This was originally posted on the SGR Blog.
Court Adjudicates Conflicting Claims for Possession
Almost fifty years ago, the renowned artist Alexander Calder allegedly gifted away 31 drawings. Half a century later, during which several transfers and transactions intervened, the Calder estate sought to recover the pieces from the gallery then in possession of the works.
Prior to his death on November 11, 1976, Alexander Calder, a renowned artist, allegedly gifted to Alfredo Melgar thirty-one drawings. Melgar retained the drawings in his possession until July 15, 2014, when, pursuant to a consignment agreement with a gallery, Chowaiki & Co., he delivered the drawings to non-party Ezra Chowaiki for sale. Melgar alleged that the drawings were neither sold during the consignment period (July 15, 2014 through December 31, 2014) nor returned to him by January 15, 2015 as set forth in the agreement.
By letter dated September 22, 2014, Aaron Richard Golub, Esq., on behalf of the Calder estate, informed Chowaiki that the Calder estate was the owner of the artwork; Melgar had no ownership, title, right or interest whatsoever in any of the drawings; Chowaiki was in wrongful possession of them; and demanded the return of the items. The letter specified that, “[u]ntil such time as this matter is resolved, under no circumstances whatsoever shall you and/or the [g]allery, or any entity or individual acting on your or the [g]allery’s behalf, permit any or all of the [drawings] to be delivered to any third party whatsoever, including, with specificity, [Melgar].”
Chowaiki was instructed to agree to maintain the status quo by signing the letter and delivering it to Golub’s office by September 23, 2014. Golub threatened to “hold the gallery and [Chowaiki] personally liable for all, damages, costs, and expenses in the event that any of the 31 Calder Works [were] delivered to a third-party or otherwise removed from the gallery’s premises without [his] or [his] client’s written consent.” Melgar was unaware of the letter for several years and he could not confirm whether Chowaiki signed and returned the letter. According to Melgar, the Golub letter was designed as an improper means to intimidate Chowaiki into not selling or transferring the drawings and not returning them to him. As evidenced by the failure of the estate to specify the basis for claiming he had no title to the drawings, as well as their failure to explain why no claim had been made by the Calder estate for the drawings for over three decades.
On October 18, 2015, after Chowaiki failed to find a buyer for the artwork, Melgar and Chowaiki executed a purchase agreement for the sale of the drawings to Chowaiki for the sum of $1 million dollars. Melgar asserted that the purchase price was to be paid in equal installments of $250,000.00 due on January 30, 2016; March 30, 2016; May 30, 2016, and July 30, 2016. The transfer of title of the drawings would occur only after the seller received all four installment payments. But Chowaiki never paid any sum of money. Melgar also contended that, upon information and belief, Chowaiki’s execution of the purchase agreement was fraudulent insofar as he never intended to perform that agreement and, instead, sought only to maintain possession or control of the drawings to finalize a transaction with one of the Calder entities and/or Alexander S. C. Rower also known as Sandy Rower, the grandson of Calder.
On or about November 18, 2015, Chowaiki allegedly transferred, in exchange for four gouache (opaque watercolor) paintings, the 31 drawings to Rower, who allegedly acted on behalf of himself and (a) the Estate of Alexander Calder, deceased, of which he was a co-executor; (b) the trust formed under article 4(b) of the last will and testament of Calder of which he was one of the co-trustees; and (c) The Calder Foundation — a nonprofit 501(c)(3) founded in 1987 dedicated to collecting, exhibiting, preserving and interpreting the art and archives of Calder — of which he was chairman and president. According to Melgar, “[s]ome or all of the Calder entities and Sandy Rower conspired with Chowaiki to conceal this transfer of possession from [him] for approximately two years until [he] finally learned of it through the efforts of a private investigator.”
The complaint further stated “[a]t various times, both before and after Chowaiki had transferred possession of the 31 [d]rawings to Chowaiki, Sandy Rower, Chowaiki and [Melgar] met in an effort to negotiate a sale of the [d]rawings to the Calder entities. There were also other communications between them. In all of these communications, [Melgar] insisted that the [d]rawings be returned to him.” At Chowaiki’s request and as part of those negotiations, on or about March 30, 2016, Melgar submitted applications to the Calder Foundation to register the drawings, but the Calder foundation took no action with respect to those applications.
Melgar asserted a claim of fraud, premised on Golub’s letter to Chowaiki, which he claimed was a false and a fraudulent means of gaining possession of the drawings. Melgar claimed that when Rower obtained the drawings he knew or should have known that Chowaiki did not have authority to transfer possession of the artwork. And he asserted that during their meetings, Rower concealed from him the fact that they had already obtained possession of the drawings. Melgar maintained that he was damaged in the amount of at least $1 million dollars and that Rower was also liable for conversion and replevin.
Rower moved to dismiss the complaint. He contended that Melgar failed to allege the five elements of fraud. And also argued that Melgar’s allegation that they concealed their transaction of possession of the artwork was an insufficient basis to establish fraud since silence alone cannot constitute an actionable claim. Melgar failed to plead the existence of any relationship with them that would give rise to a duty; inasmuch as the fraud claim was premised on Chowaiki’s purported breach of his contractual obligations, no fraud claim could stand; and that Melgar failed to plead any special damages beyond what would be recoverable under a breach of contract theory.
Rower also sought dismissal of the complaint based on Melgar’s failure to join Chowaiki as a necessary party, stating that the relief sought might adversely affect Chowaiki’s rights and liabilities.
Rower maintained that Melgar’s allegations of conspiracy did not constitute a separate cause of action and stood or fell with the underlying tort. The allegations of conspiracy—that Rower induced Chowaiki to breach the purchase agreement—failed to state a cause of action for fraud because conspiracy requires the agreement between two or more persons, and one cannot have any agreement to breach one’s own contractual obligations.
Addressing the second and third causes of action for conversion and replevin, Rower averred that Melgar failed to and could not allege New York’s unique “demand and refusal rule,” which requires that a plaintiff, prior to pleading a conversion or replevin cause of action, make a demand to the defendant to return the alleged converted property and show that the defendant had refused to return the property. And Rower also maintained that Melgar improperly disguised a claim for breach of contract as one for conversion/replevin.
Additionally Rower maintained that, pursuant to several sections of the UCC, he was a buyer in the ordinary course of business because (i) the exchange/sale of the drawings for the four gouaches was not “obviously below market”; (ii) Chowaiki’s contract agreement did not differ from previous transactions; (iii) there was no evidence that Chowaiki was having financial difficulties at the time of their transaction or, even if he was, he was not aware of them; and (iv) Rower had no reason to doubt that Chowaiki was fully authorized to sell the drawings. So that, under the UCC 2-403, “the entrustment doctrine,” Chowaiki transferred good and unencumbered title to the drawings.
And Rower argued that Exhibits A, F and H to the complaint should be rejected and not considered by the Court because they were in a foreign language and Melgar failed to annex certified translations as required by CPLR 2101(b).
In opposition to the motion, Melgar argued that the complaint sufficiently described the actionable conduct of Rower constituting fraud, and that, since the details of that conduct were peculiarly within his knowledge, the Court should not dismiss the fraud claims but, rather, allow for the details pertaining to Rower’s interactions with Chowaiki to surface during discovery.
Melgar also asserted that the gravamen of his complaint was that Rower was guilty of several species of fraud other than fraudulent misrepresentations, including that he “aided and abetted Chowaiki in violating the fiduciary obligations which he owed to [Melgar]”. He cited Rower’s alleged acts of misconduct as follows: “the demand in the Golub letter that Chowaiki not transfer the [d]rawings, especially to not return them to [him]; the claim asserted in the Golub letter that [Melgar] had no lawful interest in the [d]rawings and the innuendo that his title derived from theft; the actual delivery of the [d]rawings by Chowaiki to [Rower}; the concealment of those events from [Melgar]; the acceptance of the delivery of the [d]rawings by the [Rower] and their retention; the execution of a document purporting to constitute an exchange of artwork; the assertion of a claim by Rower that the [he and entities he controlled] were and now were the owner of the [d]rawings; the delivery of four gouaches to Chowaiki, allegedly as consideration for the [d]rawings; the refusal of the Calder Foundation to register the [d]rawings based on [Melgar’s] applications; the failure to advise [Melgar] that they had possession of the [d]rawings; the claim of [Melgar and the entities] that they had become the owner of the [d]rawings; and the failure to oversee that the payment of the `consideration’ for the [d]rawings was made to [Melgar] and not Chowaiki.”
Melgar asserted that the complaint stated a cause of action for fraudulent concealment under the “special facts” doctrine. He averred that a “holistic” reading of the complaint allowed the Court to find viable causes of action based on larceny by trick or device; common law fraud; fraudulent concealment; conversion, or, that because of the special facts or circumstances, the relationship between Rower and Melgar transformed their relationship into a fiduciary one or one in which Rower had a duty to disclose to Melgar the facts concealed. Additionally, Melgar maintained that, while the UCC’s merchant entrustment rules may be raised as an affirmative defense or in support of a motion for summary judgment, it was improperly raised in the context of a pre-answer motion to dismiss. Thus, Melgar urged the Court to disregard Rower’s conclusory assertion that the entities were buyers in the ordinary course of business. Furthermore, although demands were made for the return of the drawings, Melgar insisted that a “demand and refusal” were not necessary here since the drawings were obtained unlawfully.
As to the argument that the Court should grant dismissal based on the failure to add a necessary party Melgar argued that Chowaiki was judgment proof and that he asserted no claim as against him. Moreover, Chowaiki and Rower were acting jointly and, as such, the failure to add a joint tortfeasor did not warrant dismissal of the action. And further claimed that non-joinder of an indispensable party was a remedy of last resort and should not be granted here.
Melgar also submitted filed exhibits that had been translated and certified.
In reply, Rower argued that Melgar failed to articulate the facts that he believed would be uncovered during discovery and, thus amounted to speculation. The claims of fraud, which Melgar intended to salvage by proffering a new fraud theory—that Rower committed “fraudulent acts other than misrepresentations” —were based on nothing more than second or third-hand rumors of alleged misconduct. And further claimed that Melgar’s new allegations of “fraudulent acts” were not actionable; that no fiduciary relationship existed between Melgar and Rower; and that if Rower and the entities were, as Melgar alleged, bad faith possessors, the claim premised on replevin and conversion were therefore time-barred.
Rower maintained that the newly attached exhibits to the complaint, aimed at replacing the original exhibits annexed to the pleadings, should be rejected insofar as they were filed after the motion to dismiss. Assuming Melgar might remedy the defective exhibits in opposition to the motion, Rower argued that the newly attached exhibits failed to attach an affidavit from the translator.
Turning first to the fraud cause of action, to make a prima facie claim of fraud, a complaint must allege misrepresentation or concealment of a material fact, falsity; scienter on the part of the wrongdoer; justifiable reliance; and resulting injury. Generally, absent a duty to speak, nondisclosure does not ordinarily constitute fraud. However, even in the absence of any affirmative misrepresentation or any fiduciary obligation, a party may be liable for nondisclosure where it has special knowledge or information not attainable by plaintiff, or when a misleading partial disclosure had been made.
To state a claim for fraudulent concealment, a plaintiff must allege that the defendant had a duty to disclose material information and failed to do so, that the omission was intentional so as to defraud or mislead the plaintiff; and the plaintiff relied on the omission and suffered damages.
In order to plead a claim for aiding and abetting fraud, the complaint must allege the existence of an underlying fraud; knowledge of that fraud on the part of the aider and abettor; and substantial assistance by the aider and abettor in achievement of the fraud. Actual knowledge of the fraud may be averred generally. And substantial assistance exists where a defendant affirmatively assists, helps conceal, or by virtue of failing to act when required to do so enables the fraud to proceed and the actions of the aider/abettor proximately caused the harm on which the primary liability was predicated.
After a review of the relevant statutes and case law, the Court decided the motion as follows:
Melgar failed to plead facts sufficient to maintain a claim of fraud against Rower insofar as the cause of action lacked the requisite specificity and was premised on nothing more than conjectures that Rower conspired with Cowaiki to defraud him. The mere general allegations of fraud or conspiracy were of no value as stating a cause of action. And Melgar’s assertion that discovery would uncover acts by Rower denoting their scheme to deceive him was too speculative to warrant denial of the motion as to the fraud claim.
Melgar’s argument that the complaint set forth sufficient facts for a fraudulent concealment claim was rejected. Melgar failed to assert that Rower owed him an affirmative duty to disclose the transfer of the drawings and he failed to allege that he justifiably relied on that omission to his detriment. Melgar’s argument that the pleadings asserted, as an alternative, a claim for aiding and abetting fraud also lacked merit. Where, as here, liability for fraud was to be extended beyond the principal actors to those who, although not participants in the fraudulent scheme, are said to have aided in and encouraged its commission, it was especially important that the command of for particularity be strictly adhered to. That was because the alleged aider and abettor, by hypothesis, had not made any fraudulent misrepresentation and should not be called to account for the intentional tort of another unless the circumstances of his connection could be alleged in detail from the outset. For those reasons, including Melgar’s failure to plead specific facts showing that Chowaiki and Rower were aware of a fraud and/or orchestrated a scheme to defraud him, the argument was unavailing and unsupported by the pleadings. The branch of the motion seeking dismissal of the fraud claim was granted.
A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person’s right of possession. Two key elements of conversion are plaintiff’s possessory right or interest in the property and defendant’s dominion over the property or interference with it, in derogation of plaintiff’s rights.
And to state a cause of action for replevin, a plaintiff must establish a superior possessory right to property in a defendant’s possession. And the rule in New York is that a cause of action for replevin against the good-faith purchaser of a stolen chattel accrues when the true owner makes demand for return of the chattel and the person in possession of the chattel refuses to return.
While the Court noted Rower’s position that, applying the commercial rules, Chowaiki transferred to him good and unencumbered title to the drawings as buyers in the ordinary course of business, and relatedly, that a demand and refusal was thus required, that determination could not be made at the early stage in the litigation based on the record before the Court—because that was a fact-specific inquiry beyond the parameters of a pre-answer motion to dismiss. Golub’s letter and allegations of meetings before and after Rower acquired the artwork suggested that he was at least aware that Melgar had a potential interest in the drawings. So, viewing the pleadings in the light most favorable to Melgar and drawing all reasonable inferences in his favor, Rower failed to establish entitlement to dismissal of the conversion and replevin causes of action.
The Court noted Rower’s contention that Melgar attempted to circumvent the potential avenues available to him for relief against Chowaiki for his breach of contract. But the Court rejected Rower’s contention that the existence of the purchase agreement between Melgar and Chowaiki warranted dismissal of the conversion/replevin causes of action on the ground that Melgar sought the same damages he could potentially seek against Chowaiki under a breach of contract claim. An action for conversion cannot be maintained where damages are merely being sought for breach of contract. But there was no assertion of a contract between Rower and Melgar such that dismissal of those claims were precluded by a breach of contract claim. The branches of the motion seeking dismissal of the conversion and replevin causes of action were denied.
The rules required provides that “[e]ach paper served or filed shall be in the English language which, where practicable, shall be of ordinary usage. Where an affidavit or exhibit annexed to a paper served or filed is in a foreign language, it shall be accompanied by an English translation and an affidavit by the translator stating his qualifications and that the translation is accurate.” The Court noted that Melgar refiled translated and certified copies of the exhibits challenged by Rower; however, Melgar failed to include the affidavit of the translator. The Court directed Melgar to submit the required affidavit of the translator within 30 days or risk the striking of the documents
P.S. According to Melgar, Chowaiki, who was later accused of defrauding several other individuals and indicted on federal charges for fraud, was not a party defendant for several reasons, including that he was incarcerated and the belief that he was judgment proof.