Faircloth v. Jackie Fine Arts, Inc.

• Decision Date: 06 April 1988
• Docket Number: Civ. A. No. 2:85-1854-1.
• Citation: 682 F. Supp. 837
• Court: U.S. District Court — District of South Carolina
• Parties: Phyllis FAIRCLOTH, Administratrix of the Estate of Jiles T. Lynch, Plaintiff, v. JACKIE FINE ARTS, INC., Herman Finesod, Marilyn Goldberg, Marigold Enterprises, Ltd., Sigmund Rothschild, and F. Peter Rose, Defendants.

682 F. Supp. 837

Phyllis FAIRCLOTH, Administratrix of the Estate of Jiles T. Lynch, Plaintiff, v. JACKIE FINE ARTS, INC., Herman Finesod, Marilyn Goldberg, Marigold Enterprises, Ltd., Sigmund Rothschild, and F. Peter Rose, Defendants.

Civ. A. No. 2:85-1854-1.

United States District Court, D. South Carolina, Charleston Division.

March 30, 1988.

On Pro Se Motion for Summary Judgment April 6, 1988.

Arnold S. Goodstein, Ann M. Priest, Summerville, S.C., John P. Freeman, Columbia, S.C., for plaintiff.

Susan Taylor Wall, W. Jefferson Leath, Charleston, S.C., for Jackie Fine Arts, Inc., and Finesod.

F. Peter Rose, pro se.

Sigmund Rothschild, pro se.

ORDER

HAWKINS, District Judge.

This action is before the court on the report and recommendation of the United States Magistrate made in accordance with Title 28, United States Code Section 636(b)(1)(B). The court is charged with making a de novo determination of any portion of the Magistrate's recommendation to which specific objection is made, and it may accept, reject, or modify, in whole or in part, the recommendation made by the Magistrate, or recommit the matter to the Magistrate with instructions.

The plaintiff, Phyllis Faircloth, is the administratrix of the estate of Jiles T. Lynch (Lynch). In December 1979, Lynch purchased an art master for Picasso's Portrait Au Cou Bleu from Jackie Fine Arts, Inc. (Jackie). As consideration for the art master purchase, Lynch paid Jackie $40,000 cash and executed three notes: a $40,000 note due February 1, 1980; a $20,000 note due February 1, 1981; and a $450,000 note due June 1, 1994, $250,000 of which was non-recourse. Thus, the total purchase price of the art master was $550,000. Lynch executed all three notes on December 14, 1979, and he contemporaneously executed an assignment of net receipts whereby he assigned Jackie fifty percent of all net receipts arising from the exploitation of the art master. These sums contributed to the payment of the $450,000 note.

An art master is a reproduction plate. As a result of the execution on December 14, 1979 of the purchase and security agreement and accompanying documents, Lynch received, inter alia, the master, all copyrights related to the master and additional rights as defined by the purchase and security agreement.

The parties do not dispute that the purchase of the art master was motivated less by profit-making concerns and more by the tax shelter nature of the investment. As part of his purchase, Lynch received a free defense to a challenge of the Jackie "approach" by the Internal Revenue Service or any taxing authority. In addition, Jackie promised Lynch two independent appraisals of the art master, and these appraisals were rendered by defendants Sigmund Rothschild and F. Peter Rose. Since a large portion of the purchase price of the art master was paid in the form of a nonrecourse note, these appraisals were undoubtedly intended to refute any Internal Revenue Service challenge to the valuation of the art master.¹

Plaintiff filed this suit seeking damages and equitable recision of the purchase and security agreement. She alleges that the transaction between Lynch and Jackie involved the unlawful sale of a security, unfair trade practices, fraud, constructive fraud, breach of fiduciary duties, civil conspiracy and violations of the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968 (1984 and Supp.1987).

Defendants Jackie, Herman Finesod, Marilyn Goldberg, and Marigold Enterprises, Ltd. seek summary judgment on all of the plaintiff's causes of action. Jackie also seeks summary judgment on its counterclaim to recover sums allegedly owed pursuant to the $450,000 note. After considering the voluminous briefs submitted by the parties and conducting a hearing on the matter, the Magistrate recommended that all counts of the complaint be dismissed with prejudice with the exception of the RICO count. The Magistrate recommends that the RICO cause of action be dismissed without prejudice. The plaintiff has filed extensive objections to the Magistrate's report, and the movants have also filed objections.

The issue in determining a motion for summary judgment is whether there exists a genuine issue of material fact. Fed.R. Civ.P. 56.

Of course, a party seeking summary judgment always bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any," which it believes demonstrate the absence of a genuine issue of material fact.

Celotex Corporation v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986). Though this initial responsibility rests with the moving party, when a motion for summary judgment is made and supported as provided in Rule 56, the non-moving party must produce "specific facts showing that there is a genuine issue for trial," rather than resting upon the bald assertion of his pleadings. Fed.R.Civ.P. 56(e); see Celotex, 477 U.S. 317, 106 S.Ct. 2548.

Thus,

the plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial. In such a situation, there can be "no genuine issue as to any material fact," since a complete failure of proof concerning an essential element of the nonmoving party's case necessarily renders all other facts immaterial. The moving party is "entitled to judgment as a matter of law" because the nonmoving party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.

Celotex at 322-323, 106 S.Ct. at 2552-53.

I. Does the court have personal jurisdiction over defendants Marigold Enterprises, Ltd. and Marilyn Goldberg?

Before reaching the merits of the summary judgment motions, the court must first address the contention of Marigold Enterprises, Ltd. (Marigold) and Marilyn Goldberg (Goldberg) that the court lacks jurisdiction over them. These defendants claim that the September 30, 1981 agreement between Marigold and Lynch provided for arbitration of any disputes arising under the agreement. Second, they claim that the September 1981 agreement and the February 1984 agreement both provided that the contracts were to be performed by Marigold wholly within the state of New York, and that this court, therefore, lacks jurisdiction over these defendants.

A. Are defendants Marigold and Goldberg entitled to arbitration?

In response to defendants' claim of a right to arbitration, the plaintiff contends that her claims arise out of conduct which occurred before the parties entered into the September 1981 agreement, and that the 1981 agreement lasted only two years and that the subsequent 1984 agreement contained no arbitration clause. Plaintiff also argues that any right to arbitration has been waived by these defendants' lack of diligence in asserting their supposed right.

Federal law controls the determination of the arbitrability of a suit if the contract containing the arbitration clause involves interstate commerce. Maxum Foundations, Inc. v. Salus Corp., 779 F.2d 974, 978 (4th Cir.1985). Plaintiff initially contends that the motion must fail because RICO claims are not arbitrable.

Subsequent to the filing of plaintiff's reply, the United States Supreme Court decided Shearson/American Express, Inc. v. McMahon, ___ U.S. ___, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). In that case, the court held that RICO claims were arbitrable when the agreement which underlies the parties' relationship so provides. Id. at 2345. The arbitration clause in that case provided generally for the arbitration of disputes arising between the parties under the agreement, so it appears that the clause need not specifically direct arbitration of RICO claims. Thus, the plaintiff's argument that RICO claims are not arbitrable must fail.

Plaintiff next contends that the cause of action against these defendants does not arise solely out of the agreement which contained the arbitration clause. Indeed the plaintiff points out that the September 1981 agreement was entered almost two years after the initial art master purchase. Plaintiff alleges participation by Goldberg in the promotion of the art master which occurred prior to the purchase, and fraudulent conduct by Goldberg and Marigold after the expiration of the September 1981 agreement. Thus, plaintiff is correct that the cause of action does not arise solely from the September 1981 agreement, and the entire dispute is not, therefore, subject to arbitration.

Plaintiff next alleges that Marigold and Goldberg have waived their right to arbitration of any part of the cause of action by their lack of diligence in seeking arbitration. Specifically, plaintiff claims that she will be severely prejudiced by the court's dismissal of any aspect of this suit in favor of arbitration because of the expense incurred and time spent in the litigation prior to the filing of defendants' motion.

The Fourth Circuit Court of Appeals discussed waiver of the contractual right to arbitration in the Maxum Foundations case in the context of a default of the right to seek a stay pursuant to 9 U.S.C. § 3 (1982). The court stated, "A litigant may waive its right to invoke the Federal Arbitration Act by so substantially utilizing the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay." Maxum Foundations at 981. In that case, the court held that the right to arbitration had not been waived by the defendants having waited three months after the filing of the complaint to seek the stay.

In the case at bar, the litigation had proceeded for eighteen months before ...