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

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

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