Martin Hilti Family Trust v. Knoedler Gallery, LLC

Citation: 386 F. Supp. 3d 319Docket: 13 Civ. 0657 (PGG), 13 Civ. 1193 (PGG)

Court: District Court, S.D. Illinois; May 8, 2019; Federal District Court

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Over fifteen years, Rosales supplied the Gallery with numerous forgeries of Abstract Expressionist works, termed the "Rosales Paintings," which were sold to customers. Freedman characterized this initiative as "the project." In 2000, she engaged art historian E.A. Carmean to investigate the provenance of these paintings, leading to a fabricated connection between Mr. X and Alfonso Ossorio, a notable art figure. Freedman and the Gallery subsequently claimed that some Rosales Paintings were acquired with Ossorio's help, which Freedman deemed significant for establishing provenance. However, a 2003 report from the International Foundation for Art Research (IFAR) refuted the Ossorio link, prompting Freedman to then assert that David Herbert had assisted Mr. X instead, a connection Rosales confirmed.

Freedman communicated her research progress to Hammer, without disclosing Rosales' identity in writing or recalling any verbal discussion. During this period, Freedman's profit share from the Gallery increased from 10% in 1998 to 30% by 2008, with Hammer approving each increment. In March 2000, Frances White and her then-husband purchased four paintings, including a purported Jackson Pollock, for $5 million, with Freedman claiming it was owned by an anonymous Swiss collector. The invoice stated the Pollock's provenance as a "Private Collection, Switzerland." The Whites had previously bought at least nine paintings from the Gallery and were familiar with Freedman.

In October 2002, Michael Hilti, representing the Martin Hilti Family Trust, visited the Gallery and was shown a photograph of a purported Rothko that Freedman claimed was from a private collection. The Trust later purchased the painting for $5.5 million, transferring the funds from Liechtenstein to the Gallery's New York account.

In late 2001, Freedman and Knoedler sold a painting claimed to be by Jackson Pollock, referred to as the "Green Pollock," to Jack Levy for $2 million. Knoedler had acquired the painting from Rosales for $750,000, including a provenance reference to Ossorio. Levy's purchase was contingent upon a favorable review of the painting's provenance and authenticity by the International Foundation for Art Research (IFAR). On October 9, 2003, IFAR issued a report rejecting claims of Ossorio's involvement and highlighting "disturbing" differences in materials compared to known Pollock works from the same year. The report concluded that due to negative expert opinions and a lack of documentation linking the painting to Pollock, it could not support its addition to the artist's oeuvre.

In December 2003, Freedman informed Hammer that Levy wished to return the Green Pollock for a refund based on the IFAR findings. Subsequent memoranda from Peter Sansone, 8-31's CFO, revealed that Knoedler's gross profits had risen despite declining sales, with one memo indicating a 363% profit on a Rosales painting, although it did not specify which painting. On August 31, 2009, 8-31's board formed a special committee to investigate Rosales paintings, with Hammer stating he was unaware of authenticity issues until then. Knoedler received a grand jury subpoena regarding Rosales paintings on September 22, 2009, leading to Freedman's administrative leave and subsequent resignation.

On October 27, 2009, Hammer informed clients of Freedman's resignation without explanation, expressing confidence in the gallery's future. In 2010, Knoedler’s receivables from 8-31 were reclassified as distributions. On November 30, 2011, Hammer announced the gallery's closure and approved a liquidation plan requiring Knoedler LLC to address all legally enforceable claims, including those with unknown claimants. However, CFO Ruth Blankschen testified she was unaware of this plan, and Hammer admitted he lacked knowledge about its implementation.

On December 1, 2011, Pierre Lagrange filed a lawsuit alleging that a Pollock painting he purchased for $15.3 million from Knoedler was a forgery, coinciding with the announcement of the Gallery's immediate closure. The following day, a New York Times article highlighted the FBI's investigation into Knoedler. Rosales admitted that all works she sold to Knoedler were forgeries created by an individual in Queens and acknowledged collaborating with others to sell these forgeries while making false claims about their authenticity. The litigation involves complex issues regarding the corporate structures and relationships between Knoedler LLC, 8-31, and Michael Hammer. Knoedler LLC asserts it cannot be liable for White's injuries since her painting purchase predates its formation, while White argues for liability under successor liability theory. Plaintiffs further contend that Hammer can be held accountable for 8-31's actions through an alter ego theory. The analysis necessitates a detailed examination of the corporate relationships, tracing back to the M. Knoedler. Co. division of Knoedler-Modarco, Inc. Knoedler-Modarco was previously owned by Hammer's grandfather and Morris Liebowitz, with Hammer acquiring Liebowitz's shares in 1992, becoming the sole decision-maker thereafter. In 2001, Hammer established 8-31 and formed several LLCs under Delaware law, with 8-31 as the sole member of each. Knoedler LLC acquired the M. Knoedler. Co. division’s assets for approximately $14 million based on a valuation by Ernst & Young, although cautioning against using its valuation for transaction pricing. The asset purchase agreements were executed by representatives from both Knoedler-Modarco and Knoedler LLC, but there were no negotiations over the terms according to Sansone, who did not read the agreement prior to signing.

Freedman testified that she signed the asset purchase agreement without reading it, did not negotiate the terms, and could not recall who requested her signature. Neither Hammer nor Sansone remembered discussing this transaction at any board meeting for Knoedler-Modarco. At the time of the asset sale, there was considerable overlap in the leadership of Knoedler-Modarco and 8-31, with shared board members including Michael Hammer, Dru Hammer, Peter Sansone, Ann Freedman, and Richard Lynch. Michael Hammer served as president for both entities, while Sansone held the CFO position for all three companies involved. Freedman was the president of Knoedler's division and the sole manager of Knoedler LLC.

After completing the asset purchase agreements with Knoedler LLC, Hammer Galleries LLC, and Knoedler Publishing LLC, Knoedler-Modarco retained various assets, including the Gallery's archives, approximately 150 paintings, and two significant promissory notes totaling over $12 million. Knoedler-Modarco was dissolved in March 2007 after these notes were paid, leaving only Michael and Dru Hammer on the board. The Gallery's operations and branding remained unchanged post-transaction, as invoices continued to reflect the Knoedler name established in 1846.

8-31 serves as a holding company for Knoedler LLC, Hammer Galleries LLC, and Knoedler Publishing LLC, lacking its own operations or revenue. It conducts board and shareholder meetings, has established by-laws, and manages the three LLCs. Although 8-31 and Knoedler LLC maintain separate financial records, they share employees, with key personnel holding roles in both companies. On April 1, 2001, they entered a Management Agreement stipulating that 8-31 would charge Knoedler LLC 101% of actual costs for various services, including administrative support. Defendants assert that the services were never provided as outlined, while Plaintiffs argue that 8-31 either delivered the services or coordinated with external providers, although the fee structure was not adhered to.

Plaintiffs allege that Knoedler LLC, Hammer Galleries LLC, and Knoedler Publishing LLC systematically transferred funds to 8-31 without any legitimate need or services rendered by 8-31. These transfers were made to meet 8-31's cash needs, sourced from whichever LLC had available funds. Defendants counter that 8-31 utilized these funds for its own business expenses and those of the three LLCs, covering items such as taxes, salaries, and charitable donations. However, Plaintiffs assert that a significant portion of these funds was diverted to cover personal expenses of Michael Hammer, including automobile and credit card bills.

Prior to 2009, all non-payroll cash transfers from Knoedler LLC to 8-31 were logged as interdivisional receivables and payables. Testimonies from Sansone and Blankschen indicated they did not anticipate repayment from 8-31 for these transferred funds. In 2010, Knoedler LLC’s interdivisional receivables from 8-31 were reported at $13.5 million by Plaintiffs and $14.6 million by Defendants. Following a grand jury subpoena in 2010, 8-31 reclassified these receivables as "distributions." Defendants claim Hammer was uninvolved in this accounting adjustment, while Plaintiffs argue he directed it.

Michael Hammer, residing in California and not regularly visiting the Gallery, described his role in 8-31 as focused on brand recognition and revenue enhancement through networking with art collectors and gallery directors. He denied involvement in art transactions or marketing. Hammer frequently charged business and personal expenses on a corporate credit card, which he also provided to family members. Between 2005 and 2014, the Hammers charged $2.7 million to these corporate cards, with Hammer reimbursing 8-31 for $1.1 million of personal expenses. However, he did not disclose specific details about the business nature of his expenses, and 8-31 did not review his expense claims. The expenses listed included meals, travel, and events.

Hammer lacks recollection of the business purpose for certain charges he labeled as business expenses and failed to keep records for these transactions. Notably, a $3,176 hotel charge in Bora Bora was initially categorized as a business expense but later recognized as a personal refund. Hammer admitted to misclassifying over $10,000 in airfare for his son’s trip to New Zealand as a business expense, acknowledging that some charges he made were intended to be personal but were initially recorded otherwise. Dru Hammer testified that many charges on her corporate credit card, designated as business expenses, were in fact personal, citing a trip to Barcelona intended to visit their son, with Michael Hammer asserting that he conducted business during the trip, justifying $17,500 in expenses as business-related.

Between 2001 and 2010, Hammer purchased at least seven luxury vehicles using funds from 8-31, which he claimed were for business purposes, specifically to engage high net worth clients for the Gallery business. Hammer did not recall consulting with 8-31's chief financial officer about these purchases, often using his personal funds for the transactions and later seeking reimbursement from 8-31. Titles for the vehicles were typically registered in Hammer's name or jointly with 8-31, and he was the sole user.

The legal proceedings began with Hilti filed on January 29, 2013, followed by White on February 21, 2013. Defendants filed motions to dismiss the Plaintiffs' Amended Complaints, which led to a partial grant and denial by the Court on September 30, 2015. A subsequent order on December 22, 2015, allowed the Trust to amend its complaint to include an alter ego theory against Hammer. The Second Amended Complaint included various claims, including RICO violations and fraud against all Defendants, as well as specific claims against Hammer and 8-31. The Defendants are currently moving for summary judgment, with Hammer seeking it on all claims against him, 8-31 on RICO claims, and Knoedler LLC on claims in White and RICO claims in Hilti.

Summary judgment is granted when the moving party demonstrates that there are no genuine disputes over material facts and that they are entitled to judgment as a matter of law. A genuine issue exists if reasonable evidence could allow a jury to favor the non-moving party. If the non-moving party bears the burden of proof at trial, the moving party can highlight a lack of evidence for essential elements of the claim. The court must resolve ambiguities and favor the opposing party when evaluating the motion. However, mere speculation or conclusory statements are insufficient to create a genuine issue of material fact. Assessments of credibility and conflicting evidence are for the jury to decide, not the court.

To establish a private cause of action under RICO, a plaintiff must prove the defendant's violation of 18 U.S.C. § 1962, an injury to their business or property, and that the injury was caused by the defendant's violation. 18 U.S.C. § 1962(c) prohibits individuals associated with an enterprise affecting interstate commerce from participating in the enterprise's affairs through racketeering. A civil RICO claim requires proof of two or more acts constituting a pattern of racketeering activity and participation in an enterprise affecting interstate commerce. To establish a RICO conspiracy, a plaintiff must show that a conspiracy existed to commit acts constituting a substantive RICO violation, that the defendant agreed to participate in that conspiracy, and that the defendant acted in furtherance of the conspiracy.

In the case of De Sole, the court granted Hammer summary judgment on the RICO claims against him due to insufficient evidence of his knowing participation in the alleged RICO enterprise. The court noted that the evidence concerning Hammer was less developed than in De Sole but the arguments were similar. Hammer argued that he did not direct the enterprise's affairs or coordinate any fraudulent activities related to the sale of paintings.

Hammer asserts he did not participate in the marketing or sales of paintings sold by Knoedler and claims he did not direct or encourage the sale of forged paintings. He argues that evidence shows he had no role in managing the alleged enterprise. Hammer's family has been responsible for the Gallery's operations since the 1970s, and as the president, CEO, chairman, and sole owner of 8-31 Holdings, Inc., he had the authority to control Knoedler's operations. However, his involvement was limited; he lived in California, visited Knoedler infrequently, and primarily communicated with staff via phone every few weeks. There is no evidence he managed Knoedler daily or interacted with customers purchasing Rosales Paintings, nor was he aware of the significant profits from these sales. Hammer received annual summaries of Knoedler's financials but was not informed of the specific profit margins related to Rosales Paintings. While a staff member testified she generally informed him of sales, she did not disclose profit margins, and Hammer denies ever knowing them. Financial reports he received lacked detail and presented only aggregated figures.

Hammer had no serious or detailed knowledge regarding Knoedler's profit margins from the sale of Rosales Paintings, and thus could not have been aware of any underlying fraud scheme based on profit awareness. Freedman's testimony indicated that Hammer knew Rosales was the source of the paintings and that Knoedler was researching their provenance but did not indicate that Hammer was aware of any inconsistencies in Rosales' accounts or her reluctance to confirm the paintings' authenticity. There is no evidence that Hammer ever met Rosales or discussed the paintings with her. Freedman allegedly made misrepresentations to Knoedler's customers regarding the provenance of the paintings, but there is no evidence that Hammer was aware of these misrepresentations or that he had any knowledge questioning the authenticity of the works. Hammer's review of the IFAR report on the "Green Pollock" suggested concerns over the painting's authenticity, citing negative opinions from experts and a lack of documentation linking it to Pollock or Ossorio. Ultimately, the IFAR report concluded that there was insufficient evidence to support the painting's addition to Pollock's oeuvre.

Levy returned the Green Pollock to Knoedler in late 2003, receiving a full refund of $2 million. Hammer instructed Freedman to refund Levy and conduct research in response to the IFAR Report, which Freedman found inconclusive and questioned its validity. Despite discussing the report, Hammer and Freedman did not address the provenance issues related to the Green Pollock or other paintings from the same source. Freedman assured Hammer that there were no problems with the Green Pollock. Hammer later directed Freedman to share the IFAR Report with a potential investor in the Green Pollock but did not require her to do the same for any customer interested in Rosales Paintings. The IFAR Report alone did not prove that Hammer recognized the Rosales Paintings, including those purchased by the Plaintiffs, as forgeries. The Plaintiffs failed to demonstrate that Hammer was aware of ongoing fraud at Knoedler or that any authenticity issues concerning Rosales Paintings were brought to his attention during the decade they were sold. Actions taken by Hammer, such as increasing Freedman's compensation, were not indicative of participation in a fraudulent scheme. Although Plaintiffs claimed that new evidence warranted a different decision than in the De Sole case, their arguments were unconvincing. The court found that the evidence presented did not exceed what had previously been deemed insufficient, and while there were memoranda indicating profit margins, there was no evidence that Hammer had been informed of specific profits from individual Rosales Paintings.

Hammer was not informed that a painting with a reported 363% profit was a Rosales Painting, and there is no new evidence concerning the Gallery's profits that would warrant a change in the prior ruling in De Sole. While Hammer had access to profit information by 2006, it remains unclear if he knew about the substantial profits from Rosales Paintings specifically. The plaintiffs' claims regarding Hammer's alleged concealment of the IFAR report do not introduce new arguments or evidence that would alter the court's earlier conclusions regarding Hammer's knowledge. Consequently, Hammer is entitled to summary judgment on the plaintiffs' RICO claims.

Additionally, the defendants argue that the Trust's RICO claims are legally deficient because the alleged injury occurred in Liechtenstein, which does not satisfy the requirement for a "domestic injury" under RICO. Citing the Supreme Court case RJR Nabisco, the text emphasizes that RICO's provisions apply extraterritorially only if the underlying predicate acts do as well. Furthermore, a RICO plaintiff must demonstrate a domestic injury to their business or property. The Second Circuit's interpretation in Bascuñán clarifies that an injury to tangible property is considered domestic only if the property was physically located in the U.S., and the mere use of the U.S. financial system does not convert a foreign injury into a domestic one.

In determining whether an injury is classified as domestic under RICO, the location of the plaintiff's property at the time of harm is critical, irrespective of the plaintiff's residence. The court emphasized that only domestic injuries warrant consideration of RICO claims, with dismissal of claims occurring if a domestic injury is not established, without evaluating the extraterritorial application of RICO. In recent cases, such as Dandong Old N.E. Agric. Animal Husbandry Co. and Yanchukov v. Finskiy, plaintiffs were dismissed for failing to demonstrate a domestic injury. 

In the current context, Hilti's engagement with a purported Rothko painting involved a visit to a Manhattan gallery where misleading information was provided. The painting was shown only through a photograph, and the Trust, located in Liechtenstein, ultimately decided to purchase it after it was delivered to them. The transaction occurred when the Trust transferred funds from its Liechtenstein bank to a New York account, with no evidence of Trust representatives being present in the U.S. during the purchase. The defense argues, referencing Bascuñán, that the Trust did not experience a domestic injury, as prior rulings indicated that merely utilizing the U.S. financial system does not convert a foreign injury into a domestic one. Only injuries involving property located in the U.S. at the time of theft are considered domestic under the precedent set in RJR Nabisco.

Defendants assert that the Trust sustained its injury in Liechtenstein when funds were transferred from its Liechtenstein bank account to Knoedler LLC's New York account, contending that the location of the bank account is irrelevant to the injury's determination. In contrast, the Trust argues that its injury stems from owning a counterfeit artwork created in the U.S., claiming it was misled into believing it was purchasing a genuine piece from a reputable dealer. The Trust differentiates its case from Bascuñán, emphasizing that its injury is domestic because it voluntarily parted with money in a U.S. marketplace, which was rendered worthless due to the misconduct of Knoedler and others.

The legal analysis of "domestic injury" hinges on the location of the plaintiff's property at the time of the harm, rather than the location of the defendant's wrongdoing. Courts have consistently focused on where the plaintiff felt the effects of the injury, establishing that RICO injury location is determined by where the injury occurred, not where the injurious conduct took place. The consensus is that intangible property injuries are experienced at the plaintiff's residence or principal place of business. Since the Trust relinquished control over its funds in Liechtenstein, the Court concludes the Trust's injury is considered foreign, as the transfer occurred from its Liechtenstein account to Knoedler's account in New York. Evidence of misconduct in the U.S. does not establish a domestic injury for the Trust.

The Trust's injury occurred in Liechtenstein, and it is argued that the money involved, while fungible, was situated in a specific location at the time of the alleged theft, allowing it to be treated as tangible property. A precedent from Bascuñán establishes that a "domestic injury" occurs when stolen money is located within the U.S. Consequently, because the Trust has not shown a "domestic injury," the defendants are entitled to summary judgment regarding the Trust's RICO claims.

Regarding common law fraud claims against Hammer, the plaintiffs allege various forms of fraud and conspiracy. Previous cases, such as De Sole, resulted in summary judgment for Hammer on similar claims, and the plaintiffs have not provided new evidence to warrant a different outcome. Under New York law, a fraud claim requires the following elements: misrepresentation of a material fact, falsity of that misrepresentation, intent to defraud, reasonable reliance, and damages. 

Fraudulent concealment claims also have specific elements, including a duty to disclose, knowledge of material facts, failure to disclose, intent, reliance, and damages. New York law recognizes a duty to disclose in scenarios involving ambiguous statements, fiduciary relationships, or when one party has superior knowledge. 

Aiding and abetting fraud requires proof of an independent wrong, knowledge of that wrong by the aider, and substantial assistance provided in effecting the wrong. Conspiracy to commit fraud necessitates a corrupt agreement and an overt act in furtherance of that agreement.

The parties involved are assessed based on their intentional participation in a plan and the resulting damages. Hammer is granted summary judgment on the plaintiffs' claims of fraud, fraudulent concealment, aiding and abetting fraud, and conspiracy related to these claims, as the plaintiffs failed to prove Hammer's actual knowledge of ongoing fraud, agreement to commit fraud, or provision of substantial assistance to those defrauding the Gallery's customers. 

Regarding successor liability, White purchased a forged artwork in 2000 when the Knoedler Gallery was under Knoedler-Modarco's ownership. Knoedler LLC contends it cannot be liable for transactions before its formation in 2001, while White argues Knoedler LLC is liable as the successor-in-interest to Knoedler-Modarco. The applicable law indicates that federal courts exercising supplemental jurisdiction apply the forum state's choice-of-law rules—New York in this case. An actual conflict of law must be established, and New York courts apply the law of the jurisdiction with the most significant interest in the dispute. The court previously determined that the specific state law applicable to successor liability is not critical for the current issue, as New York and Delaware law generally align. To establish a claim for successor liability, plaintiffs must present sufficient facts to suggest an exception to the general rule that an acquiring entity does not inherit liability.

Both New York and Delaware law generally stipulate that an acquiring company is not liable for the debts of a seller when all assets are sold or transferred, with four recognized exceptions: 1) the buyer expressly assumes the debt; 2) the transaction is fraudulent; 3) it constitutes a de facto merger; and 4) the successor is a mere continuation of the predecessor. In the current case, only the de facto merger and mere continuation exceptions are relevant.

Under New York law, key indicators of a de facto merger include continuity of ownership, cessation of business operations and dissolution of the acquired company, assumption of necessary liabilities by the successor, and continuity in management and operations. However, not all indicators are required for a finding of de facto merger. 

Delaware’s criteria for a de facto merger entail that one corporation transfers all its assets to another, payment is made in stock to the transferring corporation's shareholders, and the transferee assumes all debts and liabilities. 

Both states require demonstrating continuity of ownership, albeit with differing interpretations: New York allows for indirect interests in assets, while Delaware necessitates direct ownership interest in the successor corporation. The court finds it unnecessary to decide whether New York or Delaware law applies since Knoedler LLC has not established entitlement to summary judgment regarding White's successor liability claim based on the mere continuation theory.

Under New York and Delaware law, the "mere continuation" exception to successor liability applies when not just the business, but the corporate entity itself continues after a transfer. This requires a common identity of directors and stockholders, as well as the existence of only one corporation post-transfer. The exception is applicable when a predecessor entity transfers not only assets but also its location, employees, management, and goodwill. The rationale is that a corporation should not evade liability if it undergoes merely a change in form without a significant change in substance. The determination of successor liability under this exception is fact-specific and cannot typically be resolved through summary judgment.

Knoedler LLC argues that White cannot establish successor liability under the "mere continuation" exception because Knoedler-Modarco continued to exist for six years after asset purchase agreements were made with Knoedler LLC and others. However, courts have held that the continued existence of the predecessor corporation does not negate a mere continuation claim. Various cases have denied summary judgment on such claims even when the predecessor corporation coexisted with the successor, indicating that the mere continuation analysis considers more than just the existence of the predecessor.

The court denied a motion to dismiss a mere continuation successor liability claim in Time Warner Cable, Inc. v. Networks Grp. LLC, emphasizing that the predecessor corporation's existence is crucial. A mere continuation claim survives if there is continuity in ownership, management, location, personnel, and goodwill, and if the predecessor is fundamentally altered post-asset transfer, such as ceasing operations or becoming asset-less. In cases like In re General Motors LLC Ignition Switch Litig., a claim was allowed due to continuity in personnel and operations, despite the predecessor's dissolution by trial time. The Knoedler-Modarco case illustrates this principle: after its asset purchase agreements, Knoedler-Modarco ceased operations and was left with minimal assets before dissolution. No evidence indicated that Knoedler-Modarco sold its remaining assets or engaged in business post-transaction. Thus, the court found sufficient alteration to satisfy the "existence of only one corporation" factor. Furthermore, the Knoedler Gallery continued operations with the same personnel after the sale, maintaining its identity since 1846, affirming the continuity of operations despite the predecessor's dissolution.

The board of directors for Knoedler-Modarco and 8-31 was nearly identical, with the exception of Dru Hammer, who joined 8-31's board in 2003, after the 2001 asset sale of Knoedler-Modarco. Hammer owned 24.9% of Knoedler-Modarco and is the sole shareholder of 8-31. Evidence presented indicates that the Knoedler-Modarco transaction was essentially a change in form without significant alteration in substance, as described by Sansone, the CFO of both Knoedler-Modarco and 8-31, who referred to it as a "reorganization." All parties involved were represented by the same law firm, and there was no recollection of discussions or negotiations regarding the asset purchase agreement among the executives who signed it. Freedman, another executive, testified that there were no operational changes at the Gallery post-transaction. The Court concluded that a reasonable jury could find the transaction a "mere change in form," denying Knoedler LLC's motion for summary judgment regarding liability under a "mere continuation" theory of successor liability.

Additionally, the Trust and White assert fraud-related claims against Hammer and 8-31 based on an alter ego theory. Hammer and 8-31 have sought summary judgment on these claims. Under Delaware law, while LLC members typically enjoy limited liability, a court may pierce the corporate veil in cases of fraud or when the entity acts merely as an instrumentality of its owner. The key factor is whether the individual or parent corporation exercises complete domination and control over the entity to the point that it lacks independent significance.

Under the alter ego theory for piercing the corporate veil, a plaintiff must establish two main elements: (1) a mingling of operations between the corporation and its owner, indicating they functioned as a single economic entity; and (2) an overall element of injustice or unfairness. Courts evaluate this by considering factors such as adequate capitalization, solvency, payment of dividends, maintenance of corporate records, adherence to corporate formalities, whether the dominant shareholder siphoned funds, and whether the corporation acted merely as a façade for the shareholder. No single factor is determinative; rather, a combination of them is necessary for a ruling to disregard the corporate entity.

Additionally, the plaintiff must demonstrate that the alleged injustice or unfairness stems from an abuse of the corporate form, which must extend beyond the tort or breach of contract at the heart of the lawsuit. Injustice may arise from using the corporation for inequitable, prohibited, unfair trade practices, or illegal activities. It is not required to show that the corporation was created with fraudulent intent; proving its misuse suffices.

This analysis applies uniformly regardless of whether the dominant shareholder is an individual or another corporation. To hold a shareholder personally liable, like Huggins in this instance, it must first be shown that he operated with the Defendant Entities as a single economic unit. When assessing an LLC, there is less emphasis on adherence to internal formalities since fewer are legally mandated.

The inquiry into whether 8-31 is the alter ego of Knoedler LLC is fact-specific and typically presented to a jury. In a prior case, the court determined that substantial evidence suggested a mingling of operations and a disregard for corporate formalities between the two entities. Evidence includes shared office space, a common phone system, and overlapping personnel, such as shared executives in key roles. Notably, 8-31 employees lacked distinct email addresses, indicating further integration. Although 8-31 argues that its status as a holding company mitigates these observations, the court finds this insufficient for summary judgment. The significant overlap in personnel, including individuals serving in various executive roles at both companies, further supports the claim of them operating as a single entity. Additionally, a Management Agreement established between the two entities in 2001 for services, including payroll and accounting, exemplifies their intertwined operations and lack of adherence to corporate formalities.

Knoedler LLC was supposed to pay 8-31 101% of actual costs incurred on its behalf under a Management Agreement, which was never executed, and no alternative agreement was established. Instead, Knoedler LLC regularly transferred funds to 8-31 without relation to any services performed. Defendants argue that the Management Agreement was not enacted due to 8-31's failure to provide the agreed services, yet they also contend that these funds were used for Knoedler LLC's business expenses, including payroll and accounting, which are mentioned in the Management Agreement. Evidence suggests that both entities disregarded legal formalities in their interactions, indicating a close connection between them.

In 2010, it is suggested that 8-31 siphoned over $13 million from Knoedler LLC by reclassifying interdivisional receivables as "distributions." This reclassification implies that 8-31 diminished a significant asset of Knoedler LLC. Defendants claim that the fund transfers had been misclassified for years and argue that if a holding company receives transfers it cannot repay, those transfers should not be labeled as receivables. Testimony from key executives indicated an understanding that 8-31 could not repay these funds. Even if deemed not to be distributions, defendants assert the value of the interdivisional receivables was zero, justifying the reclassification and arguing it did not constitute siphoning.

The Court finds that the dispute over the 2010 reclassification is appropriate for jury consideration. Evidence indicates that the classification of interdivisional receivables was deliberate, as Knoedler LLC and 8-31 consistently used this classification from 2001 to 2010, under different CFOs. This classification was only questioned after Knoedler LLC faced criminal investigation. An outside auditor in 2008 received a detailed explanation of 8-31's interdivisional accounts, which were identified as assets and liabilities. Furthermore, the financial accounting policies of both companies state that accounts receivable reflect expected collectible amounts.

The Court notes that 8-31 may have unlawfully transferred over $13 million from Knoedler LLC in 2010, which raises factual issues regarding the accounting reclassification. There are indications of potential unfairness, particularly as the transfer occurred shortly after federal scrutiny began, suggesting an intent to shield assets from legal actions. The evidence supports the notion that 8-31 and Knoedler LLC functioned as a single entity, and recognizing their corporate distinctions could lead to a fundamental injustice, thus precluding 8-31 from obtaining summary judgment based on alter ego liability.

Additionally, there are allegations against Hammer for misappropriating funds from 8-31 by using corporate resources for personal expenses, including a significant amount charged to his corporate credit card and the purchase of luxury vehicles. This behavior further supports the claim that the entities operated as a singular entity.

Hammer charged both business and personal expenses to his corporate credit card, later informing 8-31 which charges were business-related. He allegedly reimbursed 8-31 for the personal expenses. The legitimacy of the business-related expenses relies solely on Hammer's testimony, as there were no records maintained regarding the purpose of these charges, and no explanation was submitted to 8-31. Furthermore, 8-31 personnel did not routinely review the charges Hammer classified as business expenses.

Substantial evidence suggests that many charges identified by Hammer as business expenses were personal. Hammer admitted he could not recall the business purpose for certain charges, intended to reimburse 8-31 for some personal expenses but failed to do so, and acknowledged that some charges he categorized as business-related were indeed personal. Evidence also indicated he used refunds from business-related charges to cover personal expenses. Testimony from Dru Hammer confirmed that several charges labeled as business-related were personal.

From 2005 to 2010, 8-31 reimbursed Hammer nearly $2 million for seven luxury vehicles, which he unilaterally decided to purchase without consulting 8-31's CFO. Hammer sold two company cars and kept the proceeds; one was reported as income to Hammer by 8-31, and he issued a promissory note to 8-31 for the proceeds of the other sale. Hammer regularly sold vehicles within a year of purchase, sometimes at a loss, and did not maintain records of their business use. He referred to one of the 8-31 funded vehicles as the "company" Mercedes, indicating a potential personal use. Under Delaware law, such conduct could be interpreted as improperly siphoning funds that Hammer was not legally entitled to receive.

Evidence of siphoning has been established where a dominant shareholder and officer causes a company to pay for personal expenses, as illustrated in case law. In *NetJets Aviation*, the Second Circuit highlighted that the shareholder was the sole decision-maker regarding corporate fund usage, with no oversight procedures. Counterarguments, such as those by Hammer, claim that siphoning does not occur when payments are made to a shareholder during profitable times; however, this interpretation misrepresents case law. The case *Opus East* confirms that regular dividend payments do not equate to siphoning if the corporation is financially healthy. While insolvency may be relevant to siphoning, it is not a prerequisite for its determination, as shown in *Autobacs Strauss* and other cases, which affirm that siphoning can occur independent of the company's insolvency status. 

Additionally, there is evidence that Hammer and his company, 8-31, failed to observe corporate formalities. Hammer acted unilaterally by entering agreements on behalf of 8-31 without informing other directors, such as selling a corporate vehicle and retaining the proceeds without notice. After this transaction was discovered, Hammer retroactively executed a promissory note to 8-31 for the proceeds, signing for both himself and the company without the CFO's involvement. He later amended the note to be payable "on demand" and only repaid it shortly before his deposition. Furthermore, in 2011, Hammer unilaterally adopted a liquidation plan for Knoedler LLC, again signing for both entities involved.

Blankschen was unaware of the liquidation plan for Knoedler LLC, which was designed to ensure satisfaction of all claims, including contingent and unmatured ones. He also did not receive information regarding the requirement to make reasonable provisions for claims. Although Hammer approved the plan, he did not know who was responsible for its implementation. Hammer had a history of purchasing company cars without notifying anyone and used a corporate credit card without maintaining records or documentation for business expenses. Evidence suggests that corporate records were poorly managed and formalities were not observed, indicating potential alter ego status for Hammer with respect to 8-31, which did not issue dividends to him as its sole shareholder. This failure to pay dividends, alongside the diversion of funds, supports claims of alter ego liability. Furthermore, Hammer's actions regarding the reclassification of Knoedler's interdivisional receivables raise concerns of injustice, suggesting that 8-31 and Hammer operated as a single entity. The court concluded that sufficient evidence exists for a jury to find that observing corporate distinctions would lead to fundamental injustice, denying Hammer's motion for summary judgment on the basis of alter ego liability claims. The court's earlier order partially granted and denied the defendants' motions for summary judgment. Additionally, the excerpt references definitions and the provenance of certain artworks, noting ambiguity regarding the attribution of a $5 million value related to a purported Pollock.

Provenance for two artworks includes acquisition by a private collection in Switzerland directly from the artist, with ownership transferred by descent. The document notes uncertainty about whether the Trust received these provenance descriptions or an alternative version. Experts raised authenticity concerns regarding a Pollock signature on a painting, indicating significant skepticism among specialists about the painting’s technique and style. The parties' statements do not provide details on the formation of a special committee or the closure of a historic gallery. A purported Pollock sold to Lagrange yielded a profit of $14.35 million. Rosales was charged with multiple offenses, including wire fraud and money laundering, and pled guilty, admitting involvement in selling fake artworks attributed to prominent expressionist artists. The asset purchase agreement for Knoedler LLC is the only relevant transaction, with Dru Hammer joining the board in 2003. Initially, defendants claimed Hammer was the sole employee of 8-31 but later acknowledged additional employees, including Hammer and Richard Lynch as vice presidents and directors. Defendants also admitted that some Knoedler LLC and Hammer Galleries employees provided accounting services for 8-31 but contended they were not considered employees of 8-31. The former CFO of 8-31, Sansone, stated he made decisions regarding the transfer of funds among LLCs without further elaboration.

8-31 acted as the common paymaster for Knoedler LLC, Hammer Galleries LLC, and Knoedler Publishing LLC. An email from Blankschen referred to 8-31's payables to Knoedler LLC as "liabilities." In 2005, 8-31 reimbursed Hammer $95,000 for a Jaguar, which was later donated to Tinerino Ministries, allowing 8-31 to claim a charitable deduction. In 2007, 8-31 reimbursed Hammer $143,000 for a Mercedes Benz S550, including $38,000 for customizations; this car was subsequently given to Mark Alfano, whose role as a consultant or auto shop employee is disputed. That same year, 8-31 reimbursed Hammer $482,000 for a Rolls Royce, which Hammer sold shortly after, retaining the proceeds. The IRS later disallowed 8-31's claimed losses and deductions for this vehicle due to issues regarding ownership and business use. In 2008, 8-31 reimbursed Hammer $226,000 for a Porsche Turbo, which Hammer later traded in at a loss. The proceeds from the Porsche were used by Hammer to purchase a Ford Woody, which he customized and later sold for $160,000, retaining the proceeds. Following this sale, Hammer issued a promissory note to 8-31 for the amount received. This note was amended to be due "on demand," with Hammer signing on behalf of both parties. The chief financial officer of 8-31 was not involved in the note's negotiation or preparation. Hammer repaid the note shortly before his deposition. In 2009 and 2010, 8-31 purchased additional luxury vehicles, including a Mercedes Benz SLR for $553,000 and a Mercedes SL65 for $279,135. Hammer also owned several cars personally.

In 2008, Mr. Hammer owned twenty-seven cars, twelve valued over $600,000 each. The external auditors for 8-31 deemed these purchases reasonable, and the company reported portions of Mr. Hammer's car usage as income to the IRS. However, these reports may have lacked accuracy due to Mr. Hammer's failure to maintain records of business use. 

The Trust’s Second Amended Complaint (SAC) introduces new claims related to alter ego liability while reasserting five previously dismissed state law claims: deceptive trade practices, false advertising, breach of warranty, unilateral mistake of fact, mutual mistake of fact, and unjust enrichment. These claims will be dismissed as the Trust was not granted permission to re-plead them.

The excerpt also discusses the "domestic injury" requirement as articulated in RJR Nabisco, which emphasized that both RICO’s substantive prohibitions and its private right of action must independently satisfy this criterion when addressing conduct in foreign countries. The Court expressed concerns about providing private remedies for foreign conduct due to potential international friction and forum shopping. Despite this, the current case does not apply RICO's provisions extraterritorially, as the alleged fraudulent actions occurred within the United States. Moreover, the connections cited involve only the defendants' actions, with the plaintiff's property and injuries having remained abroad and lacking a preexisting link to the U.S.

Allowing a plaintiff to recover treble damages in this context would enable foreign citizens to circumvent their own nation's less generous legal remedies. The Supreme Court's ruling in RJR Nabisco establishes that a civil RICO plaintiff must demonstrate a domestic injury to business or property; foreign injuries are insufficient for recovery. The case of Akishev v. Kapustin, where European plaintiffs suffered a domestic injury by purchasing cars from a U.S. website, is not persuasive in this context because it focused on the moment of injury rather than the location of harm. The Trust argues it is unjust to deny its RICO claim simply because it wired payment from abroad, while U.S. victims in similar situations would have a remedy. However, this fairness argument, echoed in Justice Ginsburg's dissent in RJR Nabisco, did not gain traction. 

Knoedler LLC incorrectly asserts that case law requires an intentional effort to shield assets for a claim of successor liability to succeed. While intent is a factor, it is not mandatory for establishing such liability. Moreover, Knoedler argues that White has not alleged that 8-31 is a successor to Knoedler-Modarco, making the identity of their directors irrelevant. However, there exists a genuine issue of material fact concerning whether Knoedler LLC is the alter ego of 8-31. Additionally, it is noted that a not-for-profit entity, the Maccabee Group, owned a significant portion of Knoedler-Modarco.

Hammer asserts that he and his family have never held an equity interest in the Maccabee Group. In contrast, Plaintiffs argue that Hammer is an indirect owner or beneficiary, citing several pieces of evidence: Hammer's role as a potential sole director of the Maccabee Group, his residence in the Cayman Islands at the time the group acquired its interest in Knoedler-Modarco, and his use of the name "Maccabee" for a company he established in 1999. Despite the Maccabee Group's interest in Knoedler-Modarco, Hammer claims to have been the sole decision-maker for Knoedler-Modarco since 1992, with no involvement from the Maccabee Group in company decisions. This could lead a jury to conclude that Hammer effectively controls the Maccabee Group.

New York choice-of-law rules state that the law of the state of incorporation governs when the corporate form may be disregarded, applicable to both LLCs and corporations. Knoedler LLC is established as a Delaware limited liability corporation, and 8-31 is a Delaware corporation. 8-31 contends it cannot be liable for Freedman’s actions under respondeat superior. However, previous court findings suggest that a jury could determine Freedman was an employee of 8-31, acting within her employment scope during the alleged fraud, thus denying 8-31's summary judgment on these claims.

Defendants submitted credit card statements with handwritten notations to clarify charges. Hammer described his review practice for these statements, indicating charges were marked as personal or business. However, the admissibility of these notations for proving the truth of the charges as business expenses is uncertain, as there are concerns regarding the trustworthiness of the information and the methods of preparation.

Hammer claimed his role at 8-31 involved enhancing brand recognition for various LLCs by engaging with art collectors and gallery representatives. However, he could not identify any purchasers from these interactions and denied involvement in art sales, marketing, pricing, or communication with buyers. This raises questions about his actual contributions to brand recognition. Hammer referenced *Wetterer*, arguing that minor personal charges relative to a company's operations do not imply alter ego liability. However, the *Wetterer* case is not applicable here, as it involved legitimate business expenses and different legal standards. The Second Circuit noted that, in another case, the defendant's control over financial decisions was critical in determining alter ego status. Due to the evidence suggesting a potential material fact issue on whether Hammer and 8-31 were a single entity, the court did not address arguments regarding 8-31's capitalization or solvency. Additionally, while both parties sought to exclude each other's forensic accounting expert opinions, the court did not rely on these opinions for its summary judgment decision, rendering the exclusion motions moot but allowing for future motions in limine.