Art Buyers Beware

In New York, artists and crafts people are protected by the New York Arts and Cultural Affairs Law. Galleries and dealers that take artworks and crafts on consignment from their creators are burdened with a fiduciary duty for the benefit of the creators. The law provides that the purchase price is held by the gallery in trust for the creator. This is a stronger relationship for the artist than a mere commercial debtor-creditor relationship.

Recent cases in New York have strongly demonstrated that art collectors have an entirely different relationship with the galleries and dealers they buy from. The law considers the collector-dealer relationship to be purely commercial, notwithstanding the length or nature of any personal relationship. Art collectors are cautioned to exercise due diligence when buying artworks. Typically, the due diligence revolves around the issues of the authenticity of a work, and its fair market value. Collectors should not rely on or put too much faith into their dealers or galleries on these matters. This is so even where the artworks cost millions of dollars. In fact, it is more the case at this elevated price level because the purchaser obviously has the resources to engage independent appraisers, experts and attorneys to conduct due diligence and negotiate protective contracts.

In one case, McKenzie vs. Fishko, the collector had two oral agreements with his dealer. One agreement required the dealer to sell works to the collector “at the best possible price.” The other agreement provided for a 20% discount on certain works. The collector discovered that the dealer had violated both agreements, increasing the collector’s costs by more than $1 million. The collector sued for breach of contract, fraud and breach of fiduciary duty. The court found that the collector had failed to offer adequate evidence on the breach of contract claim. The fraud claims were held to be duplicative of the breach of contract claims and for that reason were dismissed. As to fiduciary duty, the court found that the parties were dealing at arms’ length in commercial transactions and there were no extraordinary circumstances that would justify finding a relationship of confidence or trust. This was the case even though the collector had purchased more than 100 pieces of art from the dealer over the course of several decades, and considered the dealer to be a close friend and confidant. Thus, all the collector’s claims were dismissed.

In another case, MAFG Arts Fund, LLC vs. Gagosian, the court held that the collectors “failed to state a cause of action for fraud because plaintiffs did not allege justifiable reliance… As a matter of law, these sophisticated plaintiffs cannot demonstrate reasonable reliance because they conducted no due diligence; for example, they did not ask defendants, “Show us your market data.” In addition, the court held that “statements about the value of art constitute ‘non-factual opinion’ and are not purported facts, which might provide the basis for a claim of fraud.

Finally, Arthur Properties, S.A., vs. ABA Gallery, Inc. was a case in which a collector spent $9.58 million on 18 paintings without ever seeing them. The collector said he relied on the dealer because the dealer portrayed himself to the collector as being honest and an expert who would never harm his reputation by selling works that were fake or overpriced. After several years it was determined that several of the works were fake and overpriced. The court’s decision included an interesting analysis of what might be a fair price for artwork:

By definition, the fair market value of an asset such as a work of art, a used car, a piece of real estate, and many other assets is “the price that a willing buyer and a willing seller would agree to in an arm’s length transaction.”

The court concluded that since the collector was willing and under no compulsion to buy, whatever he voluntarily paid for the paintings was their fair market value.

The courts never really say this, but it is possible to discern in these cases a subtext which is that when it comes to very wealthy collectors complaining that they were defrauded when buying multimillion dollar works of art, the courts just don’t have much sympathy for these plaintiffs. Certainly, buying millions of dollars of artwork, sight unseen, is simply reckless. The courts call the collectors sophisticated purchasers and place upon them a duty of due diligence in the tradition of the ancient warning, caveat emptor, buyer beware.

Gary Schuster is Senior Counsel with the firm and practices Arts & Entertainment and Business Law. He can be reached by phone at 866-303-9595 toll free or 845-764-9656 and by email.