Last summer, Grossman LLP was pleased to announce a major victory in an important lawsuit arising out of the massive Chowaiki scandal.  And today, just several weeks after Judd Grossman argued the appeal in the First Department Appellate Division, that ruling has been upheld, paving the way for efforts to recover the Chagall painting.

Background
This case represents one of many legal tangles emerging from the 2017 implosion and bankruptcy of New York-based gallery Chowaiki & Co., and the subsequent criminal prosecution of its principal, Ezra Chowaiki, who was accused of cheating numerous clients in fraudulent art deals.  In the fall of 2018, Chowaiki  pled guilty to federal charges.  But for many who did business with Chowaiki, the legal saga is ongoing.  Many have asserted claims for money or art in connection with the gallery’s bankruptcy, as well as in federal criminal-forfeiture proceedings in connection with Chowaiki’s guilty plea. 

Grossman LLP represents a number of Chowaiki’s victims, including dealers, gallerists, collectors, and investors.  In late 2018, Grossman LLP initiated litigation in New York state court on behalf of one of those individuals against a group of London galleries seeking the return of a painting by Marc Chagall, Bouquet de Giroflees.  Silver bought the work from Chowaiki, but alleges in the lawsuit—as detailed in the criminal complaint against Chowaiki—that after fraudulently inducing Silver to consign the work back to Chowaiki, he began playing fast and loose with the painting, consigning it to others, repeatedly moving it without Silver’s consent, and even taking out a loan to pay his own debts, using the Chagall as collateral.  Eventually, Chowaiki purported to sell shares of the work to a group of London galleries, without informing or paying Silver.  Silver’s lawsuit argues that the galleries were not good-faith purchasers of the work, where they expressed suspicions about Chowaiki’s honesty and ignored multiple “red flags” that should have alerted them to the fact that Chowaiki was dealing with the work improperly.

The defendants—U.K. based galleries Alon Zakaim Fine Art Limited, Galerie B. Weil Limited, and Thomas Gibson Fine Art Limited—moved to dismiss Silver’s complaint on multiple grounds.  Last summer, the trial court rejected those arguments, but the galleries appealed.  Today the First Department Appellate Division unanimously affirmed that favorable ruling.   

Important Issues On Appeal
The galleries appealed on two grounds.  First, they argued that, contrary to the lower court’s holding, Silver should not be able to sue these galleries at all in New York, because they should not be subject to personal jurisdiction where they claimed never to have set foot in New York in connection with this deal.

The First Department was not persuaded.  It instead ruled that the galleries were subject to personal jurisdiction in New York based on Silver’s allegations that they transacted business in New York by purporting to purchase a majority interest in the Chagall from the New York-based Chowaiki & Co., which retained a minority interest in the painting, and then by marketing the painting for sale in New York under a consignment agreement with Christie’s New York, using Chowaiki’s New York address on the Christie’s paperwork. 

This jurisdictional ruling serves as an important reminder to anyone involved in cross-border art transactions.  This appellate court has confirmed that, depending on the circumstances, a buyer may be brought into a lawsuit in a jurisdiction even if he or she was never actually physically present in that jurisdiction.  This is particularly true if the transaction is not just a simple purchase, but involves additional ties to the jurisdiction, such as an ongoing partnership with a New York entity or subsequent efforts to market or sell the art in New York (even if those efforts are unsuccessful).

The galleries’ second major argument on appeal was that Silver’s complaint did not allege sufficient “red flags” in the Chagall transaction; in their view, the lower court should have concluded (as a matter of law, before even allowing discovery) that the galleries were good-faith “buyers in the ordinary course” and therefore obtained good title to the work under the “entrustment provision” of the New York Uniform Commercial Code (see here for that statute).

The First Department again disagreed, holding that Silver’s complaint “adequately alleges that there were warning signs that should have alerted defendants that the sale was not legitimate and prompted them to undertake further inquiry.”  Silver’s complaint alleges a number of warning signs, or red flags:

• The London galleries’ own correspondence indicates that they harbored doubts about whether Chowaiki was being above-board with them;
• They galleries experienced abnormal delays in dealing with Chowaiki; and
• They galleries had concerns about another deal they were doing with Chowaiki around the same time.

Further, while art valuation can sometimes be a tricky exercise, the complaint alleged that there was evidence suggesting that the price they paid for the Chagall was well below its market value; a low price, courts have recognized, can also be a red flag that something may be “off” about a transaction.  Yet, according to the allegations in the complaint, the galleries never performed a UCC lien search, a simple step that would have revealed Chowaiki’s misconduct in taking out a loan for his own benefit using as collateral an artwork he did not own. 

The First Department’s ruling about “warning signs” should also serve as a cautionary tale for anyone engaging in art transactions.  In order to qualify for an entrustment defense, a buyer must show that he or she acted in good faith and in keeping with reasonable commercial standards of fair dealing in the art trade.  And basic diligence is, of course, vital in any art transaction.  But diligence becomes even more important if there is any indication that something may be amiss, suspicious, or out of the ordinary about a transaction.  Here, the complaint alleges that these galleries apparently harbored misgivings about Chowaiki’s conduct in this and another related deal, yet failed to take certain basic diligence steps, including a UCC lien search.  While the case is not over, the appellate court ruled that Silver’s allegations here, if proven, could disqualify the galleries from being good-faith “buyers in the ordinary course.”

We look forward to continuing our efforts to our client reclaim his Chagall masterwork, and we will provide updates as the case continues.