The New York Supreme Court ruled against Philip Falcone, the disgraced former hedge fund manager, in a case he brought against New York-based pawnbroker BLCE over a loan secured by a $6.3 million 20-carat Harry Winston diamond engagement ring that he claimed was “wrongfully foreclosed.”
In the ruling issued July 25, Judge Lyle E. Frank ruled in favor of BLCE’s counter-claims concerning fraud and breach of contract for loans secured by four artworks by Damien Hirst, Richard Prince, and Pablo Picasso.
Falcone, the founder of Harbinger Capital and the one-time majority shareholder of the New York Times, was once thought to be worth $2 billion. He made his fortune in 2007 by betting against subprime mortgages. In 2013, he was effectively barred from financial services industry for five years after reaching a $18 million settlement with the Securities and Exchange Commission. This came after charges of market manipulation, misusing customer funds to pay his taxes, and favoring certain clients over others.
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Key to BLCE’s counter-claims was the assertion that Falcone secured loans with two different lenders with the same artworks, and that he told lenders that there “no liens or encumbrances” against those works. Further, BLCE asserted that Falcone used a business entity, “First Street LLC,” to prevent the pawnbroker from ascertaining that there were in fact liens against the works.
In his ruling, Frank wrote that Falcone “made multiple misrepresentations on the Artwork Loans, that were clearly intended on their face to induce [BLCE] to issue the loans that later resulted in substantial financial injury to Defendant.”
Frank went on to conclude that Falcone had failed to raise “any genuine issues of material fact” with BLCE’s arguments of misrepresentations, breach of contract, or fraud. He ordered the loan company “be granted a money judgment in an amount to be determined at the time of trial or other such resolution of this matter.”
In BLCE’s filing, law firm Grossman LLP, which specializes in art law, asserted that Falcone and his wife, Lisa Maria, took out a $92.5 million loan with Melody Business Finance in 2013. The loan was secured with various assets, including 12 artworks. Soon after, the filing argued, the couple set up a new entity called “First Street LLC,” to which they transferred ownership of the artworks. By 2018, the Falcones had defaulted on the loan with Melody. BLCE argued that Falcone then tried to raise money through a series of other secured loans, including several from BLCE. One loan for $600,000 was secured by his wife’s diamond ring, which had been valued by BLCE at $6.3 million.
Between September 2019 and October 2020, Falcone entered into a succession of further loans with the pawnbrokers, which were secured by Picasso’s Deux Nus, Richard Prince’s Untitled (Cowboy), and Hirst’s I love you, love buds and A Playful Bubblegum Kiss. Falcone even personally delivered them himself to BLCE, Grossman LLP alleged. He then signed contracts claiming that he personally owned the Picasso, Prince, and Hirst artworks and that they were not subject to any personal property mortgage, security agreement, or pledge agreement. “But those representations and warranties were false,” Grossman LLP argued in a statement on its website.
In an affadavit filed February 7, Falcone asserted that “Pledging this collateral to more than one lender was the equivalent of taking a second loan on a home and giving a second mortgage. This is a rather common practice.” Falcone further argued that “Nothing was hidden or concealed from [BLCE CEO Jordan] Tabach-Bank and nothing was misrepresented.”
“BLCE walked into this transaction with eyes-wide open and knowingly took a risk,” Falcone added.
Grossman LLP differed, writing in a March 7 memorandum of law, “But here, the first loan expressly prohibited taking a second loan, and the second loan expressly denied the existence of any prior loan. So no equivalency can be drawn to a second mortgage; this was fraud, plain and simple.”
In February 2020, Melody Finance sued Falcone for reneging on the 2013 loan and sought to foreclose on the artworks. However, Falcone refused to hand them over before using them as collateral for the loans he took out with BLCE. He also defaulted on his loans with BLCE shortly afterward.
As a result, BLCE sold Bubblegum Kiss and Untitled (Cowboy) at auction. In June 2021, Melody Finance then sued BLCE, claiming to have superior title to the four artworks. At that point, it became clear that Falcone had lied about his title and ownership of them to BLCE. “Our client then settled that dispute with [Melody Finance],” Grossman LLP said.
“In late 2021, Falcone filed a lawsuit claiming that our client should not have foreclosed on the loans and sold the collateral,” the law firm stated. “Our client, in turn, filed counterclaims against Falcone on the basis that he had committed fraud and breach of contract by misrepresenting his ownership and legal status of the artworks. After securing dismissal of Falcone’s usury and replevin claims on a pre-discovery motion for summary judgment in 2023, we moved for summary judgment on our client’s fraud and contract counterclaims.”
In court documents, BLCE said it didn’t know about “First Street LLC” and its ownership of the artworks, which is why they didn’t show up in searches on databases for Uniform Commercial Code (UCC) filings. UCC filings note when specific assets like artworks have been used as collateral for a loan or other obligation in a secured transaction.
In response to the verdict, Grossman LLP stated, “We are pleased to have achieved this favorable outcome for our client, and proud to continue our record of litigation victories in the complex arena of art-backed loan transactions.” The law firm declined to comment to ARTnews.
In a statement provided to ARTnews, Falcone argued that the case is ongoing, and that he is pursuing an appeal.
“We strongly disagree with the court’s decision and the assertions presented in recent media coverage. The matter remains ongoing, and we are actively pursuing an appeal and are confident in the merits of our legal position,” he said. “Contrary to the characterizations made, the underlying facts are far more complex and remain subject to further judicial review. At no point was there any intent to mislead or defraud, including the use of First Street LLC, the limited liability entity that I owned and that held my art.
“We look forward to presenting a full and accurate account of events through the proper legal channels, and we remain confident that the appellate process will offer the necessary clarity and resolution.”
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