Grossman LLP | Following Summary Judgment Defeat, Knoedler Defendants Settle With Another Group of Plaintiffs
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  • Following Summary Judgment Defeat, Knoedler Defendants Settle With Another Group of Plaintiffs
    This blog has written often about the Knoedler scandal, which exploded in 2011 when a once-venerable art gallery closed following revelations that, over the course of more than a decade, it had sold about $60 million worth of artworks—purported to be by Pollock, Motherwell, Rothko, de Kooning, and other giants of the Abstract Expressionist movement—that later turned out to be forgeries.  Our previous posts contain more detail, but in short, the works all came to Knoedler through a Long Island art dealer, Glafira Rosales, who claimed to represent an anonymous collector liquidating a collection of previously-unknown masterworks.  It turned out that the seller was a fiction, and the works were actually created by a little-known artist in Queens at the behest of Rosales (who in 2013 pled guilty to a litany of federal crimes).

    Since the Gallery’s closure, bilked collectors have been pursuing various civil claims to recover the money they paid for these fakes.  Several of the buyers’ cases have settled out of court, but others are ongoing.  About two years ago, two groups of plaintiffs—the De Sole plaintiffs, led by current Sotheby’s chair Domenico De Sole, and the Howard plaintiffs, led by private equity manager and art collector John Howard—cleared an initial litigation hurdle by defeating defendants’ motions to dismiss their claims.  In January of 2015, another plaintiff, Frank J. Fertitta III, prevailed against a motion to dismiss.  See Fertitta v. Knoedler Gallery, LLC, No. 14-CV-2259 JPO, 2015 WL 374968  (S.D.N.Y. Jan. 29, 2015) (allowing most claims, including those filed against Rothko expert Oliver Wick, to proceed to discovery).

    And this fall, a federal judge in the Southern District of New York denied summary judgment for the defendants in the De Sole and Howard cases (S.D.N.Y. Docket Nos. 12-CV- 2313 and 12-CV-5263 respectively), and set a trial date for January.  De Sole v. Knoedler Gallery, LLC, 2015 WL 5918458, (S.D.N.Y. Oct. 9, 2015) (ruling on defendants’ motions for summary judgment).  The defendants had argued that they were entitled to summary judgment on the fraud claims because Knoedler’s director, Ann Freedman, had not acted recklessly or with intent to deceive, and because plaintiffs had not demonstrated that their reliance on the defendants was justifiable.  The court disagreed, noting the shifting stories concerning provenance; Rosales’ unwillingness to share information about the purported source of the paintings or to sign a statement representing that the works were authentic; and the absence of any documentation concerning the paintings.  And while Freedman had pointed to experts’ opinions about the works, the court found material issues of fact about what information Freedman had provided to the experts as well as other questions regarding their involvement.

    On the issue of reasonable reliance, the court pointed to the fact that the buyers had received written confirmation of the representations Freedman made about the works, and noted that Knoedler’s sterling reputation lent credibility to the assertions.  The court also emphasized that reasonable reliance is usually an issue for trial, and held that, even assuming that the buyers might have theoretically been able to take steps to discover the truth, the record suggested that any such discovery would be possible “only with extraordinary effort or great difficulty.”  The court also held that the plaintiffs’ RICO claims, breach of warranty claims, and unilateral and mutual mistake claims could go to a jury.  The statute of limitations for De Sole’s warranty claim under the UCC had run; but the court ruled that equitable tolling could apply to keep those claims alive.  It noted that, more than three years after the sale at issue was over, Freedman provided the buyer (at the buyer’s request, for insurance purposes) with a letter representing that the purported “Rothko” they had bought was worth $9 million, effectively reaffirming the authenticity of the Rothko.

    The court did grant summary judgment on several claims against defendant Michael Hammer, the owner of the entity that owns Knoedler, holding that a jury “could not conclude that Hammer was aware of an ongoing fraud scheme at Knoedler.”  It also granted summary judgment on plaintiffs’ claims against a lower-level gallery employee, holding that plaintiffs failed to offer “more than speculation and innuendo” that he must have known the works were forgeries.  The court did, however, uphold several claims against the corporate entity owned by Hammer, as a possible alter ego of Knoedler.

    Following October’s summary judgment ruling, the art world readied for the January trial in the De Sole and Howard cases.  (The Fertitta case is also ongoing, and discovery is underway.)  But earlier this month, the Knoedler defendants reached a settlement with the Howard plaintiffs regarding Howard’s purchase of a forged “de Kooning” painting.   The terms of the settlement are confidential, but it’s worth noting that Howard’s complaint alleged he paid $4 million for the work, and sought treble damages in connection with his federal RICO claims. With this settlement, The Art Newspaper reports that of the ten lawsuits filed in the wake of the scandal, five have now settled out of court.   But the De Sole parties intend to be the first to go to trial, according to the Wall Street Journal.

    The very fact that the Howard and De Sole plaintiffs got past the summary judgment phase of the case is significant, and the court’s opinions so far have provided important analysis of the types of claims that often arise in art dealer/customer disputes—including mistake, warranty, and fraud.  It’s particularly noteworthy that the court, on summary judgment, found it highly relevant that (1) the plaintiffs had obtained written confirmation of the oral representations that had been made to them, and testified they wouldn’t have done the deals without that confirmation; and that (2) it was theoretically possible they could have uncovered the fraud on their own, but not without near-Herculean efforts.  The takeaways here, for future art buyers, are to ensure that any representations about a work are given in writing, and that if there are obvious and straightforward steps available to seek confirmation of a representation, those steps should be taken prior to finalizing the sale.

    The next phase of the litigation will require the De Sole and Knoedler parties to make their respective cases to jurors, many of whom may be totally unfamiliar with the opaque world of high-end art transactions.  We—and the rest of the art community—will be following the trial with great interest.