Our attorneys were involved in the very first suit arising out of the infamous forgery scandal against the now-shuttered Knoedler Gallery. And this blog has covered multiple chapters since, detailing along the way the remarkable twists and turns in the dramatic tale of Knoedler’s involvement in the sales of dozens of works purportedly created by some of the top artists of the twentieth century—including Jackson Pollock, Mark Rothko, Robert Motherwell, and Willem de Kooning—that have since been revealed as fakes. Long Island art dealer Glafira Rosales pleaded guilty in mid-September to federal crimes including conspiracy, wire fraud, money laundering and tax offenses in connection with her role in the scandal.  And the plot has continued to unfold, as recently a federal judge in the Southern District of New York allowed many of the claims by several swindled buyers to proceed in two lawsuits against Knoedler, Michael Hammer, former Knoedler president Ann Freedman, former Knoedler employee Jaime Andrade, Rosales and her ex-boyfriend, Jose Carlos Bergantiños Diaz.

In late 2004, one set of plaintiffs, the De Sole family, approached Knoedler to discuss a possible Rothko acquisition.  The plaintiffs claim that Freedman told them the work was authentic, that the seller was Knoedler’s client and personally known to Knoedler, and that the work had come to the seller’s family directly from the artist, with the advice of an art dealer named David Herbert.  Freedman also allegedly told the De Soles that multiple Rothko experts (including the artist’s son and the scholar behind the Rothko catalogue raisonné) had opined that it was authentic, and that the work would be included in a supplement to the Rothko catalogue raisonné.  Relying on these assurances, the plaintiffs purchased the work for $8.4 million.

In 2007, the other set of plaintiffs, the Howard family, purchased for $4 million a purported de Kooning painting.  Again, Knoedler and Freedman allegedly made specific statements about the seller and the provenance in connection with the sale.

The De Soles and the Howards sued, bringing claims under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), as well as various state law causes of action including fraud and fraudulent concealment, aiding and abetting fraud, fraud conspiracy, breach of warranty, and unilateral and mutual mistake.  The defendants moved to dismiss both actions in their entirety.

The court first rejected the defendants’ argument that the De Soles’ fraud and RICO claims were barred by the statute of limitations.  The De Soles argued that they had no notice of the possible fraud until the Knoedler Gallery closed under a cloud of suspicion in 2011.  The defendants urged the court to hold that the statute of limitations began to run at the time the De Soles purchased the work in 2004.  The court sided with the plaintiffs, ruling that although the De Soles could have done forensic testing back in 2004, the defendants had failed to show as a matter of law that any aspect of the sale transactions or documents that should have put the De Soles on notice of the fraud; to the contrary, they had no reason to suspect the work’s authenticity at the time, given the Knoedler’s venerable reputation and Freedman’s representations about the work’s provenance, the seller, and the many experts that had apparently vouched for the work.  This holding is significant, among other reasons, because it curbs a trend highlighted by a recent decision imposing onerous burdens on purchasers of artwork to do their due diligence prior to consummating a purchase (to be sure, that case involved the purchase by an art merchant).

The court did, however, dismiss all the claims against the holding company that was the sole member of Knoedler, as well as the beneficial owner of that entity, Michael Hammer.  The court held that plaintiffs did not allege that Hammer knew or should have known about the alleged fraud, and that while Hammer may have been aware that payments to Rosales were being wired to Diaz’s brother, “the use of intermediaries in the art world is common” and should not necessarily have raised Hammer’s suspicions.  The court also held that the plaintiffs had not made sufficient meaningful factual allegations against Diaz, so their claims against him could not proceed.  As with the other claims that were dismissed, the court has granted plaintiffs leave to replead, so it will be interesting to see what additional factual allegations against Hammer plaintiffs include in their amended complaints.

As to the RICO claims, the court held that the De Sole plaintiffs had made sufficient allegations to proceed against Knoedler, Freedman, Rosales, and Andrade.  However, the court dismissed the Howard plaintiffs’ RICO conspiracy claims on the ground that Howard had not adequately pleaded a pattern of racketeering activity; unlike the De Sole complaint, the Howard complaint did not, in the court’s view, contain sufficient detail about the allegedly fraudulent communications involved in the scheme.  Again, plaintiffs have been given leave to replead, so time will tell whether they will be able to bolster their claims with additional factual allegations.

Next, the court held that the plaintiffs had adequately pleaded fraud claims against Knoedler and Freedman.  Significantly, in so holding, the court held that a statement by an art dealer to a layman about who painted a work of art is not merely an “educated guess or opinion,” but rather,   a statement of material fact that can form the basis for a fraud claim.  The court also noted the defendants’ position that the buyers were sophisticated collectors and had art consultants to advise them, but the court held that the issue of reasonable reliance could not be resolved at this early stage of the litigation; thus, the fraud claims survived the defendants’ motion to dismiss, as did the fraudulent concealment claims.  (The court did dismiss the claims against Knoedler and Freedman for conspiracy to commit fraud, holding that they were duplicative of the fraud claims, but the claims against Andrade and Rosales for aiding and abetting fraud and conspiracy to commit fraud could proceed.)

The court also dismissed the Howards’ breach-of-warranty claims, holding that such claims were untimely because under the New York U.C.C., a cause of action for breach of warranty accrues upon delivery of the purchased item, regardless of whether the buyer was aware of the problem.  Moreover, the complaint did not contain sufficient allegations to justify equitably tolling the limitations period based on the claim that the defendants fraudulently concealed facts.

On the other hand, the court refused to dismiss Howard’s claims seeking rescission of the sale on the grounds of unilateral or mutual mistake.  The court held that the Howard complaint had sufficiently alleged fraud, and adequately pled that Knoedler knew or should have known that the de Kooning was not authentic.  Knoedler urged that the mistake claims should fail because Howard did not exercise ordinary care and was “consciously ignorant” about the work he purchased, but the court held that it could not decide that issue at this early stage.

The Howard and De Sole cases, as well as other pending Knoedler-related cases, continue to showcase the difficult legal questions regarding the risks involved in high-stakes art deals—for example, this decision touches on the role of a buyer’s art consultant, the importance of a catalogue raisonné, the implications of forensic art analysis, and much more.  The cases also continue to provide additional details about the tangled web of dealings behind one of the most notorious art forgeries in history.  Stay tuned as the story continues to unfold.