U.S. Court of Appeals for the Second Circuit. Photo: ALM

The U.S. Court of Appeals for the Second Circuit on Thursday affirmed sanctions against a plaintiff and his attorney for continuing to pursue an ownership claim over an Andrew Wyeth painting after it was clear the claims were baseless.

The decision of the panel—composed of Chief Judge Robert Katzmann and Judges Denny Chin and Raymond Lohier Jr.—stems from an art ownership arrangement involving the appellant, Reed Galin, and the Wyeth painting titled “Ice Storm.” In 1989, Galin purchased a one-third interest in the painting from long-time friend and art dealer, David Ramus.

Despite years of assurances from Ramus that he was looking to re-sell the painting for all to profit from with little success, Ramus had already secretly sold off the painting, and kept the proceeds for his own use, according to the Second Circuit decision. In a later deposition during discovery in the underlying case before the appellate panel, Ramus acknowledged being a “daily maintenance” heroin user at the time he sold “Ice Storm.”

Ramus' dealings in the art world formed the basis for a federal indictment in Georgia on fraud and theft by conversion, a conviction, and a federal prison sentence in 1996, the Second Circuit opinion said.

Galin argued, according to the Second Circuit opinion, that the Coe Kerr Gallery, which handled Ramus' transaction of the Wyeth painting, was never able to take possession of its title because of Ramus' criminal acts. The gallery was not a good-faith purchaser, as it did not perform due diligence to make sure the painting was being sold legally.

In May 2015, Galin said, the panel wrote, that he learned the painting was being offered at auction in New York City by Christie's, having been consigned to the auction house by Tokyo-based art dealer Kunitake Hamada. It would ultimately sell for $820,000.

Galin brought suit in the U.S. District Court for the Southern District of New York. He asserted in that complaint he was entitled to an equitable lien and a constructive trust on the sale proceeds. Hamada moved to dismiss, arguing that New York law was clear: when a merchant dealing in a certain type of good—in this case, lucrative art—that merchant has the power to transfer all ownership rights to a buyer in the ordinary course of business.

For U.S. District Judge Jesse Furman of the Southern District of New York, the critical issue was the 1989 sale of the painting to the Coe Kerr gallery. Discovery was limited to that sale. After discovery, Hamada reasserted the entrustment argument, which the district court agreed with, finding no red flags in the records that should have led the gallery to question Ramus' authority to sell the painting. Absent that, the gallery had acquired the painting fairly, and any subsequent transfers were legitimate.

The issue before the panel on appeal wasn't Furman's decision siding with with Hamada. Rather it was the judge's granting of two separate sanctions motions filed by Galin, under Rule 11 for bringing frivolous claims and Rule 35 for abuses during discovery.

The Rule 11 sanctions, Furman found, were warranted because Galin failed to drop the suit at the close of discovery—the process only supported the fact no red flags were present, strengthening Galin's entruster provision defense. Galin, the judge stated in his September 2017 decision, “never once, in any manner, produced an admissible piece of evidence weighing against application” of the provision.

On appeal, the panel quickly dismissed Galin's own re-upping of sanctions against Hamada's legal team, led by Cahill Cossu Noh & Robinson name attorney John Cahill, over their conduct during a deposition.

On the sanctions motions against Galin, the court noted that his lawyer, private attorney Richard Altman, had assumed all responsibility for $30,000 in potential sanctions. He argued that Rule 11 does not impose a continuing obligation to correct or withdraw previous filing, but the panel found the plain text of the rule belied the argument. The discovery process failed to support Galin's assertions, and by opposing summary judgment by reaffirming the allegations of the complaint wile making “additional baseless legal and factual representations,” the district court had not abused its discretion in opposing sanctions.

Hamada also moved for the court to impose additional sanctions on Rule 38 and statutory excessive costs grounds for advancing frivolous arguments, improperly raising new arguments in a reply brief, and filing a procedurally defective stay motion contradicted by the evidence on appeal. The panel agreed.

“This is the rare case where appellants' arguments are so devoid of legal and factual support that sanctions are warranted,” the panel stated, awarding Hamada double costs.

Altman was represented on appeal by Giskan Solotaroff & Anderson counsel David Feige, who did not respond to a request for comment.

In a statement, Altman said the panel's decision was unfortunate.

“It was always our view that a transaction by an admitted daily heroin user, who was convicted of multiple art fraud-related crimes in federal court and imprisoned, raised sufficient red flags to bar summary judgment under the entrustment doctrine,” Altman said. “Obviously the Second Circuit disagreed. The decision is unfortunate, in that it will not serve to discourage the prevalence of sharp practices and fraud in the art market.”

In a separate statement, Gilan defended his attorney's actions on his behalf, while railing against what he said was the unfairness of the judicial process.

“For my attorney to inexplicably be faulted by the court for honorably and professionally conducting himself throughout … well, the whole thing really just blows my mind,” he said as part of a longer statement.

In an emailed statement, Cahill praised the panel's decision.

“We are pleased to tell our overseas client that the U.S. court system has done the just and legally correct thing by affirming the district court's dismissal of the frivolous claims and giving him some additional compensation for his needlessly having to defend against them,” Cahill said.

Related:

Judge Orders Nazi-Looted Paintings to Be Sent to Auction House

Second Circuit Finds Sanctioning Over a Novel Legal Theory Could Have Chilling Effect

Crotty Admonishes, but Won't Sanction, Former Collen IP Attorney