan and served as a copyright teaching assistant to Fordham Law Professor, Hugh Hansen.

 

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  • Nina Bompart

    Excellent article! Very well written!

     
     
     
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