Grossman LLP | <strong >Court Rules On Summary Judgment Motions In Case Over Keith Haring Deal That Fell Apart, </strong ><strong >Issuing Some Helpful Reminders For Dealers and Collectors</strong >
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  • Court Rules On Summary Judgment Motions In Case Over Keith Haring Deal That Fell Apart, Issuing Some Helpful Reminders For Dealers and Collectors
    In late December, a New York state court granted summary judgment in a dispute over an art deal that fell apart.  The decision is likely to be of interest to many dealers and collectors, as it addresses important contract and agency law issues, against a backdrop of dynamics that are not uncommon in art transactions. 
    The dispute arises out of a failed deal regarding a Keith Haring work.  In late 2016, art collector and financier Asher Edelman of Edelman Arts (“Edelman”) viewed the work, which was being offered for sale by dealer Lio Malca (doing business as New York Art World, LLC).  Edelman’s plan was to resell the Haring work, along with four other works, to an end buyer (who was representing “a Middle Eastern royal family”).  At the viewing, Edelman told Malca verbally that they had a deal, and asked Malca to send him an invoice for $5 million for the Haring.  Malca did so, noting that payment was due "upon receipt” and asking Edelman to forward a resale certificate "if all is in order with the [I]nvoice”; Edelman responded by providing his signed resale certificate (which identified him as the “purchaser” of the work for resale). 
    But the invoice went unpaid, with Edelman explaining that he was having problems getting the end buyer to pay him in a timely manner.  Just under a month after the invoice was issued, Edelman purported to “cancel” the transaction because he had not been paid by the end buyer.  Malca gave Edelman more time to “try to work things out” with the end buyer, but eventually threatened to enforce the contract in court. 
    Malca also eventually opted to transfer the work to a different entity, SL Fine Art, which in turn consigned the work to Christie’s, to be auctioned on terms that included giving SL Fine Art a guaranteed price of $4 million.  The work hammered at $3.5 million at a November 2017 auction, so Christie’s paid SL Fine Art the guaranteed $4 million.  
    Edelman filed this lawsuit in 2018 in New York state court, seeking a declaration that he was not liable for the amount of the invoice.  Malca in response asserted counterclaims for breach of contract and account stated.  As damages, Malca sought $1 million—the difference between the $5 million Edelman would have paid and the $4 million that Christie’s ended up paying for the work. 
    After discovery, both sides moved for summary judgment.  See Index No. 652017/2018 (N.Y. County).  And in late December, the court ruled in favor of Malca, awarding damages of $1,000,000, plus interest running from the date the suit was filed. 
    The court’s decision first focused on the elements of Malca’s breach of contract claim, and held that Malca had made an adequate showing that the parties had reached a binding agreement.  Generally, under New York law, to establish the existence of an enforceable agreement, a plaintiff must establish an offer, acceptance of the offer, consideration, mutual assent, and an intent to be bound; the parties must have a meeting of the minds on all essential terms.  Here, Edelman told Malca they had a deal.  Malca sent the invoice, and asked Edelman to reply with an executed resale certificate, which he did, forwarding a signed document that identified Edelman Arts as the "purchaser" "for resale." 
    Edelman sought to argue, on summary judgment, that he told Malca he was cancelling the contract less than a month after the invoice.  But the court disagreed, noting that generally speaking, a party cannot unilaterally cancel a contract after it is formed, and nothing in the invoice gave him that right.  And while Edelman testified that it was his understanding that
    "[t]radition in the industry" permitted such a cancellation, the court was unpersuaded, calling that idea “ill-defined” and insufficient to avoid liability.  Edelman had also argued that Malca led him to believe the cancellation was effective, but the court again disagreed, noting that, at most, the parties’ correspondence reflected Malca’s willingness to give Edelman an extension of time to pay, and that neither party actually considered the cancellation effective.  (Indeed, Edelman had, at one point, written to the representative for his would-be ultimate buyer, explaining that the buyer’s decision to back out had “an impossible situation for me which requires that I pay for these works and therefore that your client pays me.”)
    Edelman’s next defense to Malca’s contract claim was that he was merely acting as the agent for the end buyer, and under agency law, an agent for a “disclosed principal” is generally not liable on a contract.  The court, however, rejected the premise that Edelman was anyone’s agent in the deal.  An agency relationship arises when one entity manifests its consent that an agent can act on its behalf.  Here, the court noted there was no agency agreement between Edelman and the end buyers or their representative; on the contrary, correspondence indicated that Edelman was envisioning engaging in an arm's-length resale transaction with the ultimate buyers.  The resale certificate identified Edelman’s entity as the buyer, and documents in the case included an invoice to the representative of the would-be buyers, seeking $6 million for the work.  The court concluded, “By choosing to structure the deal with Malca such that he could resell the Artwork at a higher price to the Ultimate Buyers, Edelman bore the risk of not being able to consummate a resale transaction with the Ultimate Buyers. Edelman Arts cannot now shift that risk onto Malca by invoking, with conclusory claims, an agency relationship.”
    Again, this ruling is noteworthy in an industry where it is often less than crystal-clear who is “representing” whom in a transaction.  Is a dealer acting as the “agent,” in a legal sense, for the ultimate buyer or seller in a deal?  Or is the dealer acting purely on his or her own account, buying a work from someone and then re-selling it to someone else at a profit in a separate arms-length transaction?  These are questions that have plagued litigants in many art disputes (see here and here for just a couple of examples).  It’s also important to understand that such questions are not resolved simply by looking at how various parties label their own or others’ roles; rather, a court will look for specific facts that actually demonstrate the existence of a real agency relationship.  
    Finally, Edelman sought to undermine Malca’s contract claim on grounds that it was actually unclear who really owned the work (which apparently had passed through several entities and had at least one other part-owner at the time of the aborted deal, and which had been transferred to another entity before the Christie’s auction).  But the court held that the relevant question was only whether the counter-party in the case, New York Art World, had authority to sell the work—and there was no indication that it lacked such authority.   
    Having rejected each of Edelman’s defenses to the breach-of-contract claim, the court quickly disposed of all the other pending claims.  Malca’s “account stated” claim was dismissed as duplicative of the contract claim, and Edelman’s claims for declaratory judgment could not stand in light of the court’s conclusion that the invoice was enforceable. 
    This decision contains some strong reminders for anyone operating in the art market.
    First, as a matter of contract formation, this case demonstrates that legally-binding contractual obligations can be created even when there is nothing resembling a formal or comprehensive written “contract” document.  Under the right circumstances, an enforceable contract may even arise through a seemingly-informal course of dealing including oral conversations, emails, and bare-bones invoices.
    A second important takeaway here is that a party cannot assume it has the right to walk away from an art deal without consequences—even if a massive complication arises.  It’s possible to draft contracts to reserve cancellation rights in the event of certain contingencies, or to clarify that liability is conditioned on certain events occurring, but this should be done carefully with the aid of experienced legal counsel.  This reminder is particularly important in an industry where deals often involve multiple intermediaries between an end buyer and an end seller; the intermediaries need to understand what their risks and obligations might be if someone else in the chain fails to follow through.
    Further, it is increasingly common in the art world to see transactions in which two or more owners “partner” to buy a work, such that each owns only a partial interest in the artwork.  These circumstances can, in some cases, create complex issues (see here, here and here for examples).  But as this case shows, one key question in any deal involving partial ownership interests is that of authority—who has the power to make decisions about and take actions regarding the work in a way that binds the other partial owners?  Anyone buying a partial interest in an artwork—or buying a work from a group or consortium of sellers who co-own it—needs to understand how such partial interests impact their risks and obligations. 
    This is far from the first time this blog has written about litigation involving an art deal gone sour—and it surely will not be the last time.  But this case manages to touch on a number of issues and dynamics that are frequently present in high-value art transactions.  Some of these issues can sometimes be mitigated or avoided if parties insist on more comprehensive contracting at the outset of a deal.  And at the very least, these are issues that a savvy dealer or collector should consider and discuss with counsel when planning their next move. 
    ATTORNEY: Kate Lucas
    CATEGORIES: AuctionContracts