Opinion
17-CV-4789 (JGK)(SN)
01-11-2021
EDELMAN ARTS, INC., Plaintiff, v. REMKO SPOELSTRA, et al., Defendants.
REPORT & RECOMMENDATION
SARAH NETBURN, UNITED STATES MAGISTRATE JUDGE.
TO THE HONORABLE JOHN G. KOELTL:
Following the entry of a default for plaintiff Edelman Arts, Inc. (“Plaintiff”) against defendants Remko Spoelstra (“Spoelstra”), Jason Holloway (“Holloway”), SSR Invest Switzerland (“SSR”), Swiss Business Council (“SBC”), and John Doe (together, “Defendants”), the Honorable John G. Koeltl referred this matter to my docket to conduct an inquest and to report and recommend concerning Plaintiff's damages. ECF Nos. 84 & 85. On January 14, 2020, I issued a report and recommendation (the “First R&R”) recommending the Court award no breach of contract damages to Plaintiff. ECF No. 94. On May 5, 2020, Judge Koeltl disagreed with my recommendation and recommitted this matter to my docket for an additional report and recommendation after the Plaintiff had the opportunity to present additional evidence to demonstrate the damages to which it is entitled. ECF No. 101. On June 12, 2020, Plaintiff filed supplemental briefing on the matter of damages. See ECF No. 104.
For the reasons set forth below, I respectfully recommend that the Court award Plaintiff damages in the amount of $6,908,712.33.
BACKGROUND
The Court assumes the parties' familiarity with the factual background and procedural history in this case. Therefore, only a brief summary of the relevant factual background and procedural history follows.
As established by Plaintiff's Second Amended Complaint, Plaintiff is a New York Citybased art broker. ECF No. 25 at ¶ 1 (Amended Complaint). In 2016, Plaintiff entered into an agreement with Spoelstra for Spoelstra to purchase five pieces of art on behalf of a member of the Abu Dhabi Royal Family. Id. at ¶¶ 3, 9, 10. Spoelstra agreed to purchase from Edelman Arts (1) a Keith Haring “untitled” acrylic on canvas with metal grommets for $6 million (the “Haring Canvas”), ECF No. 25, Ex. 1 at 1, (2) a Keith Haring “untitled” acrylic on vinyl tarp for $4.8 million (the “First Haring Tarp”), id. at 2, (3) a second Keith Haring “untitled” acrylic on vinyl tarp for $6 million (the “Second Haring Tarp”), id. at 3, (4) a Keith Haring “untitled” enamel on wood totem for $3 million (the “Haring Totem”), id. at 4, and (5) an Edvard Munch painting for $7 million (the “Munch Painting”), ECF No. 25 at ¶ 14. Each of the Haring pieces was separately invoiced to Spoelstra on November 16, 2018; Spoelstra subsequently executed the invoices and in turn invoiced SBC for the Haring works and for the Munch Painting. ECF No. 25 at ¶ 21; id., Exs. 1 (Edelman Arts invoices to Spoelstra) & 2 (Spoelstra invoices to SBC). Plaintiff, however, never received payment for the works, and never delivered any of the works to Defendants. ECF No. 25 at ¶ 25.
On June 23, 2017, Plaintiff's lawsuit, originally filed in the Supreme Court of the State of New York, County of New York, was removed to the Southern District of New York. ECF No. 1. Plaintiff asserted a breach of contract claim against the Defendants. Id., Ex. 1. Defendants Holloway, SSR, and SBC never appeared or otherwise participated in this action; Defendant Spoelstra did appear and answered the original and Second Amended Complaint, but did not respond to the Court's April 9, 2019 Order to Show Cause for a Default Judgment. ECF No. 80 at ¶¶ 12-14; ECF No. 82; see ECF No. 27 (Spoelstra's Answer).
The Honorable John G. Koeltl entered a default against all Defendants on April 24, 2019. ECF No. 84. He subsequently referred the matter to me for a damages inquest. ECF No. 85.
After Plaintiff was afforded two opportunities to submit materials supporting its claim for damages, on January 14, 2020, the Court determined Plaintiff had failed to establish the legal and factual bases of its claimed damages and recommended that Plaintiff be awarded no damages. ECF No. 94. Plaintiff objected to the First R&R and moved to alter or amend pursuant to Federal Rule of Civil Procedure 52(b). ECF Nos. 97 & 98. As the Rule 52(b) motion was the improper vehicle by which to challenge the First R&R, the Court denied that motion. ECF No. 100.
On May 5, 2020, Judge Koeltl declined to adopt my First R&R. ECF No. 101. Judge Koeltl concluded that “[t]here was clearly a breach of contract.” Id. at 12. This Court is bound by Judge Koeltl's legal conclusion. Judge Koeltl further determined that the “theory of damages” here “does not rely on ‘a multitude of assumptions.'” Id. at 13; see Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir. 2000). Judge Koeltl then recommitted the matter to me for another report and recommendation after Plaintiff had the opportunity to submit additional evidence in support of its damages request. Id. at 14-15.
Accordingly, on May 29, 2020, this Court issued an order requiring Plaintiff to supplement the record, specifically requesting additional evidence as to (1) the agreed-upon commission rate with Defendants, (2) the usual and customary commission rates for these types of agreements, (3) whether Plaintiff was “ready, willing, and able” to perform the contract, and (4) Plaintiff's efforts to mitigate damages and the legal consequences related to mitigation. ECF No. 102 at 5. The Court also requested Plaintiff provide the legal basis for finding (5) that Defendants are obligated to pay a commission when the art remains in the custody of the broker, possession of the seller or both, and (6) that Defendants owe Plaintiff the difference between the sales price agreed upon by the parties for a piece of art and the subsequent sales price of that same piece to another party. Id. The Court also noted that it was bound by Judge Koeltl's legal conclusions and that it assumed the contract included payment of a commission fee regardless of whether the art was ultimately purchased. See Restatement (Second) of Contracts § 204 (Am. Law Inst. 1981). Plaintiff timely filed a Supplemental Memorandum of Law and supporting exhibits on June 12, 2020. See ECF No. 104 & Exs. 1-15.
On July 31, 2020, Holdrum Investment, N.A., an alleged judgment creditor of Asher Edelman, moved to intervene in this matter. ECF No. 110. Judge Koeltl denied the motion on October 2, 2020. ECF No. 119.
DISCUSSION
The Court must now “calculate the commissions that the plaintiff would have collected for the five works of art and . . . determine the amount by which the damages should be reduced because of mitigation efforts that either were taken or could reasonably have been taken to sell” the pieces and the “extent those efforts reduced the amount of unpaid commissions owed to the plaintiff.” ECF No. 101 at 13.
I. Legal Standard
As Judge Koeltl noted in his May 5, 2020 decision, “[t]he general rule for measuring damages for breach of contract . . . is the amount necessary to put the plaintiff in the same economic position he would have been in had the defendant fulfilled his contract.” ECF No. 101 at 8 (quoting Indu Craft, Inc. v. Bank of Baroda, 47 F.3d 490, 495 (2d Cir. 1995)). Moreover, New York law, which governs this diversity action, provides that a seller may recover the entire contract price in a breach of contract action. N.Y. U.C.C. § 2-709(1)(b); see also N.Y. U.C.C. § 1-305(a). These damages are known as “direct damages.” See Latham Land I, LLC v. TGI Friday's, Inc., 948 N.Y.S.2d 147, 151-52 (N.Y.App.Div. 2012) (citations omitted) (“Direct damages are typically expectation damages, measured by what it would take to put the nonbreaching party in the same position that it would be in had the breaching party performed as promised under the contract.”)
A component of the damages calculation for breach of contract, however, is a plaintiff's duty to mitigate the damages incurred. See U.S. Bank Nat'l Ass'n v. Ables & Hall Builders, 696 F.Supp.2d 428, 440-41 (S.D.N.Y. 2010); Restatement (Second) of Contracts § 350 (“[D]amages are not recoverable for loss that the injured party could have avoided without undue risk, burden or humiliation.”); see also ECF No. 101 at 13 (explaining Plaintiff's damages calculation is to consider whether any mitigation efforts were undertaken).
At this stage, following a default, the amount of damages must be established with reasonable certainty. See Schonfeld, 218 F.3d at 172 (“In an action for breach of contract, a plaintiff is entitled to recover lost profits only if he can establish both the existence and the amount of such damages with reasonable certainty.” (citing Kenford Co. v. Cty. of Erie, 67 N.Y.2d 257, 261 (1986)). A court may rely on “detailed affidavits and documentary evidence” when the court is assured that “there [is] a basis for the damages specified in a default judgment.” Fustok v. ContiCommodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989).
II. Breach of Contract Damages
Plaintiff asserts it is entitled to the commissions on the Haring Canvas and Munch Painting, totaling $2,600,000, the difference in sales price and the agreed-upon invoice price on the two Haring Tarps, totaling $3,985,000, the full contract price of the Haring Totem, totaling $3,000,000, as well as prejudgment interest. See generally ECF No. 104 & Ex. 1.
A. The Haring Canvas and the Munch Painting
Plaintiff asserts it is entitled to the commissions it would have earned on the sales of the Haring Canvas and the Munch Painting, both at a rate of 20 percent. ECF No. 104, Ex. 1 at ¶¶ 12, 34. Plaintiff's commissions “clearly constitute 20% of the total invoice price, ” and the rate was “agreed to with Spoelstra prior to issuing the invoices.” ECF No. 101 at 4 n.1 (quoting ECF No. 97, Ex. 1 at ¶ 7).
Were it not for Defendants' breach, Plaintiff “would have collected commissions for finding and brokering multi-million works of art.” Id. at 13. Accordingly, to calculate damages, the Court looks to the commissions Plaintiff would have received on the sales of the Haring Canvas and Munch Painting. As described in Mr. Edelman's June 2020 declaration, Plaintiff and Spoelstra had agreed to a 20 percent commission for Plaintiff “prior to issuing the invoice.” ECF No. 104, Ex. 1 at ¶¶ 12, 34. Plaintiff explains that 20 percent commission reflects an industry standard, and supports his assertion with the scale of “Buyer's Premium” rates at Christie's auction house as of February 1, 2019, ECF No. 104, Ex. 12, the conditions for sale at the Christie's, Sotheby's, and Phillips auction houses, id., Ex. 13, an article explaining Buyer's Premiums, id., Ex. 14, and a Quora thread on “What percentage cut do art dealers/galleries make on selling art.” Id. at ¶¶ 40-42; ECF No. 104, Exs. 12-15.
The total sales price for the Haring Canvas was $6 million, therefore Plaintiff asserts it is entitled to a 20 percent commission on the total sales price, or $1.2 million. ECF No. 104, Ex. 1 at ¶ 12; id., Ex. 4. Although Plaintiff asserts that it attempted to find a new buyer for the Haring Canvas, it was “unable to do so, ” and the owner of the work “asked Edelman Arts to stop trying to sell the work.” Id. at ¶ 13. Accordingly, Plaintiff is entitled to $1.2 million in commission related to the Haring Canvas.
Similarly, Edelman Arts had reportedly agreed to sell Spoelstra the Munch Painting for $7 million, and asserts it is owned 20 percent on that sale in commission, totaling $1.4 million. See ECF No. 104, Ex. 1 at ¶ 34; ECF No. 104, Ex. 11. This assertion is based solely on Mr. Edelman's declaration; Plaintiff has never produced an invoice from Edelman Arts to Spoelstra regarding the Munch Painting, and the only invoice Plaintiff has ever provided for the sale of the Munch Painting is the invoice from “J.B. Spoelstra Beheer” to SBC - Abu Dhabi. ECF No. 104, Ex. 11. In consideration of the “mitigation efforts that were taken or could reasonably have been taken, ” Mr. Edelman attests to attempting to sell the Munch Work, but he was unable to do so before the owners requested the return of the piece, and the piece remains unsold. Id. at ¶¶ 3537; ECF No. 101 at 13. Accordingly, I find Plaintiff entitled to $1.4 million in commission on the Munch Painting.
Therefore, I find Plaintiff is entitled to $2.6 million in commissions.
B. The Haring Totem
The invoice for the Haring Totem indicates the agreed-upon sales price between Edelman Arts and Spoelstra was $3 million. See ECF No. 104, Ex. 5. Plaintiff would have been entitled to a 20 percent commission on the Haring Totem, totaling $600,000. See ECF No. 104, Ex. 1 at ¶ 17. Because Edelman Arts continued to attempt to sell the Haring Totem (with no success) and remains able to comply with the terms of the contract, Plaintiff asserts it is entitled to the full $3 million contract price, rather than only the $600,000 it would have earned as commission, assuring the Court that “[i]f Edelman Arts receives payment for the totem, Edelman Arts will transfer the monies to the owner of the totem less Edelman Arts' commissions.” Id. at ¶¶ 18-20.
Plaintiff points to two cases to support its proposition: Ball v. Cook, No. 11-cv-05926 (RJS), 2012 WL 4841735 (S.D.N.Y. Oct. 9, 2012), and Sack v. Lawton, No. 01-cv-00285 (SHS), 2003 WL 22682043 (S.D.N.Y. Aug. 28, 2003). Both cases involve breach of contract actions regarding the sale of artwork. The key difference between those cases and the instant matter, however, is that the plaintiffs in those actions were the owners of the work of art and had established their rights to the works. Here, “[b]ut for the defendants' breach, the plaintiff would have collected commissions for finding and brokering” the Haring Totem. ECF No. 101 at 13. Plaintiff therefore is only entitled to the commission on the Haring Totem that it would have earned had the sale to Spoelstra taken place, and an award of $600,000 for the Haring Totem returns Plaintiff to his position had the contract been enforced.
D. The First Haring Tarp
Plaintiff asserts it is owed $1,985,000 for the First Haring Tarp. Although breach of contract damages are intended to “put the plaintiff in the same economic position he would have been in had the defendant fulfilled his contract, ” Indu Craft, Inc., 47 F.3d at 495, here Plaintiff seeks the full difference between the price at which the First Haring Tarp was later sold and the invoice price-which is more than the commission Plaintiff would have earned on the sale.
Plaintiff and defendant Spoelstra agreed to the sale of the First Haring Tarp for $4.8 million. See ECF No. 104, Ex. 2 at 3. Plaintiff would have earned $500,000 in commission on the sale. ECF No. 104, Ex. 7 at ¶ 6. After Plaintiff did not receive payment for the piece, it attempted to find another buyer. ECF No. 104, Ex. 1 at ¶ 23. Eventually, the owner of the First Haring Tarp, Artemus, found a buyer. Id. The First Haring Tarp was ultimately sold for $3,250,000, but after commissions were paid to other involved parties, the owner's final takehome profit was $2,815,000. ECF No. 104, Ex. 7. Plaintiff now asserts it is entitled to the difference between the price agreed upon with Defendant Spoelstra ($4.8 million) and the amount the owner recovered ($2,815,000), or $1,985,000. Id. at ¶ 24; ECF No. 104, Ex. 7. In an earlier affidavit, Mr. Edelman asserted that if Edelman Arts recovered $1,985,000 from Defendants, it would “retain its lost commission on the sale of $500,000 and Edelman Arts would send the price differential of $1,485,000 to Artemus.” ECF No. 104, Ex. 7 at ¶ 17.
Plaintiff has not established the basis by which it may recover damages for Artemus. See ECF No. 94 at 6. Pursuant to the theory of damages in this case, Plaintiff is entitled to its lost profits-the commission it would have collected for brokering the sale to Spoelstra. See ECF No. 101 at 13. Although Plaintiff attempted to mitigate its damages, the piece was only sold once the owner of the First Haring Tarp found a buyer, and Plaintiff did not receive any commissions on that sale. ECF No. 104, Ex. 7 at ¶ 14. Therefore, Plaintiff is only entitled only to its lost commission on the sale, or $500,000.
C. The Second Haring Tarp
Upon a breach of contract, a plaintiff may be entitled to “lost profits, ” or “consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements. When the breaching party does not perform, the non-breaching party's business is in some way hindered, and the profits from potential collateral exchanges are ‘lost.'” Tractebel Energy Mktg., Inc. v. AEP Power Mktg., Inc., 487 F.3d 89, 109 (2d Cir. 2007).
Plaintiff and Spoelstra had agreed to the sale of the Second Haring Tarp for $6 million. ECF No. 104, Ex. 1 at ¶ 26; ECF No. 104, Ex. 8. Mr. Edelman asserts that at the time of the invoice to SBC, the work was not in Plaintiff's possession, but the “owner was ready to transfer the work once payment was received.” ECF No. 104, Ex. 1 at ¶ 27. After the sale to Spoelstra was not completed, the owner sold the Second Haring Tarp for $4 million. Id. at ¶ 28. Plaintiff asserts it is owed $2 million, the difference between the sales price agreed to with Defendants and the ultimate sales price of the work. Id. at ¶ 31.
The Second Haring Tarp was the subject of a separate lawsuit filed by Edelman Arts in the Supreme Court of New York. See Edelman Arts, Inc. v. N.Y. Art World, LLC, No. 652017/2018, 2019 WL 6700444 (N.Y. Sup. Ct. Dec. 9, 2019); see also ECF No. 104, Ex. 1 at ¶¶ 21-31. In that case, New York Art World, with whom Edelman had contracted to buy the Second Haring Tarp for $5 million with the goal of reselling it to Spoelstra, sought damages from Edelman Arts after Edelman Arts did not pay the $5 million sales price following the breakdown of Edelman Arts' sale to Defendants. Id. at *2. Because the Second Haring Tarp was subsequently sold for $4 million, on December 19, 2019, the Supreme Court of New York entered a judgment against Edelman Arts for $1 million, the difference between the agreed-upon sales price and the amount for which the Second Haring Tarp was eventually sold. See generally id.; ECF No. 104, Ex. 10.
Because Plaintiff was going to purchase the Second Haring Tarp from Art World for $5 million and then sell it to Defendants for $6 million, Plaintiff would have made a $1 million profit had Defendants performed. When Defendants did not perform, Plaintiff suffered $1 million in lost profit damages. See Tractebel Energy Mktg., Inc., 487 F.3d at 109. Plaintiff also suffered direct damages of $1 million when it was sued by New York Art World for the difference between what Plaintiff had agreed to purchase the Second Haring Tarp from New York Art World, and what New York Art World ultimately sold the piece for. Accordingly, I find that Plaintiff is entitled to $1 million in lost profit damages. I also recommend that Plaintiff be awarded the second $1 million in direct damages once it has demonstrated that the judgment to New York Art World, see ECF No. 104, Ex. 10, has been paid. Until Plaintiff has sufficiently demonstrated that the judgment issued by the New York Supreme Court has been paid, the $1 million in direct damages shall be held in escrow.
D. Prejudgment Interest
A plaintiff is typically entitled to prejudgment interest in a breach of contract case. Nasdaq, Inc. v. Exch. Traded Managers Grp., LLC, 431 F.Supp.3d 176, 274 (S.D.N.Y. 2019) (quoting Graham v. James, 144 F.3d 229, 239 (2d Cir. 1998)). Although interest ordinarily accrues from the date of the breach to the entry of judgment, courts have “‘wide discretion' to determine a reasonable date from which to calculate interest where ‘damages are incurred at various times after the cause of action accrues.'” Id. (quoting Aristocrat Leisure Ltd. v. Deutsche Bank Trust Co. Ams., 727 F.Supp.2d 256, 296 (S.D.N.Y. 2010)). Under New York law, interest is calculated at nine percent per year. N.Y. C.P.L.R. § 5004.
The invoices Edelman Arts sent Spoelstra on November 18, 2016, indicate that “payment [was] due upon receipt of invoice.” ECF No. 104, Ex. 2. Yet without explanation, Plaintiff's Proposed Findings of Fact indicate that the interest started accruing on December 15, 2016. ECF No. 90 at ¶ 27. While the breach of contract would seemingly have occurred on November 18, 2016, after Defendants failed to remit payment, the Court accepts December 15, 2016, as the date of the breach and the date on which the prejudgment interest began to accrue.
As there was “clearly a breach of contract in this case, ” I find Plaintiff entitled to prejudgment interest. See ECF No. 101 at 12. Nine percent annual interest on the principal of $5,700,000 from December 15, 2016, to April 24, 2019, totals $1,208,712.33.
Nine percent annual interest on the $5,700,000 principal amounts to $513,000 in interest per year. Divided by 365, that amounts to $1,405.48 in interest accrued per day.
CONCLUSION
For these reasons, I respectfully recommend that the Court award $1,200,000 for the Haring Canvas, $1,400,000 for the Munch Painting, $600,000 for the Haring Totem, $500,000 for the First Haring Tarp, $1,000,000 for the Second Haring Tarp, with an additional $1,000,000 to be held in escrow until Plaintiff has submitted proof of payment of the judgment issued by the New York Supreme Court, and $1,208,712.33 in prejudgment interest to Plaintiff following Defendants' default.