De Sole v. Knoedler Gallery, LLC
139 F. Supp. 3d 618, 2015 WL 5918458 (2015)
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Rule of Law:
A defendant may be found to have the requisite scienter for fraud if they acted with recklessness by egregiously refusing to investigate doubtful matters or see obvious signs of fraud. A buyer's reliance on a seller's representations is justifiable, even for a sophisticated party, if the seller has a sterling reputation, provides written warranties, and the truth is discoverable only with extraordinary effort.
Facts:
- Between 1994 and 2008, Glafira Rosales, a Long Island art dealer, supplied Knoedler Gallery with dozens of previously unknown paintings purported to be works by famous Abstract Expressionist artists.
- Rosales provided a vague and inconsistent provenance story, claiming the works came from an anonymous collector ('Mr. X') with no documentation. Over time, the story shifted to involve different art world figures as intermediaries.
- As early as 1994, the family of artist Richard Diebenkorn informed Knoedler's president, Ann Freedman, that several purported Diebenkorn paintings supplied by Rosales appeared to be forgeries.
- In 2003, the International Foundation for Art Research (IFAR) issued a highly critical report on a purported Jackson Pollock painting from Rosales, noting material inconsistencies and a lack of documentation, which led to the buyer returning the work for a $2 million refund.
- Despite these warnings, in 2004 Knoedler sold a purported Mark Rothko painting to Domenico and Eleanore De Sole for $8.3 million, with Freedman providing a letter warranting its authenticity and detailing a fabricated provenance.
- In 2005, Rosales refused to sign a document prepared by Knoedler that would have required her to attest to the authenticity of the paintings.
- In 2007, Knoedler sold a purported Willem de Kooning painting to John Howard for $4 million based on Freedman's representations of its impeccable quality and provenance.
- All paintings Rosales supplied to Knoedler were eventually revealed to be forgeries created by an artist in Queens, New York.
Procedural Posture:
- Domenico De Sole and John Howard filed separate lawsuits against Knoedler Gallery, LLC, its parent company 8-31 Holdings, Inc., its president Ann Freedman, its owner Michael Hammer, and employee Jaime Andrade in the U.S. District Court for the Southern District of New York.
- Defendants' initial motions to dismiss the complaints were granted in part and denied in part by the trial court.
- Plaintiffs filed amended complaints alleging claims including civil RICO violations, fraud, fraudulent concealment, breach of warranty, and conspiracy.
- Following the close of discovery, all Defendants moved for summary judgment on the remaining claims.
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Issue:
Do genuine issues of material fact exist regarding an art gallery's fraudulent intent (scienter) and its clients' justifiable reliance, sufficient to defeat a motion for summary judgment, when the gallery sold forged paintings despite numerous red flags and a shifting, undocumented provenance?
Opinions:
Majority - Gardephe, J.
Yes, genuine issues of material fact exist regarding the gallery's fraudulent intent and the buyers' justifiable reliance. A court may not grant summary judgment for lack of scienter when a plaintiff presents sufficient facts to support an inference of bad faith or intent to deceive. Here, ample circumstantial evidence exists for a reasonable jury to find that Ann Freedman and Knoedler acted with fraudulent intent. This includes the fabricated and shifting stories of provenance, Rosales's willingness to sell masterpieces for a fraction of their market value, the absence of any documentation, the early warnings about the Diebenkorn paintings, and the 2003 IFAR Report, which Freedman reviewed. The court reasoned that Freedman’s actions, such as exhibiting the works and purchasing some herself, could be interpreted by a jury as efforts to build a 'facade of credibility' rather than proof of her innocence. Regarding reliance, the court found that even though the plaintiffs were sophisticated collectors, a jury could find their reliance justifiable due to Knoedler's venerable reputation, Freedman's explicit written warranties of authenticity, and the fact that discovering the forgeries would have required extraordinary effort. However, the court granted summary judgment for defendants Michael Hammer and Jaime Andrade, finding insufficient evidence that they had knowledge of or participated in directing the fraudulent enterprise. The court denied summary judgment for the parent company, 8-31 Holdings, finding sufficient evidence for alter ego liability based on the mingling of operations, disregard of corporate formalities, and siphoning of funds from Knoedler.
Analysis:
This memorandum opinion clarifies the standard for defeating summary judgment in a complex fraud case where scienter is a central issue. It reinforces that circumstantial evidence, such as ignoring multiple 'red flags,' can be sufficient for a jury to infer fraudulent intent or, at a minimum, recklessness constituting an 'egregious refusal to see the obvious.' The decision also limits the 'sophisticated buyer' defense, establishing that reliance can be justifiable when a highly reputable seller provides explicit written warranties and the truth is not easily ascertainable. The court's alter ego analysis serves as a practical application of the doctrine, showing how evidence of financial siphoning and disregard for corporate separateness can expose a parent company to liability for its subsidiary's actions.
