Recent court cases have highlighted the need for due diligence, even when purchasing from reputable dealers. Amelia K. Brankov, an attorney with media, entertainment, and advertising law firm Frankfurt Kurnit Klein & Selz, reviews two key cases and suggests six steps that every buyer should take.
Last year, New York courts ruled for art dealers in two significant cases, dismissing suits by buyers claiming the dealers had defrauded them. The courts said the collectors should not have relied on the dealers’ representations; instead, they should have verified what they were told. These cases remind us that the age-old rule of caveat emptor is alive and kicking, and that collectors need to conduct due diligence before any art purchase. Here’s a summary of the cases and a list of steps every fine art purchaser should consider before closing a significant deal.
In ACA Galleries, Inc. v. Kinney, a federal appeals court in New York held that a buyer’s failure to conduct its own due diligence prior to purchasing a Milton Avery painting precluded it from recovering damages from the seller when the work turned out to be a fake. According to the court, the buyer could not rescind the sale or sue the seller for fraud because the buyer failed to have the work inspected for authenticity by the Milton and Sally Avery Arts Foundation prior to the sale.
In MAFG Art Fund LLC v. Gagosian, companies owned by Ronald Perelman alleged that Larry Gagosian and his gallery defrauded them by misrepresenting the value of certain artworks and claiming that the values were supported by market data, when they were not. The trial court denied the Gagosian defendants’ motion to dismiss the fraud claim. The trial court held that the plaintiffs’ allegations that defendants had superior and unique knowledge of the art market precluded a finding that plaintiffs’ alleged reliance on defendants’ representations was per se unreasonable. The Gagosian defendants appealed, and the appellate court reversed the trial court’s decision, holding that: “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.'” As to the dealers’ alleged misrepresentations concerning the value of the artwork, the court held that such statements were non-actionable opinion.
The take away
Buyers should consider taking some or all of the following steps prior to making any significant purchase of artwork:
Authentication. Where possible, confirm that the work is included in the artist’s catalogue raisonné, have the work authenticated by the artist’s foundation, or seek an expert opinion on authenticity.
Valuation. Don’t rely on the seller’s representations. Research the value of the work yourself. Consider consulting with an independent professional such as an art advisor or appraiser familiar with the artist’s market.
Title and provenance. Search the Art Loss Register or Art Claim to find out whether the work has been reported as stolen, looted or missing, and search state Uniform Commercial Code databases to confirm that the work is not subject to a third-party’s security interest. Additionally, consider doing some background research to verify the provenance information provided by the seller.
Physical inspection. Have the work physically inspected and obtain a condition report to ensure that the work has not been damaged.
Legal compliance. Certain works of art are subject to legal restrictions such as cultural heritage and animal protection laws. Make sure that the sale of the work would not violate the laws of any jurisdiction.
Written agreement. Where possible, obtain a written agreement protecting the buyer through representations and warranties from the seller.