Playing by the Rules

You entrust a precious object to a dealer. Without a detailed contract, what does he really owe you?

First, there was a violin. It was a Stradivarius, built by the master in the mid 1690’s, just before his “golden period.” It had a deep ochre finish and an angelic sound.
Next came our client Sophie, an amateur violinist who had inherited the instrument from her grandmother. She also inherited expensive tastes that she found difficult to support on her income as a librarian.
Then there was Sophie’s violin teacher. “Ever thought of selling your Strad?” he asked her one day. “I might know just the dealer for you.”
Finally, the dealer, Bernard. In a tow-line “contract” scribbled on the back of some sheet music, he made a “gentleman’s agreement” with Sophie to sell the Stradivarius at the best possible price and to retain a 10 percent commission for his troubles. As it turned out, Bernard was no gentleman.
That’s where we came in- one year later. Sophie visited our offices with a solid complaint: “Bernard told me he sold my Strad for $700,000. But I heard that he actually sold it for a million!”
Sophie was right. Bernard had fiddled with the numbers, pocketing the $300,000 “spread” in addition to his 10 percent cut. We also discovered that he had secretly paid Sophie’s teacher a commission for the referral.
We wrote Bernard a strongly worded letter, suggesting that he had committed fraud by, among other things, withholding form Sophie material information related to the sale. We pointed out that Sophie had placed her confidence in him, relying on his superior knowledge and expertise about the violin market. In our view, Bernard, as her agent, owed Sophie a special duty of care to communicate truthfully with her about any offers. This amounted to a “fiduciary duty”—one that he had intentionally breached.
Bernard kept silent, but his lawyer soon piped up. She didn’t dispute our version of the facts but saw no reason why Bernard should have made full disclosure to Sophie, or for that matter, why he wasn’t entitled to keep the $300,000. “My client was just being a smart businessman,” she said. “Many art dealers work this way.”
Perhaps, we countered, but it didn’t make Bernard’s actions proper- or legal.
“Just because he sold the violin doesn’t mean he had a special relationship of trust with Sophie,” the lawyer replied. “Whether a fiduciary relationship exists depends on the circumstances.”
To support her position, Bernard’s lawyer pointed out that the agreement between the parties did not clearly define their relationship. It was ambiguous whether Bernard was acting as an independent third party (and thereby entitled to profits at Sophie’s expense) or as Sophie’s agent, in which case he would have been obliged to disclose the relevant terms of the sale. Most dealers jealously guard the details of the sale, but a consignor can, in the course of certain legal proceedings, obtain the relevant documents.
Certainly Sophie’s situation would have been simpler had she entered into a properly written consignment agreement with the dealer. When preparing such a contract, we try to specify the price at which the dealer may sell a work, the territory and the time frame during which the dealer may operate, and the basis for calculation the dealer’s commission. We also make clear whether or not the dealer is acting as the client’s agent. But even without this contract, our position was clear: Bernard was Sophie’s agent, not merely a third party.
Bernard’s lawyer insisted that, depending on state law, a dealer may not owe a collector a duty of loyalty. “In the state where the dealer works,” she observed, “there’s no art law statute protecting collectors in this situation.”
This was irrelevant, we replied, because Bernard still had a fiduciary obligation to act in Sophie’s interest. When the lawyer asked for case law supporting our position, we cited the most obvious example: the 1986 New York case Cristallina v. Christie’s (discussed in our June 2003 column). Cristallina, a Panamanian corporation in the business of buying and selling art, had consigned eight Impressionist paintings to Christie’s, but only sold one. The firm sued the auction house for fraudulent misrepresentation, negligence, breach of contract and breach of fiduciary duty. It claimed, in part, that Christie’s failed to disclose its doubts concerning the pictures’ appeal and may have fraudulently misrepresented the prices they might fetch at auction. The state court found that the consignor had a valid claim against Christie’s for breach of fiduciary duty and misrepresenting material facts. Christie’s settled the case out of court during the appeal.
“But Cristallina involved an auctioneer, not an art dealer!” the lawyer protested.
We pointed out that the general principals are equally applicable to both. We also referred her to In re Rothko, decided by the New York Court of Appeals in 1977. The executors of the estate of Mark Rothko consigned 798 of his paintings to Marlborough Gallery, to be sold at a 50 percent commission, unless the works were sold to or through other dealers, in which case the commission was 40 percent. This was much greater than the usual 10 percent commission that the gallery had paid while Rothko was alive.
Of the three executors, one was a director, secretary and treasurer of Marlborough and another was an artist who had been offered representation by the gallery only months after the estate contract was signed. The court, ruling on a suit brought by the state attorney general, found that these two had conflicts of interest and that all the executors violated their duty of loyalty
“My client is no common criminal!” Bernard’s lawyer insisted.
That depends on the meaning of “common,” we replied. By deceiving Sophie and pocketing several hundred thousand dollars that she was entitled to, Bernard had almost certainly committed second degree grand larceny under New York State law, which, among other penalties, carries a potential prison sentence of up to 15 years.
That wasn’t all. By using the phone and electronic and regular mail in their communications (which are legally defined as tools of interstate commerce), Bernard may also have committed mail and wire fraud under one or more federal laws. Violations of these statutes could earn Bernard substantial prison time and heavy fines.
“Why not threaten prosecution in order to get a good settlement?” Sophie asked.
We explained that attorneys in New York State are strictly prohibited from using the threat of criminal prosecution to settle civil disputes such as this one (a rule we are always careful to follow). Nevertheless, Bernard changed his tune and offered to settle the dispute by paying Sophie the difference between the violin’s sale price and what she had received- less his commission on the full million.
Based on this understanding, we drafted a settlement agreement, which,- at Bernard’s insistence- included both a confidentiality provision and a “nondisparagement clause,” which prevented both sides from publicly saying or writing anything negative about one another. These two clauses are now fairly standard in settlement agreements.
On a separate note, Sophie asked what her teacher’s liability was for, as she put it, “participating in a scheme to defraud me.”
We said that if the teacher was aware that Sophie was being defrauded and took a kickback on the sale- which seemed likely-he could be criminally liable for conspiracy. He could also be required to repay the proceeds he received.
Sophie didn’t want her teacher to go to prison (“he’s the best instructor I ever had!” she exclaimed). And she decided against suing him for breaching his duty of loyalty to her in his role as a consultant.
But at the very least, we were instrumental in teaching Sophie an important lesson: When selling through an intermediary, collectors should make certain that there are no strings attached.
Download This Article Now

This entry was posted in Articles - Brothers in Law. Bookmark the permalink.

Comments are closed.