Smudge in rosy picture of Kinkade sales
Two former Thomas Kinkade Signature Gallery owners in Virginia were awarded $860,000 by an arbitration panel that said Media Arts Group, the Morgan Hill company whose galleries feature the “Painter of Light,” failed to outline the risks of the once-booming art business. In a 2-1 ruling released Thursday, the panel found that Media Arts Group executive Richard Barnett and Pebble Beach Financial, a business planning firm associated with Media Arts, painted a rosy financial picture for opening an art gallery, then made it nearly impossible for them to succeed.
“Any reasonable potential investor should have had certain additional information,” the ruling said. Because of the omissions, the gallery owners “no longer had accurate material information to allow them to properly assess the risks in making their investment decision,” the ruling said.
The ruling is the first loss for Kinkade and Media Arts, which faces litigation from other former gallery owners. Arbitration cases involving at least 23 other now-closed art dealerships in seven states are pending, said Norman Yatooma, a Michigan attorney who represented the two Virginia gallery owners.
Media Arts’ attorney, Dana Levitt, said the company will challenge the arbitrators’ award.
“The decision was wrongly decided and it’s not going to stand,” he said. Three other cases taken to arbitration were settled in Media Arts’ favor, he said.
“Arbitration panels are used to resolve disputes outside of court, and their awards can only be appealed to a court under certain circumstances, such as a failure to hear relevant evidence,” Yatooma said.
Media Arts and Barnett also relied on religion “to instill a special relationship of trust surrounding the investment,” the ruling said. “Terms such as ‘partner,’ ‘trust,’ ‘Christian,’ and ‘God’ and many other direct and also oblique references to a higher calling were made.”
After attending a training session in Monterey for prospective gallery owners, Karen Hazlewood and Jeff Spinello opened their first gallery in Charlottesville, Va., in 1999 and then a second in Fredericksburg in 2000. Their independently owned stores were licensed to deal exclusively in Kinkade’s work, which they both admired. They put up $122,500 to enter the business.
The pair allege they were stuck with un-sellable artwork and got hurt after closeout retailer Tuesday Morning was allowed to sell Kinkade works at a substantial discount. Hazlewood and Spinello closed their galleries and initiated the arbitration case against Media Arts in 2003.
Levitt said that potential downsides of the business were discussed. The economic impact of Sept. 11 contributed to failure of the galleries owned by Hazlewood and Spinello, he said.
“When things are flush, people buy art and when they’re not, they don’t. That’s an obvious risk,” he said. “Before the recession took its toll, this was one of the hottest products in the country, and they wanted to jump on the bandwagon and be part of it. It didn’t work out and they want my client to pay the cost for mistakes they made and things that were beyond everybody’s control, like the economy.”
But Hazlewood and Spinello alleged the company itself contributed to their hard times.
“Gallery owners had minimum purchase requirements,” Yatooma said. Only certain pieces were allowed to be returned to Media Arts and could not be traded in for recent, fast-selling releases, according to documents previously filed in the case.
In order to return one piece, Yatooma said, gallery owners had to buy three more.
“Our dealers couldn’t afford to return their art,” Yatooma said. “They were stuck in an inventory channel, spending money hand over fist.”
Hazlewood and Spinello also alleged they were shown only attractive financials while at the 1998 training session. They were guaranteed an 18 percent return on their investment after 5 years, based on projections prepared for them by Pebble Beach Financial, Yatooma said. But that projection was not met.
They also said they were not told about key warnings — such as an upcoming Deloitte & Touche report saying a significant number of independent galleries were failing to meet their projections, according to a document filed in the arbitration case last year.
In 2003, when Media Arts was a public company, its officials said a weak economy contributed to losses as fewer customers were buying its upscale goods, including the company’s framed lithographs, which start at $250 and could reach $10,000 for limited-edition works on canvas.
The next year, facing a limp stock price and sagging profits, the company’s executives announced they were taking the ailing art-and-collectibles company off the stock market and returning it to private control.
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Contact Michele Chandler at mchandler@mercurynews.com or (408) 920-5731.
