In re the Estate of Rothko , 56 A.D.2d 499 ( 1977 )

Lane, J.

We would affirm the decree with one modification (to be discussed later), on the comprehensive opinion of Surrogate Midonick (84 Misc 2d 830). However, a few additional comments are necessary to clarify our position.

We are all in agreement that the executors Reis and Stamos had a conflict of interest and divided loyalty in view of their nexus to Marlborough Gallery, Inc. A majority of this court is also in agreement with the assessment of the liability of the executor Levine which was made by the Surrogate. Furthermore, we concur in the findings of liability against the Marlborough defendants and the individual Frank K. Lloyd. It is only regarding the measure of damages where we are in disagreement.

Firstly, it might be appropriate to dispel any notion that the 1970 agreements with Marlborough Gallery, Inc. and Marlborough A.G. were in any way prudent or done in the best interest of the estate.

On February 21, 1969, Mark Rothko entered into an agreement with Marlborough A.G. which provided in pertinent part that "Mark Rothko agrees not to sell any works of art for a period of eight years, except to Marlborough A.G. if a supplementary contract is made.” A supplementary agreement of even date provided that: "Mark Rothko has the option to sell to Marlborough A.G. an additional four paintings each year at prices not below Marlborough A.G.’s then current selling prices, the price to be paid being [90%] of the current selling prices.”

Though the executor Reis and Marlborough A.G. separately obtained letters from their respective counsel on the binding effect of the 1969 agreements, no attempt was made by the executors to institute court action to test the validity of the agreements or the scope of the restrictions. It is noteworthy that the estate was not cash-poor, and there was no compelling need to liquidate assets for payment of any liabilities.

Assuming, as counsel for Reis and Marlborough A.G. suggested, that the agreements were binding on the estate, no effort was made to adhere to the agreements and to restrict the sales of paintings to four paintings per year to test, at least, the market for the paintings,^* but rather a new agreement was reached for the outright sale of 100 paintings at a price of $1,800,000. This sale resulted in relinquishing of control of the paintings, an element considered by at least one expert to be crucial in husbanding the estate assets. The relinquishing of control could result in a diminution of the fullest value of the paintings by causing a sudden glut on the market.

Even in the absence of the control suggested by the expert, the sales of paintings which occurred in 1970 and 1971 are instructive as to their value and illustrate the extent to which the estate was denuded and defrauded. In 1970, the four highest prices for the paintings from that group of 100 fetched the total sum of $433,750. In 1971, the four highest-priced paintings reaped a total income of $304,100.

In the first two years, then, a total of $737,850 was realized from the sale of only eight paintings. Their total value to the estate, if sold under the terms of the 1969 "binding” agreements, would have been $664,065. The sale of eight paintings would then have benefited the estate to the extent of approximately one third of the total price paid for all 100 paintings and would still have left 92 paintings for future sale.

This must be viewed in contrast to the moneys actually received by the estate. Under the 1970 agreements, $200,000 was received in 1970 and $133,333.33 was received in 1971. A total of $333,333.33 for the two-year period was received, as opposed to a potential $664,065, which would have been received if there had been adherence to the 1969 agreements.

This certainly illustrates the improvidence and wastefulness of the 1970 agreements and emphasizes the bad faith in the execution of those agreements.

Now we must attend to the question of the measure of damages. The Surrogate awarded "appreciation damages” and explained the basis for that award in detail (84 Misc 2d 830, 873-879). We agree with his analysis and find further support for his rationale in the case of Menzel v List (24 NY2d 91). Menzel involved the purchase by Mrs. Erna Menzel of a Chagall painting in 1932 for $150. When Mrs. Menzel fled Belgium, the painting was appropriated by the Nazis in 1941. Ultimately, in 1955, it fell into the hands of the proprietors of a New York art gallery, Mr. and Mrs. Klaus Peris. They had purchased the painting from a Parisian art gallery for $2,800. The Peris in turn sold the painting to Albert List for $4,000. Mrs. Menzel saw a reproduction of this painting in an art book, accompanied by the statement that it was in List’s possession, and she demanded its return. Upon his refusal to return the painting, Mrs. Menzel instituted a replevin action against List. List in return brought a third-party action against the Peris, claiming liability for breach of implied warranty of title. List returned the painting to Mrs. Menzel and, with regard to the third-party action, a jury after trial found in favor of List against the Peris in the amount of $22,500, the painting’s present value.

Our Appellate Division (28 AD2d 516) modified that award by reducing it to $4,000 (the purchase price paid by List). The Court of Appeals, however, found that an injured buyer is not compensated by recovery of an amount placing him in status quo ante, but he is, rather, entitled to the benefit of his bargain (Menzel, cited supra, pp 97-98). The meaning of this language was made perfectly clear by Judge Breitel in Simon v Electrospace Corp. (28 NY2d 136, 144-145). Judge Breitel there pointed out that in a replevin action, or in an action where restitution or specific performance is allowed, the measure of damages is the value at the time of the trial, on the theory that the true owner had a.continuing right to possession of the painting and can be made whole only by return of the item or by payment of its value at the time of trial.

"It may be as well to remark here as anywhere, that the rule of damages should not depend upon the form of the action. In civil actions the law awards to the party injured a just indemnity for the wrong which has been done him, and no more * * * the inquiry must always be, what is an adequate indemnity to the party injured, and the answer to that inquiry cannot be affected by the form of the action in which he seeks his remedy.” (Baker v Drake, 53 NY 211, 220.)

It matters not, therefore, for our purposes, that Menzel involved an action in replevin and breach of implied warranty of title while the case at bar involved a breach of fiduciary duty. In both instances, return of the items wrongfully sold was required and therefore, if the wrongdoers (the executors in our case) cannot return the paintings, they must pay the value of the paintings at the time of trial.

However, discussion of the general rules regarding the measure of damages in cases based on conversion should not result in a different resolution of the issues presently before this court.

Concededly, the general rule with regard to the measure of damages in conversion is to award the value of the property at the time of conversion, together with interest (Jones v Morgan, 90 NY 4, 10; 10 NY Jur, Conversion, § 69).

However, where the conversion of an item of fluctuating value is involved, then damages are measured by considering the highest market value within a reasonable time after notice of the conversion (Baker v Drake, 53 NY 211, 217, supra; Mayer v Monzo, 221 NY 442, 446; Hartford Acc. & Ind. Co. v Walston & Co., 22 NY2d 672, 673).

"Reasonable time” is not susceptible of easy interpretation. Early case law fashioned a broad rule that where the item converted is subject to price variation, then the highest market value until the time of trial is the proper measure of damages (1 Clark, New York Law of Damages, § 459, p 786, and cases cited thereat).

In the case of conversion of stock, this broad rule was rejected (Baker v Drake, 53 NY 211, supra; 10 NY Damages Law, § 908). However, where the property involved is unique and irreplaceable, such as the works of art in the case at bar, then failure to return the property must result in the wrongdoer’s responding in damages to the extent of the value of the item at the time of trial (Menzel v List, 24 NY2d 91, supra).

Nor should this court consider that the property involved may have been enhanced in value through the expenditure of money by the wrongdoers in promotion of these works of art. Increase in value by the labor of the wrongdoer without change in the character of the property improved inures to the benefit of the wronged party, and the wrongdoer is entitled to no credit therefor (1 Clark, New York Law of Damages, § 467, p 803; 10 NY Damages Law, § 911).

A specific response to points raised in the opinions of Justices Kupferman, Capozzoli, and Nunez is in order.

Sheldon v Metro-Goldwyn Corp. (309 US 390), cited by Justice Kupferman, is a case dealing with apportionment of proñts owed to one injured by a copyright infringement. Its weight is unpersuasive in assessment of damages in the case at bar, involving value of items wrongfully sold.

Justice Capozzoli’s concern regarding the uneven treatment of the executor Levine as compared with the treatment of the executors Reis and Stamos overlooks the fact that the malfeasance of the latter two executors was active and deliberate, while Levine took a more subdued role in the form of acquiescence. His surcharge therefore should not be the same as that of the other executors.

The citation by Justice Nunez to Scott on Trusts, as quoted by the Surrogate, is somewhat incomplete. That portion of the quotation omitted offers some support to our position in regard to appreciation damages. The Surrogate stated (84 Mise 2d, at p 873): "[Pjrofessor Scott in his work on Trusts (3d ed, vol 3, § 208,3) states that: 'Where the trustee sells trust property which it is his duty to retain, the beneficiaries are not limited to a recovery of the value of the property at the time of sale; if the property has subsequently appreciated in value or if income would have been received thereon if the trustee had retained it, they are entitled to its present value together with such income, since they are entitled to be put in the same position in which they would have been if the trustee had not committed a breach of trust but had retained the property as it was his duty to do.’ ”

There is one modification, however, which we would make. The last sentence of paragraph 18 of the decree reads, "The new fiduciary shall have the option in the first instance to specify which paintings the fiduciary shall accept.” We are of the opinion that the new fiduciary should not be given the option to reject any painting which is returned in accordance with the mandate of the decree.

Accordingly, the decree of the Surrogate, New York County, entered January 16, 1976, should be modified on the law to the extent of deleting the last sentence of decretal paragraph 18 and otherwise affirmed, without costs or disbursements.

Although we are of the view that an appeal lies as of right to the Court of Appeals from the above disposition, in the event that court disagrees, on the basis that our disposition is viewed as nonfinal, we unanimously grant, sua sponte, leave to appeal to the Court of Appeals to all parties desiring to do so from such parts of this court’s order as affects them on the certified question: Was the decree of the Surrogate’s Court, as modified by this court, properly made?

* The expert Heller noted, for example, that after the death of a painter such as Rothko, the value of his works of art could be expected to appreciate considerably.