Wednesday, July 11, 2007

The Red Elvis Case

Still catching up on things that happened when I was away, I should note that the Connecticut Supreme Court upheld a lower court ruling that Peter Brant is the rightful owner of Warhol's "Red Elvis," which he paid $2.9 million for in 2000 but, according to this New York Daily News story, is now worth "as much as $25 million."

The work was owned by Kerstin Lindholm, who bought it in 1987 for $300,000 from a Swedish dealer named Anders Malmberg, with whom she'd had a longstanding business relationship. In 2000, claiming to have bought the work from Lindholm, Malmberg sold it to Brant. In 2001, Lindholm learned of the unauthorized sale and demanded that Brant return the work to her. He refused, and the lawsuit ensued.

In response to the decision, a friend emailed: "Can you explain why we're not seeing the obvious ruling, i.e. Brant is required to give this painting back to Lindholm and Malmberg is required to give Brant his money back? This case has never made sense to me."

Well, for one thing, according to the Daily News, "no one can find where [Malmberg] hid or spent the nearly $3 million." If that's true, requiring Brant to give the painting back to Lindholm would mean that he's out $3 million.

Leaving that aside, the explanation for the result lies in the concept of entrustment. The basic rule is of course that you can't get good title from a thief. Malmberg was in essence a thief here (the decision mentions in a footnote that "in March 2003, the Swedish court convicted Malmberg of gross fraud embezzlement," and the Daily News story says he "went to jail"), so it's tempting to wonder how Brant could have acquired good title from him. The answer is that when one party entrusts goods to another party (as Lindholm did to Malmberg here), the entrustee can (under certain circumstances) transfer good title, regardless of any conditions expressed between the parties and even if the entrustee's actions are criminal.

What are the circumstances under which good title can be conveyed? First, that the entrustee is a "merchant" who deals in goods of the relevant kind (which Malmberg clearly was here). And second, that the sale is to a "buyer in the ordinary course of business" -- i.e., someone who buys "in good faith" and without knowledge that the sale violates anyone's rights (which Brant was found to be here; the basic idea was that, under the circumstances, it was reasonable for Brant to believe that Malmberg really was the owner of the work).

The basic rationale for this rule is that where the entruster and the buyer are both "innocent," the loss should fall on the former, since she's in a better position to avoid the loss (by not putting the work in the hands of the dishonest middleman).

An AP story on the decision is here. The U.C.C. entrustment provision, § 2-403(2), is here. The Connecticut Supreme Court decision is here.