Art Law Report

Art Advisors and Duty of Loyalty in Focus Again Over Sale of Basquiat

Posted by Nicholas O'Donnell on March 17, 2017 at 10:18 AM

We reviewed in December an important decision that addressed the duties of loyalty that art advisors may, or may not, owe to their clients in dealing in the art market.  That question—of to what extent advisors and consultants must subordinate their interests entirely to the clien—is of obvious importance in a marketplace where buyer and seller often do not interact with each other.  Whereas December’s news about the sale of Cady Noland’s Log Cabin was a reminder that advisors are not necessarily fiduciaries, this month’s decision about the sale of a Basquiat painting underscores that where a fiduciary relationship exists, the penalties for straying from those obligations can be severe.

The recent decision involved claims by Michael Schulhof against Lisa Jacobs Fine Art.  According to the court ruling, Jacobs had worked personally as a curator and advisor to Schulhof and his late mother Hannelore Schulhof between 1998 and Hannelore’s death in 2012.  Michael Schulhof and Jacobs entered into a contract in October, 2011 to locate a buyer for Future Sciences Versus the Man by Jean-Michel Basquiat.  The contract specified that the minimum acceptable price was $6 million, and that Jacobs would be paid a fee of $50,000 upon successful sale.  It also included a provision that Jacobs was “not to accept any fee from the purchaser, in cash or in kind.”

According to the court’s findings, Jacobs met with a prospective buyer on  November 1, 2011, and that Jacobs informed the prospective buyer that the price was $6.5 million.  The buyer accepted the offered price.  On November 7, 2011, however, the court found that Jacobs told Schulhof that a possible buyer had been found for which Jacobs “was able to get [the buyer] up to 5.5 million.”  Schulhof agreed to the $5.5 million purchase price, unaware that the buyer was willing to pay $6.5 million.

Jacobs suggested a two-step sale to preserve the buyer’s anonymity, which is no uncommon.  In this approach, Schulhof would sell the work to Jacobs for $5.45 million, and Jacobs would sell the work to the buyer for $5.5 million (the difference being the contract commission of $50,000).  About a year later Schulhof learned that the buyer had paid $1 million more than he thought, and he sued Jacobs.

Jacobs claimed the existence of a separate “buyers premium” agreement that could have altered the written agreement contract, but the court ruled there was no “admissible concrete evidence” of any such agreement.

The court found Jacobs liable for fraud (affirmatively misstating the buyer’s offer), breach of contract, and breach of her fiduciary duty.  On the facts as the court found them, this conclusion is fairly obvious.  Any relationship will first be governed by the terms of an agreement if there is one, and this agreement spelled out clearly what Jacob’s compensation was to be (and not be).  As the record in the court states, the sin was not one of omission, but of affirmatively misrepresenting the factual position of the buyer.  Not only did Jacobs have to disgorge the $1 million she had been paid by the buyer, she was not even allowed to keep her $50,000, a penalty for being a “faithless servant.”

Given that, what lessons does this hold for advisors and collectors?  Ironically, this was a case where the parties had spelled out their expectations.  That allowed Schulhof to assert his rights with some likely expectation of success.  Interestingly, however, given the view in the Log Cabin case, the court took a more expansive view of the relationship and thus the obligations outside the contract itself.  In considering the breach of fiduciary duty claim, the court stated that:

Given Jacobs and Schulhof’s longstanding business relationship combined with the terms of the October Agreement, Jacobs owed a fiduciary duty to Mr. Schulhof as executor, thereby obligating her to disclose the $6.5 million offer. . . .

This has echoes of the ongoing Bouvier/Ryobovlev dispute, in which the Russian collector has accused Bouvier of breaching a trusted relationship by reselling a work to Ryobovlev at a much higher price than Bouvier paid.  Bouvier characterizes the sale as a fair arms length transaction, Ryobovlev argues that Bouvier had to prioritize Ryobovlev’s interest. 

The point here in the absence of knowledge of the contractual particulars of that relationship (which will likely never be fully public) is that agency is a tricky business if one is in the same market.  Transparency will always be the best protection for all involved. 

Topics: Cady Noland, Log Cabin, Michael Schulhof, Lisa Jacobs Fine Art, Jean-Michel Basquiat, Hannelore Schulhof, Lisa Jacobs, Future Sciences Versus the Man, fiduciary duty, art advisor

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About the Blog

The Art Law Report provides timely updates and commentary on legal issues in the museum and visual arts communities. It is authored by Nicholas M. O'Donnell, partner in our Art & Museum Law Practice.

The material on this site is for general information only and is not legal advice. No liability is accepted for any loss or damage which may result from reliance on it. Always consult a qualified lawyer about a specific legal problem.

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