Posted on July 14, 2008 by Samantha Evans

Unknown Buyers At Auction - Determining Who to Sue.

Despite the stock market turmoil, both high-grossing art auctions and high-rolling buyers who wish to keep their identity unknown remain a constant. This raises the following question: would a New York court, prior to filing an actual lawsuit, permit a party claiming to be the true owner of a missing artwork learn the identity of the unknowing buyer who purchased it at auction? As you may expect, the answer is: it depends.     

In In re Peters, 34 A.D.3d 29, 821 N.Y.S.2d 61 (1st Dep’t 2006), the Court stated that a party seeking pre-action discovery must establish: (1) a valid basis for seeking pre-action disclosure to aid in bringing the action (i.e., that it needs the information); and (2) that the party has a meritorious claim.   See N.Y. CPLR §§ 3012(c), 7112 for more on pre-action discovery. Notably, the statute does not require that the source of pre-action discovery be the target of the prospective action. In re Goldline Int’l, Inc., No. 2506/07, 2007 WL 3054163 (N.Y. Sup. Ct., N.Y. Co., Mar. 20, 2007).

New York courts have granted pre-action disclosure, such as depositions and document demands, to determine the identity of a potential defendant in a prospective art recovery action. For example, in Alexander v. Spanierman Gallery, LLC, 33 A.D.3d 411, 822 N.Y.S.2d 506 (1st Dep’t 2006), the Court affirmed the lower court’s decision to permit pre-action disclosure to obtain the identity of the individual or entity that purchased a sculpture allegedly stolen from the plaintiff’s home. The Court implied that pre-action disclosure of this nature is proper when the information is sought to file suit and not to determine if one exists.

However, in In re Peters, 34 A.D.3d 29, 821 N.Y.S.2d 61 (1st Dep’t 2006), the Court was not willing to grant the plaintiff pre-action discovery for this same information. There, the plaintiff was the alleged successor-in-interest to the true owner of stolen artwork. She sought pre-action discovery from Sotheby’s to learn the identity of the unknown person who purchased the subject artwork in good-faith at an auction. 

The In re Peters Court agreed that the plaintiff had a valid basis for seeking this information because she needed it in order to sue the proper defendant in a prospective action to recover the artwork. The Court explained that under New York law, one of the elements of a claim for conversion or replevin against a good faith purchaser for value is the demand and refusal rule. Stated otherwise, a plaintiff must be able to show that she made a “demand” for the return of the art from the good faith purchaser, who then “refused” such a demand. Without knowing the identity of the current owner, the plaintiff would not be able to satisfy her burden.

However, the In re Peters Court disagreed with the lower court that plaintiff had a meritorious claim. Interestingly, even though it was very early on in the litigation and the plaintiff may not have ultimately named Sotheby’s as a defendant in the prospective action, the Court was willing to entertain Sotheby’s defenses to the viability of plaintiff’s suit. Specifically, despite the fact-sensitive nature of the inquiry, the Court was persuaded that the plaintiff had unreasonably delayed in filing suit and that the suit was time-barred.  Therefore, the Court reversed the lower court’s decision to permit pre-action discovery of the unknown buyer’s identity, vacated the lower court’s order, and denied the plaintiff’s application and dismissed her petition for pre-action discovery.

The In re Peters case shows that a potential plaintiff seeking to learn the unknown identity of a buyer at auction in aid of bringing an action has to jump through certain hoops in order to have a realistic shot at pre-action discovery.   

For other commentary about discovering the identity of an unknown buyer, see our previous blog “Confidentiality Agreements Between Art Buyers and Art Galleries are Not Bulletproof.”  

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Posted on April 29, 2008 by Samantha Evans

Confidentiality Agreements Between Art Buyers and Art Galleries are Not Bulletproof

Many art buyers operate under the belief that a confidentiality agreement with an art gallery is a bulletproof mechanism to preserve the secrecy of their identities. A recent case by a New York Surrogate Court shows that this is a misperception because the law is above these private agreements.     

In Lumerman v. Tunick et. al., No. 0489/05, 2008 WL 920666 (Surr. Co., Westchester Co. Mar. 14, 2008), a New York Surrogate Court ruled that Sotheby’s, Inc. (“Sotheby’s”) and Christie’s, Inc. (“Christie’s”) had to turn over information concerning the identities of buyers, despite confidentiality agreements with the buyers. 

At issue in the case were over 200 of the decedent’s artworks by the famous artist Willem de Kooning. In May 2007, the decedent’s first wife and three daughters (over the objection of the second wife) sued to recover certain of these artworks that had been consigned to Christie’s and Sotheby’s prior to and shortly after the decedent’s death. Among others, the lawsuit named Christie’s, Sotheby’s, and “John Does” as defendants. The John Does referred to persons and/or entities who purchased the subject items from Christie’s and Sotheby’s (the “buyers”). After Christie’s and Sotheby’s refused to identify during discovery the names of these buyers, the plaintiffs filed a motion to compel. Both Christie’s and Sotheby’s opposed plaintiffs’ motion on the basis that confidentiality agreements were in place with the buyers which prevented them from disclosing the buyers’ identities. Christie’s and Sotheby’s also claimed that having to disclose this information would damage their trust-based relationships, threaten the privacy and safety of the buyers, and harm their reputation and business advantage. Christie’s and Sotheby’s also argued that the plaintiffs should first be required to prove that they are entitled to the return of the artworks.

The court rejected all of these arguments, and compelled Christie’s and Sotheby’s to turn over the information requested about the buyer’s identities. The court found that: (i) New York’s C.P.L.R. § 3101, which requires “full disclosure of all evidence material and necessary to the prosecution or defenses of action,” was met because without this information, the plaintiffs would not be able to maintain an action against the buyers - i.e., satisfy New York’s demand and refusal rule; (ii) denying the requested disclosure would increase the chance that the art would be re-sold or moved beyond the jurisdiction of the court; and (iii) proving ownership first would be a waste of judicial resources, because the plaintiffs would still need to know who was in possession of the artworks to satisfy New York’s demand and refusal rule.     

This case presents an important reason why clients should understand that a confidentiality agreement is not impregnable and its enforceability may one day be subject to the discretion of a court.

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