Dispute Involving Art "Investments" Provides Another Cautionary Tale About Pre-Sale Diligence
09/28/2016An art investor has initiated legal proceedings in New York state court against a Manhattan gallery she says she “trusted and relied upon” to select artworks as investments, claiming that she now has reason to question key details (like authenticity and purchase price) of several transactions with the gallery. As is all too common, the parties apparently engaged in multiple art deals—here, involving over a hundred works, over the course of several years—with minimal documentation. And now that their relationship has deteriorated, a court may have the difficult task of adjudicating the dispute without a written contract in place to guide its analysis.
The disgruntled investor is Oregon resident Nira Levine, who, according to court filings, buys and sells art both in her individual capacity and as the president and majority shareholder of an investment entity, NLR Unlimited. She claims that, for a period of several years between about 2002 and 2008, she invested “approximately $874,000” via multiple art transactions with the New York-based Woodward Gallery. See Docket No. 155481/2016 (Sup. Ct. N.Y. Co.). Sometimes, the Gallery bought works on behalf of Levine and NLR “as investments,” where Levine or NLR would fund the acquisition, and the Gallery would store, market, and exhibit a work; if and when it was sold, the Levine parties would recoup their purchase price and the parties would split the profit 50/50. Other times, the Gallery and the Levine parties would jointly purchase a work (each contributing a portion of the purchase price), and would likewise split the profits once the work was resold. The Levine parties admit that they “never inspected” any of the works, instead relying upon the Gallery’s representations, and “never insisted on receiving documentation substantiating the financial details of the various transactions the parties engaged in.”
This casual course of dealing continued for years, until, in April 2014, Levine learned details that called into question the Gallery’s veracity regarding one of their deals. Back in 2007, Levine says she agreed to fund the Gallery’s $28,000 purchase on her behalf of a portfolio of works. But in 2014, she learned through another art dealer that in fact, the Gallery had paid less than $28,000 for the portfolio. She believes that the Gallery misrepresented the purchase price “in order to increase their profit in complete contravention of the parties’ oral understanding.”
She also became concerned about a set of ninety Warhol prints she purchased jointly with the Gallery in 2008. She claims that in 2014, she learned for the first time that the prints had had to be sent to a restorer for repairs. Upon further questioning, she came to suspect that in fact that Gallery had already owned the prints for years prior to 2008, and that there may be in fact fewer than 90 prints (and, she points out, she has no way of knowing how much the Gallery really paid for the works). She further claims that the Gallery altered the condition report and proposal from the restorer, and misrepresented whether the works had been authenticated by the Warhol Foundation’s art authentication board.
According to court filings, after these revelations regarding the 2007 portfolio purchase and the Warhol prints, the Levine parties now “fear[s] the worst—that they had been defrauded over a period of many years,” and they now want to reexamine all their previous dealings with the Gallery. Levine has not asserted actual claims against the Gallery yet; rather, the Levine parties’ filing says they “intend to prosecute a civil action . . . for breach of contract, breach of fiduciary duty, conversion and fraud, among other causes of action.” For now, they have initiated court proceedings seeking discovery of documents related to a long list of transactions (involving artworks by boldface names like Warhol, Basquiat, Calder, Haring, Picasso, Lichtenstein, and Matisse, among many others) between the Levine parties and the Gallery, in order to help them “frame a cogent complaint.” It seems possible that the parties may be trying to reach a settlement; they have twice agreed to adjourn hearings scheduled by the court. But in statements to the press, the Gallery has “emphatically” denied Levine’s allegations, and specifically rejected her insinuation that the Warhol prints are fake.
If something about this case seems familiar, it is because unfortunately these sorts of disputes surface with regularity in the largely unregulated art market. This blog has written about many cases in which a buyer of art puts significant trust in a dealer and engages in minimal pre-sale due diligence before consummating an art deal—or even many art deals—with little or no documentation. In fact, Levine’s anecdote about how her suspicions became aroused—when she learned that the Gallery had paid less for a work than it had charged her to buy it, and pocketed the difference—calls to mind (albeit on a smaller scale) the ongoing dispute between Russian billionaire Dmitry Rybolovlev and his onetime art dealer, Swiss businessman Yves Bouvier, who had helped Rybolovlev amass a huge art collection. (There, the parties had a spectacular falling-out after Rybolovlev learned, by chance, that Bouvier had charged him a significant markup on a Modigliani; Rybolovlev thought that Bouvier was his “agent” and was charging only a small fixed fee for his assistance. Bouvier, for his part, has said that he was an independent seller who was free to buy and resell art for as much as the market would bear.)
And as we’ve seen in other cases, courts are often less sympathetic to plaintiffs who are themselves sophisticated investors in art. Here, as the Woodward Gallery has taken pains to emphasize to the press, Levine was apparently an art dealer herself and was treating these works as “investments,” yet she apparently did not insist on doing any of her own diligence, nor did she ask for much in the way of documentation, including any formal contract memorializing their agreement. While the case has not yet ripened into full-blown lawsuit, it stands as a stark reminder that art buyers who merely trust a dealer (without attempting to verify or memorialize important features of an art deal) may face an uphill legal battle if they later come to feel that their trust was misplaced.
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