Tennis icon John McEnroe and a Washington, D.C., foundation are the real owners of an abstract expressionist masterpiece an unscrupulous gallery owner sold twice, a Manhattan Commercial Division judge has ruled.

Justice Shirley Werner Kornreich (See Profile) ruled McEnroe and the foundation's claim to Arshile Gorky's 1943 "Pirate II," was superior to that of art dealer Joseph Carroll who said he traded two paintings with the now-incarcerated dealer Lawrence Salander.

"Carroll acquired Pirate II in a grossly undervalued transaction in which he chose to make no inquiry as to Salander's authority to sell the work, despite behavior on Salander's part which marked a departure of their normal course of dealings," Kornreich wrote in The Dorothy G. Bender Foundation v. Carroll, 601375/2009. "By going forward with the transactions despite these red flags, Carroll did not observe the reasonable commercial standards of the art trade."

Pirate II was valued at between $1.3 million and $2.2 million in 2006.

The dealings involving Pirate II were one of the transactions cited by the Manhattan district attorney's office in its grand larceny case against Salender. In 2010, he was sentenced in Manhattan Supreme Court to a six- to 18-year sentence for swindling $120 million from clients.

In 2004, Salander, then the owner and operator of the prominent Salander-O'Reilly Galleries in Manhattan, entered a venture with McEnroe to become equal partners in the purchase of Pirate I and Pirate II, which were coming up for sale at an Paris auction house.

Salander attended the auction and bought the paintings in the name of his gallery for $4 million. After the October 2004 purchase, McEnroe wired his $2 million share to Salander's gallery. McEnroe took Pirate I and Salander took Pirate II.

Before the auction, Salander had, unbeknownst to McEnroe, also contacted Washington, D.C. businessman Morton Bender about partnering to buy the paintings. Bender agreed, advancing Salander $4.3 million, which Salander told him was the paintings' price. The sum represented Bender's share and a loan to Salander for his share.

Salander confirmed his arrangement with Bender in a letter dated the same day he received McEnroe's payment.

Almost two years later, Carroll and Salander worked out a deal in which Salander would attempt to sell three paintings owned by Carroll.

The pair had known each other for 15 years at the time, and Carroll had bought between 120 and 150 pieces from Salander.

Instead of selling the paintings, however, they decided to trade two of the three for Pirate II, which Carroll saw Salander buy at the auction and then saw hanging in his gallery.

Although Carroll previously had done business with Salander through his gallery, Salander said this transaction would benefit Salander's children under an entity called "The Seven Salander Children Group."

Carroll never heard of the group and asked his attorney to see if the group actually existed. Carroll dropped the inquiry after being told, as Kornreich put it, "the Group's existence would not necessarily be a matter of public record." It turned out the group did not exist, Kornreich said.

After Carroll got Pirate II, Salander gave him a provenance statement on gallery stationery that did not mention the auction or name the current owner. Carroll did not get any documents showing the purported group owned the painting.

Under the deal's terms, there was a brief buy-back period during which Salander could reacquire Pirate II with terms including the possible $1.25 million payment for each painting. The option went unexercised.

Soon after the trade, Carroll and Salander entered another swap deal.

In exchange for two paintings, Carroll received John Covert's painting, "Kabuki Tetrad"; the work was one of the two that Carroll traded to get Pirate II.

Again, there was a brief period during which either side could buy back the paintings, Salander could reacquire Kabuki Tetrad for $400,000.

In early 2007, Carroll consigned Pirate II to an art show, and word of Carroll's claimed ownership of Pirate II got to McEnroe. The pair spoke and McEnroe, to avoid litigation, told Salander he would give up his claim on Pirate II if Salander gave up his share on Pirate I. Salander agreed.

McEnroe then consigned Pirate I, but the gallery later told him it could not return the work because Bender had put a lien on it.

Bender and McEnroe spoke, and McEnroe told him Carroll had Pirate II. The pair decided to become equal partners on Pirate I and try to get control of Pirate II, which they would also share.

This suit followed, with Bender and McEnroe seeking a declaratory judgment that they were the true owners of the work. Carroll counterclaimed for a judgment he was the work's true owner.

Buyer in Ordinary Course?

Carroll argued that Salender-O'Reilly Galleries, as a partner to Bender and McEnroe, had the power to convey title to the painting and the plaintiffs could not disturb the binding effect of their partner's conveyance.

Kornreich, who held a bench trial, did not agree. She said the argument "fails for the simple reason that there is no evidence that when Salander sold Pirate II, he was acting in his capacity as a partner of either the McEnroe or the Bender Foundation." Besides, she noted Salander had claimed to be selling the painting to Carroll on behalf of the purported group for his children.

Carroll also claimed he had good title to the painting, as a buyer in the ordinary course of business.

Uniform Commercial Code 1-201(9) defines a "buyer in the ordinary course" as "a person that buys in good faith, without knowledge that the sale violates the rights of another person."

When applied to the actions of merchants, the code says an assertion of a good faith purchase must also demonstrate "the observance of reasonable commercial standards of fair dealing in the trade."

As a result of the "heightened standard," Kornreich said the state's courts have held merchant buyers may have a duty to ask about the provenance and ownership of merchandise when there are "warning signs" or "red flags."

Kornreich said several elements of Salander and Carroll's deal were "troubling."

She noted the Kabuki Tetrad painting could have been bought back for $1.25 million. In the second swap, it could be reacquired for $400,000—a $850,000 difference.

"This discrepancy raises serious doubts as to whether Carroll's acquisition of Pirate II followed commercially reasonable standards," the judge said.

Kornreich also questioned why Carroll abandoned his query about the existence of the purported group for Salander's children.

"That Carroll's 'curiosity was satisfied' upon being informed that its formation was not necessarily a matter of public record, is difficult to understand given that he had not clarified the status of the supposed seller," Kornreich said, noting Carroll saw Salander first obtain Pirate II at the auction, "yet he did not ask to assuage his curiosity by viewing the [auction house] invoice, which would have shown that the painting was sold to [Salander-O'Reilly Galleries]."

Kornreich added there was "no credible reason" for Salander to give Carroll an incomplete statement of provenance.

Dale Cooter and Donna Mangold of Cooter, Mangold, Deckelbaum & Karas in Washington D.C. appeared for McEnroe and the foundation.

"We're pleased with the result,said Cooter. "The court's opinion is well reasoned."

Jeffrey Udell and Peter Sartorius of Olshan Frome Wolosky appeared for Carroll.