A recent court case in which an art collector failed in his overcharging complaint against a dealer is a cautionary tale, writes Amelia Brankov, an attorney with media, entertainment, and advertising law firm Frankfurt Kurnit Klein & Selz.
Last month, a New York federal court dismissed a lawsuit brought by prominent collector Richard F. McKenzie and his foundation (collectively, “McKenzie”) alleging that his dealer overcharged him on art purchases in order to inflate commissions. The court ruled that McKenzie – the owner of a $200 million art collection – failed to prove that the dealer had breached any contractual or fiduciary duty or committed fraud.
Here’s a summary of the case and some practical pointers for dealers and collectors to consider.
In McKenzie v. Fishko, McKenzie sued his longtime dealer Forum Gallery, and its principals (collectively, “Forum”) for, among other things, breach of contract, fraud and breach of fiduciary duty. McKenzie claimed that he had two oral agreements with Fishko: (i) for works by artists not represented by Fishko, Fishko would negotiate with other dealers on McKenzie’s behalf to get the “best possible price” in exchange for a 5% commission on the “best possible price;” and (ii) for works by artists represented by Fishko (i.e. primary market sales), Fishko agreed to act as McKenzie’s “agent” and would apply a 20% discount to the sales price.
Over time, McKenzie purchased over 100 works through Fishko. But in 2011, a competitor of Fishko allegedly told McKenzie that a Ralph Goings painting McKenzie thought he had purchased from a collector through Fishko was actually sold to Fishko for much less – meaning Fishko may have reaped a greater profit than McKenzie believed he should. Additionally, McKenzie later learned that Fishko may have made a $200,000 profit by purchasing a Norman Rockwell painting on McKenzie’s behalf for $1,025,000 while invoicing McKenzie $1,225,000, instead of the purchase price plus 5% commission ($51,250). As to primary market sales, McKenzie claimed that, even though Fishko gave him a 20% discount on primary market sales, the “list prices” were inflated so that the discount was essentially meaningless.
On February 24, 2015, a New York federal judge granted summary judgment to Fishko, dismissing all of McKenzie’s claims. The court found that McKenzie failed to prove the existence of the two alleged agreements – the only evidence McKenzie proffered was his own testimony, which was vague and contradictory. The court rejected McKenzie’s fraud claim because it was duplicative of the breach of contract claim and for lack of evidence of any material misrepresentations made by Fishko. The court dismissed the breach of fiduciary duty claim because, according to the court, Fishko owed no fiduciary duty to McKenzie. The court found McKenzie’s claim that Fishko’s superior knowledge and expertise in the art field, even if true, did not, as a matter of law, establish the existence of a fiduciary relationship – especially here, where the parties dealt at arms’ length and, as McKenzie acknowledged, the parties negotiated sales prices for the works.
The McKenzie court’s rejection of the collector’s overcharging claims continues a trend in the courts to place the burden on buyers to protect themselves by conducting their own due diligence on market values. See, e.g., MAFG Art Fund, LLC v. Gagosian, 998 N.Y.S.2d 342, 343 (1st Dep’t 2014). The decision is also a reminder that, absent a written agreement, the courts are going to be reluctant to get in the middle of a dispute between a collector and either a dealer or consultant. Therefore, buyers, sellers and intermediaries should bear the following in mind:
- Primary Market Sales. Even if a collector has a long-standing relationship with a gallery, with respect to primary market sales, the dealer is not the collector’s agent and does not owe the collector any fiduciary duty. Therefore, it is not reasonable for a collector to rely on the dealer’s assessment of value. If a collector has any questions about the value of an artwork, he or she should conduct due diligence or consider hiring an independent professional such as an art advisor or appraiser familiar with the artist’s market.
- Other Sales. Where a dealer also takes on the role of consultant finding works by artists it does not represent, both sides benefit from a written agreement that specifies dealer compensation and the manner in which the dealer and the third-party seller will be paid.
The McKenzie case is another cautionary tale for collectors to conduct their own due diligence before purchasing artwork. Collectors need to remember that, as to primary market sales, dealers are counterparties, not advisors, and collectors should direct any questions concerning valuation to independent professionals. It’s also a reminder that written consultant agreements allow the parties an opportunity to discuss payment issues before they arise, and memorialize terms, which can prevent either party from later challenging deals