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