In re Austin

• Decision Date: 07 April 1992
• Docket Number: Bankruptcy No. 91 B 00675,91 A 00399.
• Citation: 138 BR 898
• Parties: In re Donald S. AUSTIN, Debtor. FEDERAL TRADE COMMISSION, Plaintiff, v. Donald S. AUSTIN, Defendant.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

138 B.R. 898 (1992)

In re Donald S. AUSTIN, Debtor FEDERAL TRADE COMMISSION, Plaintiff, v. Donald S. AUSTIN, Defendant.

Bankruptcy Nos. 91 B 00675, 91 A 00399.

United States Bankruptcy Court, N.D. Illinois, E.D.

April 7, 1992.

COPYRIGHT MATERIAL OMITTED

John Rothchild, F.T.C., Washington, D.C., for plaintiff.

Richard Larson, Myler, Ruddy & McTavish, Aurora, Ill., for defendant.

MEMORANDUM OPINION

DAVID H. COAR, Bankruptcy Judge.

This matter comes before the Court on the Plaintiff's Motion for Summary Judgment. The Court, having considered the memoranda of law and affidavits submitted by the parties, now rules as follows.

FINDINGS OF FACT

The Defendant in this adversary proceeding, Donald S. Austin Austin, is the founder, president, and sole shareholder of several corporations Austin corporations which operate a chain of art galleries in Illinois, California, and Michigan. In this capacity, Austin is responsible for developing and implementing corporate policies for the sale of artwork at his galleries. He is also responsible for choosing the artwork which is purchased and offered for sale in the galleries and for selecting artwork suppliers.

The Plaintiff in this adversary proceeding, the Federal Trade Commission FTC, is an independent federal agency which is charged with enforcement of § 5(a) of the Federal Trade Commission Act Act, 15 U.S.C. § 45(a). Section 5(a) of the Act prohibits unfair or deceptive acts or practices in or affecting commerce.

On May 3, 1988, the FTC brought an action against Austin, the Austin corporations, and Joanne Granquist, the executive vice-president of the Austin corporations Defendants in the United States District Court for the Northern District of Illinois. This action was denominated FTC v. Austin Galleries of Illinois, Inc., et al., No. 88 C 3845 (N.D.Ill. filed May 3, 1988). In this action, the FTC alleged that the Defendants had violated § 5(a) of the Federal Trade Commission Act by falsely representing the authenticity and value of several art lithographs purportedly by the well-known artists Salvador Dali, Marc Chagall, Joan Miró, and Pablo Picasso. The FTC sought to enjoin the Defendants from making such false representations in connection with the advertising, sale, or other promotion of artworks. In addition, the FTC sought to compel the Defendants to disgorge profits earned from the allegedly fraudulent sales, to rescind outstanding purchase orders, and to make restitution to customers injured by the alleged misrepresentations.

On June 13, 1988, the District Court entered a stipulated preliminary injunction. The preliminary injunction, inter alia, prohibited the Defendants from selling any artworks represented to be authentic or original lithographs by Dali, Chagall, Miró, or Picasso except upon 20 days' written notice to the FTC. The purpose of the written notice was to give the FTC an opportunity to have the prints in question examined for authenticity and to object to the sale if the prints were found to be inauthentic. Pursuant to this provision, the Defendants notified the FTC on June 27, 1988, that they wished to sell 110 Chagall prints and 12 Miró prints represented as authentic originals. The FTC had these prints examined by art experts, who concluded that at least 113 of these 122 prints were inauthentic.

In response to this development, the FTC moved the District Court on August 16, 1988, to modify the June 13 preliminary injunction so as to completely prohibit the Defendants from selling any prints represented as authentic originals by Dali, Chagall, Miró, or Picasso. On October 24, 1988, the District Court granted the FTC's motion with respect to lithographs by the four named artists, and imposed lesser restrictions on the Defendants' sale of non-lithographic works by those artists.

On April 11, 1990, Austin and the Austin corporations the Austin Defendants stipulated to the entry of a Consent Decree and Permanent Injunction.¹ The injunctive provisions prohibited the Austin Defendants from making misrepresentations in the sale of artworks. In addition, the Consent Decree required the Austin Defendants to pay $625,000 into a consumer redress fund to be administered by the FTC. This $625,000 represented full satisfaction of all monetary claims asserted by the FTC. The Austin Defendants were required to pay an additional $5,000, however, for each month or portion of a month between September 1, 1990, and January 1, 1991, that they failed to make full payment of the amount due under the Consent Decree.

The Consent Decree further provided that the Austin Defendants would be considered in default if they failed to pay the full amount due by January 1, 1991. Upon default, the Austin Defendants would become liable to the FTC for $1.5 million, due and payable immediately. In addition, the parties entered a Stipulation for Judgment which provided that if the District Court were to find the Austin Defendants in default under the Consent Decree, and such default was not excused, then the following would occur:

1) judgment would be entered against the Austin Defendants for the amount remaining due under the Consent Decree, plus interest at the rate provided in 28 U.S.C. § 1961;

2) the Austin Defendants would make no objection to the FTC's use in any bankruptcy proceeding of the Answer to the Amended Complaint filed by the Austin Defendants, dated July 7, 1988, or the Corporate Defendants' Response to Plaintiff's First Request for Corporate Defendants' Admissions, dated May 19, 1989; and

3) the Austin Defendants would admit the truth of several of the allegations contained in the FTC's Amended Complaint filed in FTC v. Austin Galleries, Inc., et al., No. 88 C 3845 (N.D.Ill., filed May 3, 1988).

The Austin Defendants failed to pay the full amount due under the Consent Decree by the January 1, 1991, deadline. The Austin corporations filed a petition for relief under Chapter 11 of the Bankruptcy Code on January 9, 1991. Austin filed a Chapter 11 petition on January 11, 1991. Pursuant to the Consent Decree between the Austin Defendants and the FTC, the District Court entered a judgment on January 25, 1991 against the Austin Defendants for $1.5 million. Enforcement of this judgment was stayed under § 362(b)(5) of the Bankruptcy Code.

The District Court entered the parties' Stipulation for Judgment as part of its order on January 25, 1991. Pursuant to this Stipulation, Austin admitted the following factual allegations:

a) Defendant Donald Austin ("Austin") is president, founder, and sole shareholder of Austin Galleries, Austin Galleries of Illinois, and Austin Galleries of Michigan. Individually or in concert with others, he directs, controls, formulates, or participates in the acts and practices of the corporate defendants including the acts and practices set forth herein. He transacts or has transacted business in the Northern District of Illinois.

b) Defendant Austin has participated in or directed the purchase of all art work by Austin Galleries, including works by artists such as Pablo Picasso, Marc Chagall, Salvador Dali and Joan Miró.

c) Defendant Austin has developed or authorized implementation of corporate policies governing the sale of art work, including representations as to their originality and value.

d) Defendant Austin has developed or authorized the implementation of corporate policies governing returns or exchanges of art work in instances where consumers have cited concerns as to a work\'s originality.

e) Defendant Austin has authorized or directed the preparation of documentation for consumers attesting to the authenticity and value of art work sold by Austin Galleries.

f) As set forth herein, in connection with the sale of their art work, defendants have engaged in numerous violations of Section 5(a) of the FTC Act.

g) In numerous instances, defendants have falsely represented that they are selling authentic, original, limited edition, hand-signed graphic art by well-known artists, including, among others, Salvador Dali, Marc Chagall, and Pablo Picasso. In fact, in numerous instances, the graphic art work sold by defendants were not authentic, original, limited edition, hand-signed graphic art by the named artist. In fact, in numerous instances, the named artist did not play a substantial role in the creation and production of the graphic art or did not retain control over key aspects of the creation and production of the edition.

h) In numerous instances, defendants have falsely represented that the art work they market for $200 to several thousand dollars have a market value comparable to or greater than the prices which defendants charge for them. In fact, in numerous instances, the art works which defendants sell have a market value of, at most, $50 because the art works sold by defendants are not authentic works of art.

i) In numerous instances, defendants have falsely represented that the art work they are marketing are sic sound investments and that customers can reasonably expert sic art works sold by defendants to increase substantially in value over the purchase price. In fact, in numerous instances, defendants\' art work has no investment value and consumers cannot reasonably expect to make a profit over the purchase price because, among other reasons, the art work sold by defendant is not authentic works sic of art and thus, has no investment value and no resale market.

j) The aforementioned acts and practices of the corporate defendants constitute unfair or deceptive acts and practices in violation of Section 5(a) of the FTC Act, 15 U.S.C. § 45(a).

k) As a result of his corporate duties and responsibilities ..., Donald Austin ... knew or should have known of the acts and practices listed in paragraphs f-i, and failed to act within his authority to control such acts and practices.

l) Donald Austin ... participated in the acts and practices listed in paragraphs f-i above.

m) As a result of the acts and practices

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