Art Law Report

Knoedler Gallery Owners May be Liable for Forgery Scandal, Jury Will Decide

Posted by Nicholas O'Donnell on May 14, 2019 at 9:11 AM

The sprawling saga of the M. Knoedler & Co. Gallery forgery scandal is approaching a full decade since the storied gallery closed abruptly in 2011 (fuller background further below). The last pending civil suit related to the case is now headed for trial in July after the U.S. District Court denied a motion for summary judgment by the gallery’s shareholders that argued that they could not be responsible for the company’s liability. Judge Paul G. Gardephe of the Southern District of New York ruled that there were factual disputes on whether those shareholders indeed could be responsible for alter ego liability that can only be resolved at a trial. The court did award Defendant Michael Hammer summary judgment on the plaintiffs’ fraud, fraudulent concealment, aiding and abetting fraud, aiding and abetting fraudulent concealment, conspiracy to commit fraud, and conspiracy to commit fraudulent concealment, RICO, and RICO conspiracy claims.

The decision deals with a concept known in business as piercing the corporate veil. That is, under what circumstances can potential liability of a corporation be imputed to—and pursued against—the company’s shareholders. The default rule is that it may not—for this reason shareholders of Monsanto would not have to contribute to this week’s $2 billion jury verdict about the use of Roundup. But that rule may be overcome when the shareholders of a company use the company as an “alter ego,” when they do not respect the distinction between the personal and the corporate: “a mingling of the operations of the entity and its owner plus an ‘overall element of injustice or unfairness.” With Knoedler long depleted of any assets, any judgment against the gallery would be a moral victory at most unless there were another contributor from whom it could be collected. Knoedler is owned by Knoedler LLC, a Delaware limited liability corporation. 8-31, a Delaware corporation, is the sole member of Knoedler. Michael Hammer is the president, chief executive officer, chairman, and sole owner of 8-31, and became the sole manager of Knoedler LLC in 2011. The recent decision leaves Knoedler’s shareholder in the case as a potential source of that recovery, if a jury agrees.

Respecting corporate formalities is an essential practice in any business. The corporate structure is in many ways the engine of capitalism: companies can raise capital by selling equity to shareholders whose liability is limited to what they contribute (i.e., they may not recover their capital contributions if the company fails, but they will not have to pay more if the company becomes insolvent). The key is that there has to be a real company, a board that holds meetings and respects the bylaws, does not intermingle company funds with shareholder funds, etc.

There is nothing art- or gallery-specific about arguments over whether the corporate veil can be pierced. Yet as many of us know, the art market is a notoriously informal business. This can lead to temptations to cut corners or simple ignorance of the need to do so. The consequences can be devastating. Without suggesting whether the Knoedler owners should or should not face a piercing of the corporate veil, from a risk perspective they are now facing a trial where a jury will decide that answer.

The sixty-eight page decision lays out the history of the case and the factors in the court’s decision in detail. On the veil-piercing, the court found disputed facts that stood out were the purchase of automobiles by 8-31—(according to the defendants themselves, “8-31 is a holding company for Knoedler LLC, Hammer Galleries LLC, and Knoedler Publishing LLC, and has no operations or revenue of its own“)—for its members, and accounting changes. As the opinion laid out:

Hammer generally obtained titles for the cars in his own name, or his name and the name of 8-31. []  Other than Hammer, no one associated with 8-31 or the LLCs drove the cars. []  On one occasion in which Hammer requested reimbursement for a car, he told 8-31’s chief financial officer that the reimbursement was for “work and improvements on the ‘company’ [car].”

8-31 clearly (at least as recited by the judge) did observe many of the requisite formalities: it had meetings, separate bank accounts, and the like. What were deemed “interdivisional cash receivables” were clearly important to the court, however, from which a jury could conclude that “8-31 siphoned more than $13 million from Knoedler LLC.” The court found parallel disputes of fact about funds related to Hammer. Further, the court held, “there is evidence that 8-31 and Knoedler LLC disregarded corporate formalities in their dealings with each other.” The court also found disputed evidence about whether 8-31 and Knoedler followed an applicable Management Agreement and “failed to follow legal formalities when contracting with each other.”

Lastly, another interesting thing happened with which many attorneys can empathize. After setting a trial date in July (following a decision that had been pending for may months), the judge flatly denied the parties’ requests to reschedule because of preexisting scheduling conflicts. This is, as any lawyer can relate, completely unreasonable. Lawyers have multiple commitments that must be balanced and honored, and a decision like that puts them in an impossible position. But having been through just this sort of thing recently, I can say that it also happens all the time and is a relatively unsubtle way of the court saying that the case should be settled, posthaste. We have no knowledge of whether such settlement is attainable here, but it is classic arm-twisting by the court.

Background

In November, 2011, the art world was shocked when M. Knoedler & Co.—an old line dealer that opened in 1846—suddenly announced its immediate, permanent closure. Only days later, litigations were initiated in New York alleging that Knoedler had sold buyers forged paintings by Jackson Pollock and Robert Motherwell, among others. Knoedler’s then-director Ann Freedman was also named as a defendant, but she vehemently denied any responsibility. Then, in December, 2011, federal authorities revealed their related investigation targeting a woman named Glafira Rosales, whom the authorities alleged was responsible for supplying dealers in New York with forged paintings. According to the New York Times, that investigation had begun as long ago as 2009. Rosales had claimed access to the unnamed collection Abstract Expressionist paintings. Every single one was a forgery.

Rosales was charged in May, 2013 with a number of crimes related to the forgery scandal. Still unknown to the public at the time was the identity of the actual alleged forger. When charged, Rosales initially declared her intention to defend herself and clear her name.

The plot thickened in 2013 when federal authorities revealed that they believed that the forgeries were all the work of one man in Queens, an “unusually talented but unknown artist who was paid only a few thousand dollars apiece for his handiworks.”

Rosales eventually pleaded guilty to what was described as an “$80 million art forgery scheme.” In connection with the plea, the U.S. Attorney released a statement that Rosales had made more than $30 million in the process.

Over the next several years the cases went to trial and/or settled, including one mid-trial settlement. This trial is the last pending civil case related to the gallery.

Topics: Ann Freedman, Jackson Pollock, Robert Motherwell, Southern District of New York, RICO, Glafira Rosales, M. Knoedler & Co., Abstract Expressionist, Gardephe, piercing the corporate veil, Monsanto, Roundup, Michael Hammer, 8-31, Knoedler LLC, alter ego

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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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