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Attorneys

Red Rothko: Confidentiality Agreements in the World of Big Art

February 20 2014

By David R. Gabor

I. The Art World Is No Longer A Quiet Place

Decades ago, a former counsel for the Metropolitan Museum of Art in New York City commented that transactions in the art world are generally very “hush-hush” and have always been that way. See Gabor, Deaccessioning Fine Art Works, 36 UCLA L. Rev. 1005 (1989).

Much has changed in the intervening years. Like the now-ubiquitous tallies of weekend movie box office grosses, the ups and downs in the art market, driven by spiking art world prices, increasing art speculation, and an influx of the day-trader mentality into the art world, have become fodder for many major publications. Most recently, the value of a significant portion of the Detroit Institute of Art has made national news headlines, with various creditors and experts jousting over the proper valuation of the artworks, for purposes of potential sale within the context of Detroit’s municipal bankruptcy.

Despite the increasing public fascination with blockbuster art auctions, the rarefied world of the discrete art dealer, quietly buying, selling, or trading works, for any number of reasons, including to shore-up shaky owner finances to help them save face, still very much exists.

Those two worlds, that of the discrete private dealer and the hurly-burly of the art world capital markets, came into sharp legal contrast in late December 2013 with the federal jury trial in Marguerite Hoffman v. L&M Arts, et al., case number 3:10-cv-00953 in the U.S. District Court for the Northern District of Texas. That case revolved around the 2007 sale, and then the 2010 re-sale at Sotheby’s auction house, of an untitled painting completed by Mark Rothko in 1961, commonly known as the “Red Rothko.”

II. Background to the 2007 Sale of the Red Rothko

Initially, prior to 2007, the Red Rothko was owned by the Hoffman family of Dallas, Texas. After Robert K. Hoffman, the founder of the National Lampoon magazine, passed away, his estate needed quietly to raise funds. Part of the need for discretion was to avoid embarrassment to the estate, which was apparently on unsound financial footing. Speculation that the “quiet” nature of the sale was because the Rothko had been promised to the Dallas Museum of Art, was apparently untrue.

Although it now seems somewhat incredible that the Hoffman Estate thought it could simply make such a high-profile painting “disappear,” that is exactly what the estate tried to do. According to the Wall Street Journal, Mrs. Hoffman contacted a high-end New York dealer who arranged the sale that would supposedly assure that, “this picture would disappear [into a] private collection in Europe” and would not be re-sold. To that end, the 2007 sale involved a letter agreement that, “all parties agree to make maximum effort to keep all aspects of this transaction confidential indefinitely” and that the work would not be displayed for at least six months after sale. The work was then sold for $17.6 million, the second highest price ever paid for a Rothko at that time. (Source: Wall Street Journal, December 8, 2013; for details, see http://online.wsj.com/news/articles/SB10001424052702303997604579238520198557970.

Three years later, in 2010, when the purchaser re-sold the painting at the Sotheby’s auction for $31.4 million, is when the plot thickens. Although the Hoffmans were left out of the auction catalog provenance, the catalog did note that the painting had been featured in a 2007 Dallas museum show and pointed readers to that show’s catalog — which catalogue prominently featured a photo of the Hoffmans standing in front of the Red Rothko.

III. Federal Litigation In Dallas Ensues

It is this act, and certain others, that underpinned Hoffman’s claim in a case filed in the Dallas Federal District Court, that the seller and his company, along with the previous art dealer’s art gallery, violated the terms of the confidentiality agreement. The defendants responded that there was never any restriction on re-selling the work at auction, apparently implying that the painting’s provenance would have come out anyway, and that the confidentiality agreement did not constitute a restriction on resale. Defendants argued that, had such a restriction actually been in place, the restriction would have considerably lowered the value of the Rothko in the market. Mrs. Hoffman countered with an expert who testified at deposition that had Mrs. Hoffman chosen to sell the piece at auction in 2007, such sale could have yielded roughly twice the price ($30-$40 million) than she had been paid. At trial, Ms. Hoffman sought in excess of $22 million in damages.

As pointed out in a December 8, 2013 article in the Wall Street Journal, based on a review of deposition transcripts, there were various wrinkles in the case, including the fact that the initial dealer in 2007 did not convey the terms of the confidentiality agreement to the buyer at that time, but rather stated on an invoice that the, “parties are committed to keeping the terms of this transaction strictly confidential.” The case was salacious reading for the “inside sports” world of the art market. It was all the more ironic given that the Hoffman estate had wanted to keep the matter out of the press. If that was the original gambit, Mrs. Hoffman failed miserably.

She also failed, in all but name, at trial. On December 20, 2013 the Dallas federal jury awarded her $500,000, prompting defense counsel to crow that, “the elephant labored and came forth with a mouse.” See Law 360, December 20, 2013 at http://www.law360.com/articles/497957. Mrs. Hoffman, of course, had some consolation that the jury technically found in her favor on the breach of contract claim. Whether or not that amount even covered her lawyers’ fees for three years of hard-fought federal litigation, is unknown.

IV. The Take-Away

The case is certainly a cautionary tale for those who wish to keep quiet the details of significant art world sales. Selling a major painting – particularly one that has been exhibited prominently in major museums and that is a major work from a major artist – is really no longer a purely private matter. It is no exaggeration to say that art world aficionados, bloggers, groupies, etc. now are able to follow the art market with the attention once only lavished on other arcane areas of arcane interest, such as the world of obscure baseball statistics.

As long as there was no subsequent restriction on public auction sale, the probability is high that the transfer would have inevitably come to light. Reliance on an art dealer’s word that the work would disappear into the estate of a European collection, presumably forever, may not be reasonable reliance. After all, scrape away the fine veneer, and an art dealer is — surprise — a sales position. Just as the Hoffman family’s circumstances changed, necessitating the initial sale, there is never a guarantee that a subsequent purchaser’s financial condition will not similarly change and force a sale, or that financial opportunism would eventually raise its head (as it apparently did in this case). Defendants are most likely correct in their argument that selling such a work with a limitation on re-sale, for example, a no-public auction clause, would be damaging to a work’s sales potential. This is particularly true where a work by a “blockbuster” artist such as Rothko is involved.

The lessons here, regardless of the outcome of this particular case or whether it ends up being appealed by either side, is manifold. First, the seller seeking to keep a major art world transaction quiet, should carefully think of the ramifications of that decision, and whether it is even possible to do so. The more renowned the work of art, the more exhibited, the less likely this would be. Second, the dealer should understand the consequences of her or his participation in such a confidentiality contract and the potential liability it may create. Ethics still matter, and as the outcome of the Hoffman case establishes, so do contracts. Arguably, the Hoffman defendants got off lucky. Third, all parties should understand that at least in the case of a major work, there’s very little secrecy left in this digitized, Google-ized and bloggerized world.

Finally, let’s look at the concept of embarrassment. This is the basis asserted by Mrs. Hoffman for her desire for the “quiet” sale in the first place. This concept, while sometimes magnified in the world of the super-rich, is certainly familiar to everyone. Think of the neighbor’s garage sale, where the justification is always that “we wanted to clean out the attic, ” quickly followed by, “it’s not that we need the money…”. Often, for whatever reason, people really do need the money, but would prefer others to mind their own business and not know about it. What to do with the trophy art then?

Certainly, one way to lessen the embarrassment factor from a subsequent public sale in the world of Big Art, would be to contract for a lengthy — but not indefinite — “no-resale period.” Let the waters calm, let the interested observers move-on and focus elsewhere. If the work is desirable enough, and a purchaser’s time horizon is long enough, such a limited limitation on sale might potentially work to both parties’ interests. By incorporating such a clause, it can save the seller embarrassment that, in some circles, comes with exposing a weak financial position. It can also avoid the immediate public scorn that a reversal of a promise to donate a particular work of art can engender in the public at large. From the buyer’s prospective, it allows the work to marinate by being “off the market” for a while, while not impairing long-term resale value – and maybe even improving it. While perhaps an imperfect solution, this kind of “waiting period” may be better than three years of federal litigation, and front-page news across the media world, digital and otherwise. Just ask Mrs. Hoffman on that one.