Latest Chapter in Salander-O’Reilly Fallout; Appellate Court Affirms Decision Against Dealer
04/09/2015For much of the last decade, the art world has been riveted by the story of infamous art dealer Larry Salander. Around 2007, civil suits and allegations of fraud began to dog the prominent dealer, ultimately leading to Salander’s bankruptcy and the shuttering of the once-great Salander-O’Reilly Galleries. By 2009, a lengthy criminal investigation revealed that Salander had been bilking customers, artists, and investors for years. Today, Salander assets are still being sold off to satisfy creditors, and Salander himself is in prison after pleading guilty to charges including grand larceny. But those who did business with him are still trying to sort out the tangled mess he left behind. This month, an appeals court has weighed in on one of the cases that arose out of Salander’s complex double-dealing—or in this case, triple-dealing. This case is yet another example of a recent trend of courts closely scrutinizing buyers’ pre-sale due diligence.
The case involves a dispute over an important abstract impressionist work, Pirate II, by painter Arshile Gorky. This blog’s previous post on the trial court’s decision reviews the details, but in short, thanks to Salander’s shady dealings, three different people claimed to own Pirate II. In 2004, Salander and professional tennis legend John McEnroe decided to become equal partners in the purchase at auction of two Gorky paintings, Pirate I and Pirate II. McEnroe had physical possession of Pirate I and Salander kept Pirate II. Unbeknownst to McEnroe, however, Salander had also cut a deal with Washington real-estate developer, Morton Bender, to co-own the same works. Then, in 2006, without the knowledge of either McEnroe or Bender, Salander negotiated a deal with a longtime associate, art dealer Joseph Carroll, to trade Pirate II to Carroll in exchange for two other works. In 2007, McEnroe learned that Carroll was claiming to own Pirate II; to settle the matter, Salander and McEnroe agreed that McEnroe would drop any claim to Pirate II if Salander would release his share of Pirate I. In 2008, however, McEnroe learned that Bender had placed a lien on Pirate I. Ultimately, McEnroe and Bender settled their claims against each other, and joined forces to sue Carroll, seeking a declaratory judgment that they, not Carroll, rightfully owned Pirate II.
In 2013, after a bench trial, Justice Shirley Werner Kornreich sided with McEnroe and Bender. See The Dorothy G. Bender Foundation v. Carroll, No. 2009/601375, 2013 N.Y. Slip Op. 51362(U) (Sup. Ct. N.Y. Co., Aug. 20, 2013). The court ruled that, although McEnroe and Bender had each been in a partnership with Salander with respect to the Pirate works, they were not bound by Salander’s later transaction with Carroll because under partnership law, “an act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way” does not bind the partnership. And here, Salander had told Carroll he was acting on behalf of an entity to benefit his children, and the transaction documents between Salander and Carroll reflected that entity’s name (the entity turned out to be a fiction); Salander was not acting on behalf of either of his partnerships (with Bender or McEnroe), and thus those partners were not bound by his later sale to Carroll.
The trial court also rejected Carroll’s argument that, under the Uniform Commercial Code (see N.Y. U.C.C. § 2-403(2)), when someone entrusts goods to a dealer of that type of goods (as Bender and McEnroe had done in entrusting the artworks to Salander), the dealer has the power to transfer the entruster’s rights to a “buyer in the ordinary course of business” such as Carroll. The court, however, emphasized that Carroll himself was a dealer, and under New York law, an art dealer who buys a work without making adequate inquiry may not qualify as a “buyer in the ordinary course” whose title is protected by the U.C.C. In other words, when art dealers act as buyers (as Carroll did here), they must observe “reasonable commercial standards of fair dealing in the trade,” and in the court’s view, Carroll had not done so.
Justice Kornreich found, based on expert testimony at trial, that some of the terms and values of the paintings involved in the trades and buyback arrangements between Salander and Carroll did not make economic sense and should have raised questions in Carroll’s mind. In addition, in the court’s view, the fact that Salander asked Carroll to buy Pirate II from the purported entity for his children—a departure from his previous dealings with Carroll—should have been another red flag, yet Carroll did not press for more information or documentation about the entity’s existence or ownership of the work. Finally, the court noted that the provenance Salander provided to Carroll did not list that entity as the current owner (indeed, it did not list any current owner). Carroll had argued that provenance statements often do not list the current owner, but that was inconsistent with both Carroll’s own practices and his past deals with Salander. In sum, the trial court concluded that because Carroll had gone forward with the transaction despite these red flags, he had not observed the reasonable commercial standards of the art trade and did not qualify as a buyer in the ordinary course of business for purposes of the U.C.C.; thus, he could not defeat McEnroe and Bender’s claim to Pirate II.
On appeal, a five-judge panel unanimously affirmed the trial court’s decision. See Dorothy G. Bender Found., Inc. v. Carroll, 2015 N.Y. Slip Op. 02405 (App. Div. 1st Dep’t March 24, 2015). The appellate court held that Justice Kornreich properly rejected Carroll’s argument that under partnership law principles, McEnroe and Bender were bound by Salander’s sale to Carroll. The court noted that Carroll could not have received good title from a nonexistent entity; that the deal with Carroll was not in the ordinary course of the partnership’s business; and that neither Salander nor his Galleries had apparent authority to bind Bender or McEnroe.
The appellate court also upheld the trial court’s reasoning that Carroll was not a “buyer in the ordinary course of business” under the U.C.C.. The trial record supported a conclusion that Carroll made insufficient inquiry about Salander’s authority to sell the work, despite red flags regarding the value of the works and Salander’s departure from their previous dealings. The appellate panel also rejected Carroll’s argument that McEnroe was precluded from claiming Pirate II due to his earlier agreement with Salander to give up his share of Pirate II in exchange for Salander’s share of Pirate I. In so holding, the court noted that McEnroe at that time didn’t know that Bender also claimed a share of Pirate I, and there was no evidence that Carroll relied on or changed his position due to McEnroe’s purported relinquishment of a claim to Pirate II.
This case is another example of a recent trend of courts closely scrutinizing buyers’ pre-sale due diligence when a dispute arises out of an art transaction. Here, the courts seem to have been particularly unsympathetic to Carroll because he was a dealer himself and should have known what steps were warranted. But even non-dealers can and should protect themselves by seeking legal advice, and by demanding and closely examining documentation about an art transaction.
Art Law Blog