A recent decision by a federal judge in the Southern District of New York stands as a stark warning to galleries and collectors about the importance of completing comprehensive due diligence before purchasing any work of art.

In 2007, Joseph Kinney contacted New York-based ACA Galleries, Inc. about selling a Milton Avery painting titled “Summer Table, Gloucester.”  ACA’s president, Jeffrey Bergen, purchased the painting from Kinney for $200,000 after personally inspecting it at a New York storage facility.  A short time later, however, the Milton and Sally Avery Arts Foundation examined the painting and determined that it was not a genuine Avery work.  When Kinney refused to return ACA’s purchase price, ACA sued Kinney.

ACA sought to rescind the sale, arguing that both parties to the contract had been under the mistaken impression that the painting was authentic.  The court, however, disagreed and granted summary judgment in favor of Kinney, reasoning that under New York contract law, the doctrine of mutual mistake “may not be invoked by a party to avoid the consequences of its own negligence,” particularly where “the party wishing to invoke the doctrine bears the risk of the mistake because he was aware of his limited knowledge but acted anyway.”  ACA Galleries, Inc. v. Kinney, 2013 U.S. Dist. LEXIS 23983, at *5 (S.D.N.Y. Feb. 18, 2013).  The court held that ACA’s failure to conduct an adequate investigation prior to the purchase precluded ACA from later seeking rescission on grounds of “mutual mistake.”  Id. at *6-7.

ACA also claimed fraud, but those claims fared no better.  In order to prevail on its fraud claim, the court held, ACA had to show that it reasonably relied on Kinney’s representations about the painting’s authenticity. The court held that, under New York law, ACA’s reliance on any representations made by Kinney was unreasonable because the question of authenticity wasn’t solely within Kinney’s knowledge, and there was no indication that Kinney refused to permit inspection by the Avery Foundation, or any other expert, prior to the sale.  In fact, there was evidence that a pre-sale inspection by the Foundation would have been feasible.  Thus, ACA had the means to make its own investigation, for example, by having the painting inspected by the Avery Foundation or another expert prior to the sale.  The court held that this was not reasonable, particularly given that “ACA is in the business of buying and selling art.  Such a business must be cognizant of forgery of the works of well-known artists like Avery.”  Id. at *10.

This case reminds all players in the art market about the risks—and significant losses—that can be mitigated or averted through pre-sale diligence.  Depending on the situation, this may mean seeking authentication through an artist’s foundation, calling upon additional experts, requesting detailed documentation, or executing a carefully crafted purchase agreement defining clearly the parties’ rights and obligations. Here, ACA waited until after the purchase to have the painting examined by the Avery Foundation—and a lawsuit could not protect ACA from the consequences of that risk.