ArtAssure, a New York based fine art dealer, thought it had a monumental deal in the bag: it was going to purchase a collection of paintings from Hiroshima Bank that included pieces by famous artists such as Renoir, Picasso, and Monet. The collection was apparently offered at the price of 350 million Euros, but according to ArtAssure, it had negotiated the price down to 315 million Euros and expected to make USD $204 million in resale profits.
Artmentum, the Swiss company brokering the deal between the banks, the Japanese government, and ArtAssure, said that this deal was the product of a year and a half of negotiations. In fact, Sotheby’s, Christie’s, and others were also trying to buy the art collection themselves, but ArtAssure was given a Memorandum of Understanding, which gave them the exclusive right to sell the collection, pending its ability to show its financial capability to execute the transaction.Picasso’s Two Women at a Bar
It seemed the Japanese Government was the controlling shareholder of Hiroshima Bank, and approval of the sale from the various governmental ministries involved made the deal politically sensitive. Because of this complicated Japanese political maneuvering (*mumble mumble hand-waving mumble*), the condition was that the potential deal had to be kept completely secret. Artmentum provided a redacted document from the Japanese agent, representing that he had the power to sell the collection.
ArtAssure, eager to get its hands on the collection of such esteemed fine art, had its bank contact the Swiss bank handling the transaction, DZ PrivatBank, with confirmation of financial ability. Everything seemed ready to go.
And then… nothing. Artmentum said DZ PivatBank wouldn’t accept ArtAssure’s letter of financial capability or its money. Not only that, when ArtAssure investigated, it claims that it discovered: 1) Hiroshima Bank doesn’t own the collection; 2) The Japanese government has less than a 1% interest in the bank; 3) Neither the government nor the Bank have either the desire or the power to sell the collection; 4) Sotheby’s never valued the collection; 5) Christie’s was never involved; 6) There were no third party buyers lined up among other reasons. The entire deal, essentially, was a total fiction.
Understandably irked, ArtAssure filed suit against Artmentum in January of this year, seeking to get paid its expected profits of USD $204 million had the deal existed/gone through. In an included affidavit, DZ PrivatBank has said that while Artmentum had an account with them, the bank had never heard anything about the alleged art deal until the lawsuit was filed. They deny ever asking for or rejecting anything from ArtAssure.
Interesting considering that Artmentum’s lawyer, Thomas Burkhalter, was sending emails supposedly on behalf of DZ PrivatBank. When confronted with inconsistencies last September, Burkhalter wrote to ArtAssure, “We find it difficult to understand that… you truly think that this transaction is not real.” So who is lying here? What was the end goal? And if the whole thing was a scam, why pull the plug before any money changed hands?
Damages for Fraud and Breach of Contract
Can ArtAssure actually receive $204 million in damages? To figure that out, we must look at legal reasons under which ArtAssure is suing; in this case, breach of contract and fraud. To win a breach of contract action, ArtAssure must show that they had a contract with Artmentum, which was broken by Artmentum, which resulted in damages. However, ArtAssure and Artmentum didn’t have a contract in the traditional sense of a document laying out the terms signed by both parties. The parties had a Memorandum of Understanding, a preliminary document laying out the requirements necessary to move to the final contract. ArtAssure performed its part of the requirements, while Artmentum did not. However, the company’s reliance on the Memorandum in expending time and resources, in good faith, can be construed as a contract, but it is a hurdle that Artmentum will try to exploit in its defense. Should ArtAssure overcome that obstacle, it must then show that it was damaged, for which it can receive restitution.
Breach of contract allows for direct damages, which would include things like the time and money spent during the course of the deal. But the lost profits are not direct damages, but indirect damages, which are available if those damages are reasonably foreseeable, meaning that a reasonable person would be able to predict or expect the ultimately harmful result of their actions. Indirect damages are much harder to prove, yet in cases where the actions of the defendant are willful, indirect damages are more likely to be awarded. So indirect damages are a distinct possibility in this case, but receiving such a high damage award is unlikely. The law is design to make an entity that was damaged, whole again. It is rare for plaintiffs to make a windfall.Modigliani’s Portrait de jeune fille à la blouse bleue
Fraud, which often goes hand-in-hand with a breach of contract, on the other hand may provide significant punitive damages. To succeed with the fraud claim, ArtAssure must prove that Artmentum intentionally misrepresented itself, in such a way that caused ArtAssure to rely on the misrepresentation. The key here is intent. Did Artmentum purposefully act to deceive or was the whole thing due to gross incompetence. Court’s award punitive damages where the defendant’s conduct amounts to such willful dishonesty or malicious wrongdoing that it is appropriate to deter the defendants from engaging in similar conduct in the future. That may be the case here.
I say ‘may” because the facts discussed here are from the complaint filed by the plaintiff. We have yet to hear Artmentum’s defense, which may be wildly different. One thing is sure though, unless that price cones down a bit, settlement negotiations won’t get very far.
The moral of the story: the world of fine art has its scammers just like any in which the goods involved are of significant monetary value, so when you find artwork for sale, keep up your guard. ArtAssure dodged a bullet by performing a thorough due diligence. They may have expended significant time and effort, but in the end, it could have been much worse. So before making any fine art purchase, be sure the person selling the piece of art actually owns that piece of art. Also, for anyone interested, I am currently taking offers on a certain piece of prime bridge real estate. Inquires and offers may be sent to [email protected]