1. Did Mosionzhnik reserve the right to engage in private art transactions for her own personal benefit under paragraph 6(c) of the Shareholders Agreement thus allowing her to keep the $500,000 Swiss bank funds?

2. Mosionzhnik and Chowaiki accuse each other of improprieties. How did the court dispose of these cross-accusations?

3. Discuss the business climate in the art industry in Russia. In this context, should U.S. courts accommodate different ethical practices so long as they are restricted to off shore transactions?

On July 23, 2008, Luba Mosionzhnik, a 25% shareholder and vice president of the Gallery, was summoned to a meeting by Ezra Chowaiki, a 25% shareholder and president of the Gallery and financial backer David Dangoor a 50% shareholder. She was accused of a myriad of improprieties, and fired from her employment. Section 42 of the Shareholders Agreement provided that upon termination of an employee who owned stock, he or she would be required to sell their shares to the Gallery. Mosionzhnik admitted to committing the most egregious of the alleged improper acts. She secretly opened a Swiss bank account which she used to divert approximately $500,000 related to the Gallery’s art sales and used over $13 million of art consigned by the Gallery’s clients as collateral for loans without the clients’ consent. Rather than deny these allegations, at her deposition, Mosionzhnik testified that her actions were not improper and noted that “plenty of advisors take a kickback … that’s not ethical but it happens because it’s the art world.” With respect to illegally using client art as collateral, her defense is that Chowaiki also did so and told her that such a thing was accepted practice in the industry. The Holtz accounting firm determined that Mosionzhnik shares were worth $170,000. The Gallery seeks to recover from Mosionzhnik for her improprieties. She seeks to keep the $500,000 in the Swiss bank account and believes her shares are worth $4,367,200 as valued by her experts “GMSL”.

JUDICIAL OPINION

KORNREICH, J.… Mosionzhnik contends that she should be permitted to keep the $500,000 that she secretly transferred to a Swiss bank account because paragraph 6(c) of the Shareholders’ Agreement permits her to engage in private art transactions for her own, personal benefit. If the deals that led to her procuring the money were her own, private deals, she would be entitled to keep the money. However, the record establishes that all of the money was related to the Gallery’s transactions. Mosionzhnik was the Gallery’s liaison to its Russian clients, and it was she who invoiced them and directed them how to pay the Gallery. Mosionzhnik did nothing wrong by utilizing the services of a broker in Russia and paying him a “finder’s fee” for procuring deals on behalf of the Gallery. Nevertheless, taking a kickback on that finder’s fee is legally impermissible, even if such a practice is pervasive in the art industry. Calling a kickback a “gift” does not sanitize it. Consequently, Mosionzhnik must pay the $500,000 in kickbacks to the Gallery….

II.

Recovery on the remaining improprieties of which Mosionzhnik and Chowaiki accuse each other is barred by the doctrine of in pari delicto. This doctrine “mandates that the courts will not intercede to resolve a dispute between two wrongdoers.” Kirschner v. KPMG LLP, 15 N.Y. 3d 446, 464….

“Agency law presumes imputation even where the agent acts less than admirably, exhibits poor business judgment, or commits fraud.” Kirschner, 15 N.Y.3d at 465. Here, the record unequivocally establishes that the legality of the Gallery’s business practices ranged from the questionable (the champertous funding of European litigation) to the impermissible (using client property as loan collateral). The Gallery cannot recover against Mosionzhnik for her bad acts because the Gallery benefited from them. Indeed, much of the Gallery’s Russian business during Mosionzhnik’s tenure was predicated on all sorts of shady practices.

Mosionzhnik, however, cannot be said to have “totally abandoned [the Gallery’s] interests” and was not “acting entirely for [her own purposes].” Id. Instead, Mosionzhnik’s business decisions, regardless of their wisdom, were made both for her benefit (as she was skimming commissions) and for the benefit of the Gallery (because she actually procured millions of dollars in sales). There is also no question of fact that Chowaiki knew of the questionable nature of Mosionzhnik’s conduct, even if he did not know every detail or the extent to which the Gallery’s sales to Russian clients were predicated on business practices that are considered untoward in this country. Such practices may very well be the cost of doing business in Russia. The Gallery cannot reap the benefits of Mosionzhnik’s bad acts when times are good and later protest when its relationship with her soured. As a result, Mosionzhnik’s actions are imputed to the Gallery, precluding it from suing her for losses arising from those actions. …………………..