Five Art Market Lessons from Recent Case Law

By Daniel S. Kokhba, Esq.

A growing number of investors have turned their attention to the art market. There, they are greeted by advisors, appraisers, brokers, experts and insurers. Art collectors and art investors hop from gallery to auction house to website, and their motives are as varied as the prices and mediums of the art and the structures of the transactions. In the midst of this exhilarating and ever changing marketplace, a review of recent case law identifies five fundamental lessons to keep in mind in navigating the art world.

I.  ACA Galleries, Inc. v. Kinney Lesson: Investigate before you buy 

A real estate buyer is unlikely to close on a sale without proper investigation. Such investigation may include careful and repeated visits, professional inspections, review of board minutes and title reports, and securing title and homeowner’s insurance. By contrast, an art buyer may skip critical investigatory steps at great risk of loss. Such risk can be hedged by performing adequate due diligence, including but not limited to, independent professional inspection, review of the provenance, attorney review of the contract and securing adequate insurance. ACA Galleries, Inc. v. Kinney, 2013 WL 638835 (S.D.N.Y. 2013), ACA Galleries, Inc. (“ACA”) sued an art seller for selling a forged Milton Avery painting. The District Court granted defendant’s motion for summary judgment and dismissed the fraud claims, holding that “Kinney’s motion for summary judgment on ACA’s fraud claims must be granted because, as a matter of New York law, ACA’s reliance on any representations made by Kinney was unreasonable and thus ACA’s fraud claims fail.” Id. at *3. ACA cannot establish justifiable reliance because it had the opportunity to fully investigate the authenticity of the painting but failed to do so.” Id. at *3.

Here, the Court recognized that ACA “failed to avail itself of the opportunity to have the painting inspected by the Avery Foundation or another expert prior to purchase…  ACA is in the business of buying and selling art. Such a business must be cognizant of forgery of the works of well known artists like Avery.” Id. at *4. The Court’s reasoning would be wisely followed by all buyers in an effort to avoid both purchasing a forged work of art and finding themselves without legal recourse in such an event.

II. Craig Robins v. Zwirner. Lesson: Get it in writing

In Craig Robins v. Zwirner, 713 F.Supp.2d 367 (S.D.N.Y. 2010), plaintiff sued an art dealer claiming the dealer reneged on a promise to sell certain paintings by the artist Marlene Dumas. The Court noted “plaintiff has not come forward with any writing signed by Zwirner promising to sell paintings to Robins. Absent a writing signed by Zwirner, enforcement of the oral Gallery Agreement is barred.” Id. at 376. The lesson here is clear: if you feel strongly about that artist or her artwork, get the promise to sell in writing.

“Under New York law a contract for the sale of goods for the price of $500 or more is not enforceable without a contemporaneous writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought.” Craig Robins v. Zwirner, 713 F.Supp.2d 367, 375 (S.D.N.Y. 2010); N.Y.U.C.C §2-201(1); Hoffman v. Boone, 708 F.Supp 78, 80 (S.D.N.Y. 1989). “However, where a service component of a contract ‘predominates’ over the incidental sale of personal property, an oral agreement is barred by the Statute of Frauds only if it is incapable of being performed within one year.” Id.; N.Y. Gen. Oblig L. § 5-701. Practically, not having the transaction memorialized in a detailed and signed writing invites litigation.

III. Flaum v. Great Northern Insurance Company. Lesson: Review the policy for adequate coverage

While insurance can protect the insured against certain losses, it is imperative to review the applicable policy and ascertain if a specific risk is actually covered by it. As illustrated by the case below, one cannot equate insurance with universal protection against all losses.

In Flaum v. Great Northern Insurance Company, 28 Misc.3d 1042 (Sup. Ct., Westchester, 2010), Flaum, as an insured, brought an action against an insurer alleging breach of an insurance policy based on the Company’s failure to provide coverage for a painting that Flaum claimed was a forgery. The Court noted that “the language of the Valuable Article’s Coverage clearly and unambiguously state that ‘all risk of physical loss’ is covered under the terms of the policy. Here, however, plaintiffs did not sustain a physical loss. There is no dispute that the painting originally attributed to the famous French painter Pierre-Auguste Renoir still hangs in [plaintiff’s] primary residence in substantially the same condition as when it was purchased.  In addition there is no claim that [this painting] has been lost, damaged or destroyed”. Id. at 1045.  It just happens to be a fake.

This case clearly demonstrates that an insured should carefully review the terms of an insurance policy obtained to protect his investments, in case something believed authentic turns out to be a fake.

IV. Schoeps v. Andrew Lloyd Webber Art Foundation, Inc. Lesson: If a lawsuit is initiated, make sure the proper party brings the case

Notwithstanding, litigation may be needed due to, inter alia, tortious conduct and/or breach of contract. Before considering taking legal action, it is important to determine who is the proper party to proceed with the claim.

In Schoeps v. Andrew Lloyd Webber Art Foundation, Inc., 66 A.D.3d 137 (1st Dept. 2009) the Court affirmed an order dismissing the complaint. The court held that a beneficiary of an estate may not act on behalf of the estate, instead any such moving party has to be appointed a representative first.

While a claimant may have a beneficial interest in the claim, standing may rest with a particular person or require that this person obtains authority to proceed from the Court. Failure to consider this procedural step can lead to delay and even dismissal of valid claims.

V. Grosz v. Museum of Modern Art. Lesson: Remember about the statute of limitations – even when discussing settlement

It is imperative that if a lawsuit is inevitable, that it is filed timely. If a claim is filed outside of the applicable statute of limitations it may be dismissed with prejudice. A common misconception is that settlement discussions alone toll the statute of limitations. In fact, they do not.

To protect a valid claim from expiring, one may file a summons and complaint to preserve rights to sue which could also apply additional leverage in settlement negotiations. If the negotiations are fruitful, the litigation can be discontinued upon securing a written and signed settlement agreement.  If they are not, claimant’s rights are preserved with timely filing.

The mere existence of settlement negotiations is insufficient to equitably toll the statute of limitations. Grosz v. Museum of Modern Art, 403 Fed. Appx 575 (2nd Cir. 2010).  According to Grosz, as soon as a claim arises it may be prudent to assess what claims are viable and what statute of limitations period applies. Should a lawsuit be required, it should be timely filed to avoid dismissal on that ground.

* * *

In conclusion, this survey of recent case law confirms that good practices of navigating the art market are far from universally learned, and these lessons warrant attention. Doing so may help art collectors both before and after art law issues arise.

About the Author

Daniel S. Kokhba, Esq. is a Partner at Kantor Davidoff, Wolfe, Mandelker, Twomey & Gallanty, P.C. and focuses his practice on commercial law, employment law and art law.  He may be reached at Kokhba@kantordavidoff.com or 212-682-8383

Disclaimer

This article is intended as general information, not legal advice, and is no substitute for seeking representation.

2 thoughts on “Five Art Market Lessons from Recent Case Law

  1. I can't believe I'm the first person commenting on this summary! I found this article illuminating…and timely, given the appraisal assignment I'm charged with at the moment; thank you!

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