Last year, this blog covered a federal court’s decision involving New York-based ACA Galleries, Inc.’s purchase of a painting purportedly created by artist Milton Avery.  In a recent decision affirming that opinion, the Second Circuit reiterated the warning to galleries and collectors about the importance of completing comprehensive due diligence before purchasing any work of art.

ACA’s president inspected the work prior to the purchase, but after the $200,000 sale was completed, the Milton and Sally Avery Arts Foundation examined the painting and determined that it was not a genuine Avery work.  When the seller, Joseph Kinney, refused to refund ACA’s purchase price, ACA sued Kinney.  In the lower-court proceedings, ACA had argued that both buyer and seller had believed that the painting was authentic, and therefore the contract should be rescinded under the New York doctrine of “mutual mistake.”

The district court granted summary judgment in favor of Kinney, reasoning that ACA’s failure to conduct an adequate pre-sale investigation barred ACA from later seeking rescission for mutual mistake; mutual mistake was not available to protect a party from the consequences of its own negligence, especially where that party “bears the risk of the mistake because he was aware of his limited knowledge but acted anyway.”  ACA Galleries, Inc. v. Kinney, 2013 U.S. Dist. LEXIS 23983, at *5 (S.D.N.Y. Feb. 18, 2013).  The court also rejected ACA’s fraud claims, holding that ACA’s reliance on Kinney’s representations was unreasonable under the circumstances, particularly because ACA was in the business of dealing art, should have been aware of the risk of forgeries, and could have made its own investigation or had the painting inspected by the Avery Foundation or another expert prior to the sale.

Earlier this month, in a brief summary order, the Second Circuit Court of Appeals affirmed the lower court’s decision ruling that ACA was not entitled to rescission because of its failure to investigate the authenticity of the painting prior to the sale.  The Second Circuit agreed with the trial court that ACA knew its pre‐purchase inspection provided “only limited knowledge,” but treated that knowledge as sufficient, and thereby accepted the risk that the painting might be a forgery.  The Second Circuit admonished, “The contract is not voidable merely because the consciously accepted risk came to pass.”

This appeal is likely the final chapter of this cautionary tale about the importance of pre-sale diligence in connection with art purchases. Buyers should explore pre-sale authentication (by an artist’s foundation or other experts), carefully examine all available documentation, and consider seeking legal advice to ensure that the purchase agreement sets forth the parties’ rights and obligations and addresses the risk of an authentication issue.  As ACA learned, diligence after the sale may be too little, too late.