A Million-Dollar Lawsuit Uncovers Backdoor Art World Contracts
A Million-Dollar Lawsuit Uncovers Backdoor Art World Contracts
(Bloomberg) -- A lawsuit has dragged the discreet negotiations of the top-tier primary art market into the public spotlight.
According to the suit, Michael Xufu Huang, a prominent Chinese art collector and socialite, had a financial agreement with Monaco-based Argentinian collector Federico Castro Debernardi.
The nature of the deal was that Debernardi would use Huang to buy difficult-to-secure artworks. Huang would purchase the pieces in his own name, then quietly resell them to Debernardi for a 10% commission.
The two collectors settled on the arrangement, documents submitted as evidence in Miami-Dade County circuit court show, because Huang had access to choice works that Debernardi did not. That’s because art galleries don’t operate like department stores: Works by hot artists are often reserved for collectors who have an ongoing relationship with the artist’s gallery—effectively, they’re reserved as a type of reward for repeat business.
Additionally, selling works to museums is preferable to selling works to collectors. Not only is prestige associated with an artist’s work being hung in a museum, it also means the work won’t soon be resold on the secondary market.
As a consequence, collectors who have their own museums, and who also buy large amounts of work for themselves, often have access to art that mere casual collectors do not. Huang is a noted art collector and co-founder of the X Museum in Beijing.
In a phone interview, Huang says his arrangement with Debernardi wasn’t about money. “If I really wanted to make money flipping artworks, I would buy them and sell to him at the [much higher] market price.” The 10% commission, he adds, “was to make sure there was a contract: I’m doing him a favor, but it’s not just an ‘I’m giving it to you for free’ kind of gesture.”
The arrangement went south after Huang purchased a $700,000 painting by the artist Cecily Brown from the Paula Cooper Gallery during Art Basel Miami Beach in December 2019 in return for a $70,000 commission from Debernardi, according to documents submitted to court as evidence. As part of the purchase, documents show, Huang signed a contract with the Paula Cooper Gallery stating that if he sold the work within three years, he would have to do so through the gallery.
Nevertheless, Huang sold the work to Debernardi, and then shortly after Debernardi acquired it from Huang, the painting was sold yet again.
Paula Cooper Gallery quickly caught wind of the second sale.
A representative for Debernardi, Luke Nikas, a partner at Quinn Emanuel Urquhart & Sullivan, emailed a statement stating that “Mr. Debernardi acted in good faith from the very beginning: he had absolutely no intention of selling the artwork when he acquired it, and he transferred the work at the outset of the world-wide COVID-19 crisis in circumstances that the court will find to be completely appropriate.”
The lawsuit, Nikas continues, “has absolutely no merit—it contains numerous false, frivolous, and irrelevant allegations and has no chance of success. Fortunately, the parties are therefore on the verge of reaching an agreement to resolve this matter, which was based on a serious misunderstanding between them about what actually transpired.”
Under normal circumstances, the practice of flipping work is frowned upon, though it’s not unusual.
Huang got in trouble because in order to purchase the painting, he’d signed the exclusivity agreement with the Paula Cooper Gallery. If he breached that agreement, the conditions of sale stated that he would have to pay the gallery the difference between what a similar work by Brown sold for at auction (where Brown’s paintings often sell for millions of dollars) and what Huang paid for it.
After Paula Cooper Gallery discovered that Huang had, in fact, broken the agreement, the gallery allegedly pegged this difference “between $500,000 and $1 million.”
In lieu of litigation, it offered to settle, according to screen captures Huang submitted to the court. “Litigation will result in the details of the transactions being made public along with the identities of those involved,” the gallery wrote. “Given the artist’s profile, media attention can be expected. Your actions and the various statements you have made to us will become widely known.”
In an emailed statement, Steven Henry, a senior partner at Paula Cooper Gallery, wrote that "We have no comment on the litigation between Mr. Huang and Mr. Debernardi. The information in the documents that the parties chose to make public in court filings speaks for itself. The gallery will continue to protect the interests of the artists with whom we work."
Huang privately settled with the gallery for an amount he says in an interview was “way over the 10% I made” from the initial commission. “It was my fault for letting this happen,” he continues, “so I paid it and took responsibility.”
But then he brought the entire exchange into the public realm and sued Debernardi in Miami-Dade County circuit court in March 2021 for damages exceeding $1.325 million.
Terms of Sale
The painting by Brown wasn’t the first work Huang purchased on Debernardi’s behalf, according to documents submitted as evidence.
In February 2019, Huang bought a work by the highly sought-after contemporary artist Nicolas Party for €60,000 ($68,000); after adding a €6,000 commission, he resold it to Debernardi. And in November 2019, shortly before the Miami art fair, Huang purchased a painting by another white-hot artist, Harold Ancart. It cost $220,000, for which Huang received a $22,000 commission, documents show.
The terms of their agreement were written into sales contracts signed by both men. In a contract for the painting by Brown, terms stipulated that neither could tell anyone else that Debernardi owned the work—or even show pictures of the work to third parties without mutual written consent. If Debernardi ever decided to sell the work, Huang would receive 10% of the profit.
“Stop the Drama”
Text messages and emails between the two, submitted as evidence, suggest a chatty friendship. “Hi my dear, Hope you’re enjoying Thailand,” reads an email from Debernardi to Huang dated February 2019.
In a text during Art Basel Miami Beach in 2019, for which Debernardi paid Huang’s travel costs, Debernardi asks if Huang wants “to hang out by the pool? I’m at the Edition.”
But when Huang confronted Debernardi with the message from Paula Cooper Gallery in August 2020, their relationship quickly cooled. “This is a lie,” Debernardi wrote. “All of it,” adding that Huang should “stop the drama,” according to screen captures Huang submitted to the court.
Huang filed suit in early March 2021, arguing that Debernardi had breached their contract and owed him $25,000 for the legal fees he’d spent to settle with Paula Cooper Gallery, along with reputational damages “believed to be no less than $1 million.”
In a motion to dismiss, Debernardi’s lawyers were unsparing.
The motion alleges that Huang “brands himself to the public as a reputable art collector and museum founder. In fact, he is an opportunistic ‘art flipper’ and market manipulator: he uses the veneer of credibility created by his museum front to get access to emerging artists’ works. He acquires their most important works from prominent galleries subject to anti-competitive no-sales contracts that are designed to manipulate the supply and pricing of artworks by the artist.”
Then, the motion continues, Huang “immediately ‘flips’ the artworks for his own profit by selling them to undisclosed third-party collectors, whom he forces to accept even more restrictive anti-competitive terms if they want access to the works, all to conceal and perpetuate his wrongful scheme.”
In an emailed response to Bloomberg, Huang wrote: “I have to say I have over 800 works in my collection and I only sold 2-3 pieces maximum throughout my collecting history. I am not afraid to open my storage to let the artists and galleries I acquired from to check.”
In an amended complaint, Huang’s lawyers argued that Debernardi effectively tricked Huang into purchasing the painting for him, fully intending to flip it soon after.
Debernardi, Huang’s lawyers wrote, “hid his true motives,” and “made these false representations knowing they were false.”
But in an email sent to Bloomberg shortly before this article published, Huang’s lawyer Wendy Lindstrom, of Mazzola Lindstrom LLP, said the case was nearing resolution. “Mr. Huang and Mr. Debernardi Castro have have reached a tentative agreement to resolve the matter,” she wrote. “This matter is the result of a misunderstanding between them, and they look forward to collaborating again in the future.”
A hearing is still scheduled for September. The judge overseeing the case has ordered both parties to try to resolve their dispute through mediation in advance.
©2022 Bloomberg L.P.