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Knoedler cases to investigate who should be blamed for neglecting to exercise due diligence

Court papers raise the question of who should have spotted fakes

The question of who bears responsibility to carry out due diligence in the sale of a work of art is at the centre of recent papers filed in the ongoing legal cases against the Knoedler gallery and its former director Ann Freedman.

Experienced collectors have a duty to investigate a work’s authenticity before they buy it and cannot rely on a dealer’s reputation, say Knoedler, Freedman and Michael Hammer, the head of Knoedler’s holding company, 8-31 Holdings. These arguments are made in their summary judgment motions, which were filed in Manhattan federal court last month in response to two lawsuits accusing them of knowingly selling forged paintings.

The plaintiffs are Domenico De Sole, who is the chairman of Tom Ford International and a director of Sotheby’s, and his wife Eleanore, who bought a fake Rothko for $8.4m. The second case was filed by John Howard, the chief executive of Irving Place Capital, who bought a fake Willem de Kooning for $4m.

According to Freedman’s filing, the cases are “about one thing—diligence”. Her lawyers claim that she “exercised a great deal” of diligence by showing the paintings to experts and hiring E.A. Carmean, formerly a curator at the National Gallery of Art in Washington, DC, to do years of research. In contrast, the collectors and their art advisers “exercised none”, and so do not have a case, Freedman and Knoedler say.

“These cases could be extremely significant in clarifying to what extent the buyer must do due diligence. No one knows the answer now,” says the art lawyer Donn Zaretsky of John Silberman Associates.

The issue is key because the collectors accuse the defendants of fraud. To prove it, they must show that Freedman misrepresented material facts. For example, they claim that she told them that certain experts had declared the works to be authentic, but some of those experts testified that they did not in fact give an opinion.

The collectors must also show that they were justified in relying on those misrepresentations. The defendants argue that such reliance on Freedman was not valid because the collectors should have carried out their own due diligence and contacted experts themselves. The defendants point to, among other things, a letter to one of the plaintiffs’ lawyers written on behalf of Jack Flam, the president of the Dedalus Foundation (which authenticates the works of Robert Motherwell), who, according to Freedman, was one of the experts who had “viewed” the fakes.

The letter was sent in January 2012 from Perry Amsellem, the Dedalus Foundation’s lawyer, to Gregory Clarick, the lawyer representing the De Soles. After writing that Flam “never made any representation… or gave any opinion as to the alleged authenticity of any purported Rothko painting,” Amsellem adds that “your client—a ‘well known business person’—apparently made a significant purchase without the most basic due diligence.”

The plaintiffs disagree with this line of argument for suggesting that the “victims are themselves to blame for trusting” Knoedler and Freedman, according to papers filed by Howard. The collectors say that they should have been able to rely on Freedman’s assurances of authenticity and on what they describe as Freedman and Knoedler’s “impeccable” reputation.

When fraud is the issue, an obligation to investigate “depends on the relative knowledge of the parties”, says the lawyer Peter Stern of McLaughlin & Stern. “Art dealers perhaps have a greater duty to do their own research versus individuals. If I go to Tiffany’s and buy a diamond, I don’t expect to have to take it to a gemologist.” But much of the law is unclear, he says. “It’s all grey.”

To protect themselves, buyers could sign a contract with the gallery to make their purchase conditional on a forensic report or vetting by a third party, or insist that the gallery discloses the identity of anonymous sellers and then sign a confidentiality agreement, says Tom Kline of the law firm Andrews Kurth, who is involved in a related matter.

Knoedler, which closed in 2011 amid allegations of selling a fake Jackson Pollock, sold around $60m of forged paintings. The defendants are facing nine lawsuits. The Long Island art dealer Glafira Rosales, who brought the fakes to Knoedler, pleaded guilty to money-laundering and tax evasion in September 2013 and is awaiting sentencing.

The scandal “ought to be the final nail in the coffin of ‘trust me’ art transactions,” Kline says.

Buyers beware: more legal issues

In their fraud claims, the plaintiffs also contend that Knoedler had a duty to disclose certain information. “It’s caveat emptor out there unless it’s a fundamental component of the transaction,” says the art lawyer Nicholas O’Donnell of Sullivan & Worcester.

The plaintiffs say that essential facts were never disclosed. For example, in 2003, the International Foundation for Art Research investigated a work said to be by Jackson Pollock that was brought to Knoedler by Glafira Rosales and concluded: “We cannot currently support its addition to the artist’s oeuvre.” Freedman did not inform the plaintiffs of this report. They say that, had they known of it, they would not have bought the paintings, which also came from Rosales.

The plaintiffs also have “breach of warranty” claims. Here, Knoedler and Freedman could be liable simply because they sold the works as being by Rothko and De Kooning when in fact they were not. “If they’re within the statute of limitations, this is a clear breach of warranty,” says the lawyer Dean Nicyper of Withers Worldwide.

The court earlier dismissed the warranty claims because the four-year statute of limitations expired before the plaintiffs sued. The collectors are arguing that the limitations period should be suspended because Knoedler misled them into believing that there were no authenticity issues. They contend, for example, that Freedman was fired in 2009 after Knoedler received a government subpoena to investigate the works brought to the gallery by Rosales, but Knoedler informed them that Freedman had resigned and said nothing about the government investigation.

Originally appeared in as 'Knoedler cases focus on due diligence'