Hoffman v. L & M Arts

Decision Date28 September 2016
Docket NumberNo. 15-10046,Cons. w/ 15-10293,15-10046
Citation838 F.3d 568
CourtU.S. Court of Appeals — Fifth Circuit
Parties Marguerite Hoffman, Plaintiff–Appellee Cross–Appellant v. L & M Arts, Defendant–Appellant Cross–Appellee David Martinez; Studio Capital, Incorporated, Defendants–Appellees. Marguerite Hoffman, Plaintiff–Appellant v. David Martinez; Studio Capital, Incorporated; L & M Arts, Defendants–Appellees.

Frederick Bartlett Wulff, Sr., Koning Rubarts, L.L.P., Dallas, TX, Mary Eaton, Dan Cogan Kozusko, Roger David Netzer, Willkie Farr & Gallagher, L.L.P., New York, NY, for PlaintiffAppellee Cross–Appellant.

Harry Paul Susman, Susman Godfrey, L.L.P., Houston, TX, Tibor L. Nagy, Jr., Dontzin Nagy & Fleissig, L.L.P., New York, NY, David Dean Shank, Esq., Scott, Douglass & McConnico, L.L.P., Austin, TX, for DefendantAppellant Cross–Appellee.

Jonathan I. Blackman, David H. Herrington, Cleary Gottlieb Steen & Hamilton, L.L.P., New York, NY, Kurt Allen Schwarz, Esq., Jackson Walker, Gordon M. Shapiro, L.L.P., Dallas, TX, for DefendantsAppellees David Martinez and Studio Capital, Incorporated.

Before DENNIS, ELROD, and GRAVES, Circuit Judges.

JENNIFER WALKER ELROD

, Circuit Judge:

This appeal arises out of the sale and public re-sale by auction of a well-known Mark Rothko painting. The painting's original owner, Marguerite Hoffman, argues that she was fraudulently induced into selling the painting with assurances of secrecy and that the eventual public re-sale of the painting constituted a breach of a confidentiality provision in her agreement with the original buyer. For the reasons described below, we AFFIRM the district court's grant of summary judgment for defendant L & M Arts on Hoffman's fraudulent inducement claim, AFFIRM the district court's judgment as a matter of law for defendants David Martinez and Studio Capital, Inc., on Hoffman's breach-of-contract claim, REVERSE the district court's denial of judgment as a matter of law for L & M on Hoffman's breach-of-contract claim, and AFFIRM the district court's denial of Hoffman's motion for attorney's fees under Texas Civil Practice & Remedies Code § 38.001(8)

. The case is REMANDED for proceedings consistent with this opinion.

I. Background

Dallas arts patron Marguerite Hoffman purchased Mark Rothko's Untitled 1961 (“the Red Rothko”) in 1998. Hoffman later bequeathed the Red Rothko to the Dallas Museum of Art, of which she was a major supporter, and it hung there from November 2006 through April 2007 as part of an exhibit called “Fast Forward” that showcased future additions to the museum's collections. The painting had been publicly associated with Hoffman on the front page of the Dallas Morning News and in other media. Nevertheless, in the wake of her husband's death in 2006, Hoffman decided to sell the Red Rothko. Although the sale was permitted under the terms of the bequest, Hoffman was eager to avoid the publicity that would likely result from a public sale and decided to sell the Red Rothko privately.

For help finding a buyer, Hoffman and family friend John Van Doren reached out to Robert Mnuchin, a long-time friend and an expert in the market for Rothkos. Mnuchin, along with Dominique Levy, was the co-principal of defendant L & M Arts, an art gallery. Through Van Doren, Hoffman conveyed to L & M her concern for confidentiality. To maintain the secrecy of the sale, Mnuchin agreed to approach only a single buyer and assured Van Doren that the buyer would be an individual.

L & M approached defendant David Martinez, an art collector, to discuss purchasing the Red Rothko. On several previous occasions, both Levy and Mnuchin had transacted with Martinez. Martinez would acquire art sometimes on his own behalf and other times on behalf of Studio Capital, a Belize corporation with which he was involved.1 From L & M's perspective when transacting with Martinez, he and Studio Capital were one and the same.

Martinez's and Studio Capital's identities remained undisclosed to Hoffman, but Mnuchin assured Van Doren that the buyer was a “very private” “single individual” and that the painting would “disappear” into that buyer's collection based in Europe. In early 2007, Martinez flew with Levy to Dallas to view the Red Rothko, which was still hanging in the Dallas Museum of Art. Negotiations began over the sale, with L & M communicating offers and counteroffers back and forth between Van Doren and Martinez.

The parties eventually agreed to a sale price of $17.6 million (excluding commissions) and memorialized the terms of the sale in a February 2007 letter agreement (“the February Agreement”). The agreement contained a specific confidentiality provision, which provided that [i]t is the specified wish of the seller that the sale and terms of the sale remain confidential,” and that [i]t is requested that confidentiality be maintained indefinitely.” In March 2007, however, Christie's auction house contacted Hoffman to discuss her plans to sell the Red Rothko. Christie's had learned the Red Rothko was for sale because Martinez, in the midst of negotiations, had consulted with the chairman of Christie's International for his advice on an appropriate price. Hoffman immediately canceled the sale and conveyed to Martinez and Studio Capital (“the Martinez defendants) and to L & M her sense that there had been a breach of confidentiality.2

In April 2007, Van Doren and Mnuchin executed a new letter agreement for the sale of the Red Rothko (“the Agreement”). The Agreement reflected the same sale price as the February Agreement, $17.6 million excluding commissions, but differed from the February Agreement in two notable respects. First, the Agreement contained several new commitments by the buyer: to anonymously donate $500,000 to the Dallas Museum of Art on behalf of an entity of Hoffman's choosing; to allow Hoffman to retain possession of the painting for six months after closing; and to refrain from hanging or displaying the painting for an additional six months thereafter. Second, the Agreement contained modified confidentiality language: “All parties agree to make maximum efforts to keep all aspects of this transaction confidential indefinitely.” The entire Agreement fit on a single page.

The Agreement closed, Martinez paid the purchase price, and title for the Red Rothko passed from Hoffman to Studio Capital. As agreed, the painting remained in Hoffman's possession for six months and was subsequently shipped to Studio Capital. After attempting to privately re-sell the Red Rothko with the aid of L & M for a year spanning March 2009 to March 2010, Martinez moved the Red Rothko to L & M's gallery in New York and decided to sell it at public auction at Sotheby's. L & M shipped the Red Rothko to Sotheby's on Martinez's instructions. During this time and until May 15, 2010—three days after it was ultimately auctioned—the Red Rothko was the subject of a consignment agreement between Studio Capital and L & M that entitled L & M to possess it.

In May 2010, the Red Rothko appeared on the cover of the Sotheby's catalog. The catalog entry for the Red Rothko, as to which L & M had input with Sotheby's, referenced the “Fast Forward” exhibit at the Dallas Museum of Art that had been dedicated to Hoffman and two other benefactors. The entry specifically referenced pages in the “Fast Forward” exhibit catalog that contained pictures of Hoffman and her late husband posing in front of the Red Rothko and of the Red Rothko hanging in their home. In the lead-up to the auction, an art blogger referenced the Red Rothko's previous appearance in the “Fast Forward” exhibit and named the exhibit's three benefactors, including Hoffman.

Mnuchin reached out to Hoffman in mid-March 2010 and informed her of the impending auction. Through Van Doren, Hoffman asked Mnuchin if she could buy back the painting and was rebuffed. On May 12, 2010, Sotheby's auctioned the Red Rothko for approximately $31 million, including commissions.

Hoffman sued the Martinez defendants and L & M for breach of contract in Texas state court in May 2010, and the defendants removed the case to federal court shortly thereafter based on diversity. The defendants moved to dismiss, arguing in part that there had been no breach because the confidentiality provision in the Agreement governed disclosures about the terms of the 2007 private sale, but not about the fact of the sale itself. In denying the motion, the district court held that the confidentiality provision was enforceable as a best-efforts clause, and that the fact of the sale was among the “aspects of the transaction” that the parties were obligated to make best efforts to keep confidential.

At the conclusion of discovery, all defendants moved for summary judgment, arguing that there was insufficient evidence of breach and no triable issue on damages. In denying summary judgment, the district court specifically upheld Hoffman's proposed damages measure based on an “auction premium” theory. Per the district court, the value of the allegedly breached confidentiality provision—i.e. the benefit of the bargain that Hoffman did not receive—could be measured by “the difference between $17.6 million [the sale price in the Agreement excluding commissions] and what the painting would have sold for at public auction on or around April 24, 2007.”

The district court later granted Hoffman leave to amend her complaint. Hoffman's ensuing Third Amended Complaint added a claim against L & M for fraudulent inducement, alleging that L & M had misrepresented “that L & M had made the undisclosed buyer aware of her concerns and of the terms of both contracts, that the undisclosed buyer was an individual and not an institution, and that the Red Rothko would ‘disappear’ into that individual's very private European collection.” The district court allowed a new round of summary judgment motions and subsequently granted summary judgment for L & M on Hoffman's fraudulent inducement claim. In the same order, the court denied ...

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