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Of Koons, Twombly, Perelman and Gagosian: Lessons to be Learned

January 20, 2015

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By Jessica M. Curley (Part I) and Daniel Kokhba (Part II)

Part I: Places, lights, action

The lack of transparency in the art world can sometimes cause unease and distrust among transacting parties, as can be seen in the protracted litigation between billionaire financier Ronald O. Perelman and renowned art dealer Larry Gagosian. Former friends, who once traveled in the same social circles, and had even co-owned a restaurant together, found themselves entangled in an ongoing legal battle stemming from an exchange/sale transaction involving a Jeff Koons sculpture and a Cy Twombly painting.

The initial dispute dates back to April of 2011 when Perelman first expressed interest in the Cy Twombly painting titled “Leaving Paphos Ringed with Waves” (the “Twombly painting”), which at the time had been available for sale at Gagosian’s Gallery. Court papers filed in 2012 stated that Gagosian, whose clients include Steve Cohen and Francois Pinault, quoted a price of $8 million for the painting. Shortly thereafter, Perelman returned to the gallery to purchase the work only to find that it had already been sold to another notable art collector Jose Mugrabi, famous for his extensive Warhol collection. According to Perelman, a few months following the sale, Gagosian advised him that the Twombly painting was back on the market, this time at the increased price of $11.5 million. Even after negotiating a $1 million discount, paying a final price of $10.5 million, Perelman still felt as though he was being defrauded by the forgoing series of transactions, so he proceeded to file suit.

According to the amended complaint, Perelman asserted several legal causes of action against Gagosian including breach of contract, breach of fiduciary duty, fraud, breach of the covenant of good faith and fair dealing, unjust enrichment, and deceptive business practices under section 349 of the General Business Law. Perelman alleged that Gagosian conspired with the Mugrabi family, to take advantage of him by upwardly manipulating the market price of the Twombly painting, resulting in a second sale and commission for Gagosian and a quick profit for the Mugrabis. Perelman also accused Gagosian of undervaluing artworks, including Koon’s “Popeye” sculpture and multiple Willem de Kooning paintings that he exchanged as partial satisfaction of the $10.5 million purchase price of the Twombly.

The attorney representing Gagosian, Matthew S. Dontzin, of Dontzin Nagy & Fleissig LLP, stated in court that Perelman’s business entities, including MacAndrews & Forbes Group LLC and MAFG Art Fund, through which he acquired the art, are “sophisticated” professional art investment firms that had a “heightened duty” to engage in due diligence in selecting artworks to acquire. Typically, professional art investment firms specialize in generating returns by strategic purchase and sale of artworks, and have a fiduciary duty toward their investors to secure returns according to best practices and efforts. The attorney for Perelman, Marc Kasowitz, partner at Kasowitz Benson Torres & Friedman LLP, countered Dontzin’s claim by asserting that Perelman is not of the same “level of expertise and skill” as Gagosian, who is “probably the world’s leading and most powerful art dealer,” and thus has relied on Gagosian for over twenty years for advice on investing in art. Kasowitz went on to emphasize that Gagosian not only has “unique knowledge of the art markets,” but that he “makes those markets.”

In his ongoing quest to uncover how other deals involving Gagosian have been executed, Perelman sought unprecedented access to transaction details and even subpoenaed numerous high profile figures and institutions in the art world including members of the Mugrabi family, Gagosian himself, and Sothebys and Philips auction houses. He even apparently hired a former FBI agent experienced in the art business to interview other major collectors, dealers and artists.

Perelman has remarked that art is “a beautiful thing” and has stated that the goal of his litigious activity is to expose the “dirty” side of the otherwise prestigious world of buying and selling fine art. In response, Gagosian’s lawyers stated that Perelman was motivated by a different agenda, mainly “harassing Gagosian and disparaging the gallery”.

In 2013, presiding judge Barbara R. Kapnick suggested that the parties “get themselves together at a cocktail party in the Hamptons” and work their issues out amicably, adding that “this is a crazy case to have going on here in court.” However, the former friends chose not to settle.

Part II: Bright Line on Control and Dominance (Arm’s Length Precedent)

The December 4, 2014 decision by the Appellate Division, First Department in the high profile action entitled MAFG Art Fund, LLC et al. v. Larry Gagosian, et al offers valuable jewels of insight into the art industry and beyond on such topics as fiduciary obligation, investigation, statements about value, and contracts – constant themes underlying many art transactions and attendant disputes. The case included breach of fiduciary duty and fraud claims filed by Plaintiff-buyer against Gallery-seller in connection with a purchase agreement.

Fiduciary Obligation

A fiduciary obligation owed to seller by the dealer is often mistakenly assumed and expected in art transactions. In MAFG, the Court did not find a fiduciary obligation between Plaintiff and the Defendant gallery. “The parties operated at arm’s length when they negotiated for art works. Thus, fiduciary obligations did not exist between them. Moreover, even read liberally, the complaint does not establish that the defendants exercised control and dominance over Plaintiffs – limited liability companies who, by their own description, frequently purchased, sold and exchanged works as investments. Gagosian had no duty vis-à-vis Perelman, an active player in the art market. Accordingly, parties to this and similar transaction should not assume a fiduciary duty, especially when both sides are sophisticated participants in the art market.

Investigation

The false expectation of fiduciary obligation can contribute to sloppy due diligence and lack of investigation. The Court in dismissing the fraud claim recognized the absence of such investigation. The lesson here is to conduct independent investigation before closing on a transaction. Meaning, if Perelman was uncertain of the fair market price for the works he was exchanging for the Twombly or if he did not believe the Twombly offered to him was priced fairly, he had a duty to conduct independent research into the prices.

Statements of value

The Court interestingly notes, “[a]s to the claim that defendants misrepresented the value of certain art works, statements about value of art constitute [a] ‘non-actionable opinion that provide[s] no basis for a fraud claim’”. (Internal citation omitted).   This pointed sentence is a warning to buyers and their advisors and may impact the viability of similar future fraud claims predicated on misrepresentations relating to value.

Contract

In MAFG, Plaintiff claimed that Defendants breached the covenant of good faith and fair dealings by entering into a subsequent agreement that decreased Defendants’ incentive to be involved in resales thereby adversely affecting Plaintiff. The Court refused to interpret the purchase agreement in this manner because subsequent agreement and resale were not covered in the agreement. Granted, many art transactions are regrettably entirely undocumented at great risk to the parties involved. However, even when the parties cross the threshold of handshake to written agreement, they should ensure to document in sufficient detail all provisions, contingencies and expectations.

Review

Friendship is not a defense and should not be used or relied upon while making business decisions involving any sums of money, especially millions of dollars. Careful drafting, review offering plans, negotiation, contemplations and incorporation of expectations and contingencies, and coordination of due diligence by counsel seem like an implicit lesson from the resulting litigation and decision. A dose of preventive medicine may help reduce the risk of litigation. Hamptons may help too.

Sources:

About the Authors:

Jessica M. Curley is a post-graduate fellow at Center for Art Law, and a recent graduate from the Benjamin N. Cardozo School of Law, admission to the NY State Bar pending. Curley is pursuing her interest in art law and financial regulation. She may be reached at jessicamcurley@gmail.com or 858.822.9410.

Daniel S. Kokhba, Esq. is a Partner at Kantor Davidoff, Mandelker, Twomey, Gallanty & Olenick, P.C. and focuses his practice on civil litigation, art law and employment law. He may be reached at Kokhba@kantordavidoff.com or 212-682-8383

Disclaimer: This article is intended as general information, not legal advice, and is no substitute for seeking representation.

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