Business Law 13th Edition by Frank Cross, Kenneth Clarkson, Roger LeRoy Miller

Exercise 5

BACKGROUND AND FACTS In 1987, Kerstin Lindholm of Greenwich, Connecticut, bought a silkscreen by Andy Warhol titled Red Elvis from Anders Malmberg, a Swedish art dealer, for $300,000. In 1998, Lindholm loaned Red Elvis to the Guggenheim Museum in New York City for an exhibition to tour Europe. Peter Brant, who was on the museum's board of trustees and also a Greenwich resident, believed that Lindholm was the owner. Stellan Holm, a Swedish art dealer who had bought and sold other Warhol works with Brant, told him, however, that Malmberg had bought it and would sell it for $2.9 million. Malmberg refused Brant's request to provide a copy of an invoice between Lindholm and himself on the ground that such documents normally and customarily are not disclosed in art deals.
To determine whether Malmberg had good title, Brant hired an attorney to search the Art Loss Register (an international database of stolen and missing artworks) and other sources. No problems were found, but Brant was cautioned that this provided only "minimal assurances." Brant's attorney drafted a formal contract, which conditioned payment on the delivery of Red Elvis to a warehouse in Denmark. The exchange took place in April 2000.a Lindholm filed a suit in a Connecticut state court against Brant, alleging conversion, among other things. The court issued a judgment in Brant's favor. Lindholm appealed to the Connecticut Supreme Court.
IN THE LANGUAGE OF THE COURT
sullivan, J. [Justice]
* * * * * * * "A person buys goods in the ordinary course if the sale to the person comports with the usual or customary practices in the kind of business in which the seller is engaged or with the seller's own usual or customary practices * * *" [according to Connecticut General Statutes Annotated Section 42a-1-201(9), (Connecticut's version of UCC 1-201(9)]. A person buys goods in good faith if there is "honesty in fact and the observance of reasonable commercial standards of fair dealing" in the conduct or transaction concerned [under Section 42a-1-201(20)]. [Emphasis added.]
We are required, therefore, to determine whether the defendant followed the usual or customary practices and observed reasonable commercial standards of fair dealing in the art industry in his dealings with Malmberg. * * * The defendant presented expert testimony that the vast majority of art transactions, in which the buyer has no reason for concern about the seller's ability to convey good title, are "completed on a handshake and an exchange of an invoice." It is not customary for sophisticated buyers and sellers to obtain a signed invoice from the original seller to the dealer prior to a transaction, nor is it an ordinary or customary practice to request the underlying invoice or corroborating information as to a dealer's authority to convey title. Moreover, it is not customary to approach the owner of an artwork if the owner regularly worked with a particular art dealer because any inquiries about an art transaction customarily are presented to the art dealer rather than directly to the [owner]. It is customary to rely upon representations made by respected dealers regarding their authority to sell works of art. A dealer customarily is not required to present an invoice establishing when and from whom he bought the artwork or the conditions of the purchase. [Emphasis added.]
We are compelled to conclude, however, that the sale from Malmberg to the defendant was unlike the vast majority of art transactions. * * * Under such circumstances, a handshake and an exchange of invoice is not sufficient to confer status as a buyer in the ordinary course.
* * * * * * * A merchant buyer has a heightened duty of inquiry when a reasonable merchant would have doubts or questions regarding the seller's authority to sell. * * * In the present case, the defendant had concerns about Malmberg's ability to convey good title to Red Elvis because he believed that Lindholm might have had a claim to the painting. The defendant also was concerned that Malmberg had not yet acquired title to the painting * * *. Because of his concern that Lindholm might make a claim to Red Elvis, the defendant took the extraordinary step of hiring counsel to conduct an investigation and to negotiate a formal contract of sale on his behalf. * * * Such searches typically are not conducted during the course of a normal art transaction and, therefore, provided the defendant with at least some assurance that Lindholm had no claims to the painting.
Moreover, * * * both Malmberg and Holm had reputations as honest, reliable, and trustworthy art dealers. * * * The defendant had little reason to doubt Malmberg's claim that he was the owner of Red Elvis, and any doubts that he did have reasonably were allayed [reduced] by relying on Holm's assurances that Malmberg had bought the painting from the plaintiff * * *.
The defendant's concerns were further allayed when Malmberg delivered Red Elvis to a * * * warehouse in Denmark, the delivery location the parties had agreed to in the contract of sale. At the time of the sale, the painting was on loan to the Guggenheim, whose policy it was to release a painting on loan only to the true owner, or to someone the true owner had authorized to take possession. * * * We conclude that these steps were sufficient to conform to reasonable commercial standards for the sale of artwork under the circumstances and, therefore, that the defendant had status as a buyer in the ordinary course of business.
DECISION AND REMEDY?The Connecticut Supreme Court affirmed the judgment of the lower court. The state supreme court concluded that "on the basis of all the circumstances surrounding this sale," Brant was a buyer in the ordinary course of business and, therefore, took all rights to Red Elvis under UCC 2-403(2).
THE ETHICAL DIMENSION How did the "usual and customary" methods of dealing in the art business help Malmberg deceive the other parties in this case? What additional steps might those parties have taken to protect themselves from such deceit?
THE GLOBAL DIMENSION Considering the international locales in this case, why was Lindholm able to bring an action against Brant in Connecticut?