Galin v. Hamada: Investor Who Entrusted Painting to Fraudulent Gallery Owner Loses Claim Against Buyer in Ordinary Course

February 2018

The recent decision in Galin v. Hamada 1 establishes again that parties to commercial art transactions often fail to recognize the applicability of the Uniform Commercial Code (“UCC”), and the consequences of that inattention can be devastating. For consignors and investors, the case teaches that they must diligently police their selling agents to avoid the harsh consequences of the entrustment rules of the UCC. The opinion also holds that a merchant buyer of art must conduct a reasonable due diligence inquiry to investigate potential title issues; that is a merchant buyer must consider whether a sale has the presence of “red flags” that might impact the status of a “buyer in the ordinary course.”

In June 1989, the plaintiff in Galin purchased a 1/3 interest in the Andrew Wyeth painting “Ice Storm,” from Davis Ramus, an art dealer operating in New York and Atlanta. The intended arrangement was that Ramus would sell the artwork at a profit and repay Galin and the other investor in the work. Although Ramus sold the painting in November 1989 to Coe-Kerr gallery, he did not pay Galin.2 In the Ice Storm transaction, Ramus transferred Ice Storm and $450,000 in cash to Coe-Kerr for a painting that the parties valued at $819,382. Prior to selling Ice Storm, Ramus and Coe-Kerr had completed other similar transactions involving trades of artwork. Galin, for his part, never filed a UCC-1 financing statement identifying his interest as a consignor.

Coe-Kerr resold the work, but Galin took no action for many years, although he learned of the sale no later than December 1995, by which time Coe-Kerr had gone out of business. But according to the opinion, Galin never pursued Coe-Kerr, nor after the closing of that gallery, its principals. Nor did he register the work with the Art Loss Register, although the opinion states that he “sporadically contacted museums and galleries to inquire about the painting’s current location.” In May 2015, Galin learned that the work was to be sold by Christie’s, at which point he contacted Christie’s and asserted an ownership interest. By agreement, the painting was sold, with Christie’s retaining the proceeds pending a resolution of the dispute.

Galin brought an action against Hamada, the purchaser of Ice Storm, alleging that the sale to Hamada was invalid because he held title to the work. Hamada moved to dismiss, arguing that under the entrustment provisions of the UCC Section 2-403, it had acquired good title to the work. But the court denied that motion to allow Galin to take discovery to enable him to challenge Hamada’s entrustment defense. Crucially, at the motion to dismiss stage, the court indicated that if the entrustment provisions of the UCC, Section 2-403 applied, Hamada would prevail.

After discovery closed, Hamada moved for summary judgment on the entrustment defense, and for sanctions against Galin for pursuing the claim when, it argued, there was no basis to dispute the validity of its entrustment defense.

The court first explained that if the Section 2-403’s entrustment provisions applied, then “Galin’s claims fail as a matter of law – without regard to the circumstances under which [Hamada] himself procured the painting.” Section 2-403 provides that “[a]ny entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the enstruster to a buyer in ordinary course of business.” The court explained that the theory behind the provision is that a person who entrusts his goods to a known reseller bears the risk that the unscrupulous seller will sell the property to an innocent buyer and pocket the proceeds.3

The court then briskly moved through the evidence, finding that the entrustment provisions were satisfied: (a) Ramus was a merchant who dealt with goods of this type; and (b) that Galin had authorized Ramus to sell Ice Storm. The court said that the fact that Ramus had failed to pay Galin (and a third co-owner of the work) was immaterial. Thus, the only remaining issue was whether Coe-Kerr qualified as a “buyer in ordinary course of business.” The court said that the UCC defines such a buyer as one who “buys in good faith, without knowledge that the sale violates the rights of another person in the goods” (emphasis added).

In the case of a merchant, the court explained, good faith requires “honesty in fact and the observance of reasonable commercial standards in the trade,” adding that “a merchant might be required under the UCC to take additional steps to verify the true owner of a piece of artwork. This heightened duty of due diligence is triggered where there are warning signs about problems in a sale.” The warning signs include:

  • whether the sale price is obviously below market;
  • whether the negotiations or procedure of the sale differed from previous transactions between the parties;
  • whether the buyer was aware of the seller’s financial difficulties; and
  • whether the buyer would have reason to question the seller’s ownership of the artwork.

After reviewing the evidence produced in discovery, the Galin court determined that Coe-Kerr gallery qualified as a buyer in the ordinary course of business, which entitled Hamada to summary judgment. The court found that while Galin had made allegations to undermine Coe-Kerr’s status as a buyer in ordinary course, he had not been able to present any evidence to substantiate those claims.

The court also held that Galin’s continued pursuit of the claim after the close of discovery was sanctionable under Rule 11, because, it said “it could not have been clearer going into discovery that, if the entruster provision applied, Galin had no viable legal claim.” The court noted that “discovery yielded no admissible evidence whatsoever to support Galin’s assertions that there were red flags.” Based on that analysis, “Galin and his counsel had an obligation under Rule 11 to withdraw the Complaint because they knew – by that point if not earlier – that their allegations on the central (and dispositive) issue in the case were ‘utterly lacking in support’.”

Although the court cited other cases where Rule 11 sanctions had been imposed for pursuing claims that were without evidentiary support, it is unusual for a court to suggest that a plaintiff has an absolute duty to withdraw a claim at the conclusion of discovery when it has failed to develop evidence to support its pleading theories. Thus, although Galin is important as an art law decision, its Rule 11 ruling also means that it is an important case for general federal litigation.

For more information on this Alert or other restructuring & bankruptcy matters please contact:

Stephen B. Selbst at +1 212 592 1405 or [email protected]

© 2018 Herrick, Feinstein LLP. This alert is provided by Herrick, Feinstein LLP to keep its clients and other interested parties informed of current legal developments that may affect or otherwise be of interest to them. The information is not intended as legal advice or legal opinion and should not be construed as such.

1. No. 15-CV-6992 (JMF)(September 26, 2017).

2. When he sold Ice Storm, Ramus was experiencing financial pressure; eventually he was convicted and imprisoned on multiple fraud-related charges.

3. Interestingly, the court did not discuss or analyze whether its decision would have been different if Galin had filed a UCC-1 financing statement listing his interest as a consignor.