The Purchase of Andy Warhol’s “Uncle Sam” Screen Print Edition 1/5 and The Dispute That Followed

• Posted on: Feb 22 2021

In today’s article, we examine familiar territory: complaints alleging breach of contract and fraudulent inducement. Kleber v. 10012 Holdings Inc., 2021 N.Y. Slip Op. 30441(U) (Sup. Ct., N.Y. County Feb. 8, 2021) (here).

As the title of the article indicates, Kleber involved the purchase of an “Uncle Sam” screen print edition 1/5 by Andy Warhol (the “Artwork”), which was signed and numbered by the artist. In April 2019, Plaintiff Claus Kleber and Defendant Guy Hepner (“Hepner”) on behalf of his gallery, defendant 10012 Holdings Inc, (“Holdings”), bought the print for $45,000.00. The Terms and Conditions of the Sale (“Terms”) were printed on an invoice, dated April 5, 2019. Pursuant to the Terms, Kleber was required to pay one-half of the $45,000.00 purchase price upon receipt of the invoice and “the remaining due after inspection and prior to delivery.” If the print was not delivered, the seller “reserve[d] the right to rescind the transaction and refund any monies paid to the buyer in full satisfaction of any obligation of [the] seller to [the] buyer with respect to the subject transaction.” The Terms also included a limitation of damages clause pursuant to which any claim for damages was limited to the purchase price.

On April 12, 2019, plaintiff paid the seller $22,500.00, or one-half of the purchase price. Six days later, plaintiff’s art expert travelled to defendants’ Manhattan gallery to inspect the print that defendant “presented as the Artwork and as ‘ready to be shipped.’” However, the expert discovered that the artwork was not the agreed-upon screen print. According to plaintiff, defendants’ employee told plaintiff’s expert that the real screen print would be in the gallery soon.

In his complaint, plaintiff claimed that defendants admitted that the real screen print was never in New York but was in Sweden. As a result, the parties agreed to an inspection of the screen print through the seller’s gallerist in Sweden. That inspection took place on June 10, 2019.

Thereafter, the parties agreed that the transaction would go through London. According to plaintiff, defendants informed him that they had “London representation and a British VAT”, which would reduce plaintiff’s costs and allow direct shipment of the screen print from Sweden to Germany, where plaintiff lived. In connection therewith, plaintiff requested a new invoice of the full amount to be issued to him from London. 

On June 14, 2019, plaintiff learned from the seller’s gallerist that defendants provided an invalid British VAT number. As a result, the seller withdrew the Artwork from the sale.

According to plaintiff, from that point forward, various communications were exchanged with defendants to have the deposit returned to him without success.

On November 13, 2019, plaintiff filed a summons and complaint, alleging three causes of action: breach of contract, breach of express warranty pursuant to the Arts and Cultural Affairs Law and fraudulent inducement. After defendants failed to answer, plaintiff moved for a default judgment, which was granted on February 28, 2020. In May 2020, defendants moved to vacate the default judgment and in September 2020, the parties stipulated to vacate the default judgment that had been entered.

Thereafter, defendants moved, pursuant to CPLR § 321l(a)(1) and (7), to dismiss the complaint or in the alternative to strike the demand for treble damages. 

The Court granted in part and denied in part the motion. 

The Court denied the motion as it pertained to plaintiff’s breach of contract cause of action. The Court found that plaintiff “clearly” pleaded “‘the existence of a contract, the Plaintiff’s performance thereunder, the Defendant’s breach thereof, and resulting damages.’” Slip Op. at *3 (quoting Harris v. Seward Park Hous. Corp., 79 A.D.3d 425, 426 (1st Dept. 2010)).

With respect to the portion of the motion to limit plaintiff’s damages to the return of his deposit as set forth in the invoice, the Court held that plaintiff was entitled to pursue the damages demanded. Id. 

Under New York law, courts will enforce a “clear contractual provision limiting damages … absent a special relationship between the parties, a statutory prohibition or an overriding public policy.” Ryan v. IM Kapco, Inc., 88 A.D.3d 682, 683 (2d Dept. 2011); see also Colnaghi, US.A., Ltd., v. Jewelers Protection Servs., Ltd., 81 N.Y.2d 821, 823 (1993). “However, public policy forbids a party’s attempt to escape liability, through a contractual clause, for damages occasioned by grossly negligent conduct.” Southern Wine & Spirits of Am., Inc. v. Impact Environmental Engineering, PLLC, 104 A.D.3d 613, 614 (1st Dept. 2013). Gross negligence, when invoked to defeat an agreed-upon limitation of damages in a contract, must “‘smack[] of intentional wrongdoing’ [or be] … conduct that evinces a reckless indifference to the rights of others.” Sommer v. Federal Signal Corp., 79 N.Y.2d 540, 554 (1992) (internal citations omitted).

In Kleber, the Court found that plaintiff met the foregoing standard by alleging “that Defendants knowingly made false statements regarding the quality of the print offered for sale and its location in Defendants’ gallery in New York.” Slip Op. at *3. The Court also found that plaintiff adequately pleaded “that Defendants falsely represented that the Swedish seller required a deposit” and that “despite the transaction being cancelled by the Swedish seller, his repeated demands for the return of his deposit were rebuffed by Defendants.” Id.  “It is undisputed that, to date, Plaintiffs deposit has not been returned,” said the Court.” The foregoing allegations, concluded the Court, sufficed to state “a claim of willful conduct to sustain a claim of gross negligence.” Id. (citing Dolphin Holdings, Ltd. v. Gander & White Shipping, Inc., 122 A.D.3d 901 (2d Dept. 2014)). Accordingly, plaintiff was entitled to pursue his “claim for his demanded damages for the alleged breach of contract.” Id.

Turning to the cause of action alleging breach of an express warranty under the Arts and Cultural Affairs Law, the Court held that plaintiff failed to state a claim. Slip Op. at *4. 

Under the Arts and Cultural Affairs Law, “[w]henever an art merchant, in selling or exchanging a work of fine art, furnishes to a buyer of such work who is not an art merchant a certificate of authenticity or any similar written instrument it shall be presumed to be part of the basis of the bargain” and “shall create an express warranty for the material facts stated as of the date of such sale or exchange.” See Arts and Cultural Affairs Law § 13.01 (l)(a), (b). 

The Arts and Cultural Affairs Law § 13:05(1) further states that “[w]hen an art merchant furnishes the name of the artist of a multiple, or otherwise furnishes information required by this title for any time period as to transactions including offers, sales or consignments, the provisions of section 13.01 of this article shall apply except that said section shall be deemed to include sales to art merchants.” 

To prevail, a plaintiff must plead that the defendant, as an art merchant or merchant consignee, offered or sold a multiple in, into or from the state, without providing the information required for the appropriate time period, or who provided required information which was mistaken, erroneous or untrue. See Arts and Cultural Affairs Law §15.15(1).

In Kleber, the Court found that plaintiff failed to satisfy the statute as the required information (i.e., the inspection of the Artwork) had been provided. Indeed, noted the Court, plaintiff specifically alleged that the information was provided after his expert detected the discrepancy:

In his complaint, … Plaintiff pled that Defendants presented in their New York gallery “an inferior copy of the Artwork that did not match the description of the Artwork on the invoice.” However, as pled, this was immediately detected by Plaintiff’s art expert upon inspection and resulted in a second inspection. In the end, as Plaintiff alleges in his complaint, over the course of this transaction, his expert travelled to Stockholm and inspected the Artwork that was specified on the invoice. 

“As such,” concluded the Court, “the required information was provided, there was no breach of the express warranty and there exists no basis for treble damages.” Id. (citations omitted).

Finally, the Court held that plaintiff failed to state a claim for fraudulent inducement because he did not satisfy the justifiable reliance element of the claim. Slip Op. at *5. The Court said that plaintiff “did not detrimentally rely on any alleged misrepresentations regarding the quality of the work since he engaged an art expert who identified the discrepancy and which ultimately resulted in inspection of the artwork that comported with the description on the invoice.” Id. 

The Court also addressed the materiality of the alleged falsity concerning the deposit. In this regard, the Court said that “[a]ny misrepresentation regarding the requirement of a deposit by the Swedish seller was immaterial because the invoice required a deposit of half of the purchase price upon receipt.” Id. 

Takeaway

In prior posts, we have examined cases in which the court dismissed a fraudulent inducement claim because the plaintiff, a person with sophistication, failed to take any affirmative steps to protect against the possibility of fraud. See, e.g., here and here. Kleber stands in contrast to these cases because Kleber actually took affirmative steps to protect against fraud and discovered the truth about the statement in question. The lesson of Kleber is, therefore, a plaintiff cannot claim fraud and reliance thereon when he or she actually discovers the falsity of the statement alleged to be false. 

The other lesson of Kleber concerns the limitation on damages clause. Kleber teaches that such a clause will not bar a claim for greater damages in a contract when the conduct at issue rises to the level of gross negligence or worse.