It’s a flip-flop over an art flip. In a surprising reversal, a Dallas judge has dismissed collector Marguerite Hoffman’s lawsuit for breach of contract against finance mogul David Martinez and defunct New York gallery L&M Arts, in a case that involves a spectacular flip of a multi-million dollar Mark Rothko.

Back in 2007, Martinez paid Hoffman $19 million for the painting, then turned around just three years later and sold it at Sotheby’s for a headline-grabbing $31.4 million (in the interim, court papers say, it was kept out of sight in storage). The crux of the issue is the spectacle of money at auction: Hoffman claimed that by selling it at Sotheby’s, Martinez violated a carefully crafted confidentiality agreement she had arranged.

An Unreasonable Finding
The contentious suit, which has dragged on for several years now, was seemingly put to rest this past December when the jury ruled that Martinez’s 2010 consignment of the so-called “red Rothko” to Sotheby’s New York was, in fact, a violation of the terms she had stipulated when she sold the painting. The terms demanded that secrecy be maintained “indefinitely.” L&M Arts, which was run by high-profile dealers Robert Mnuchin and Dominique Lévy (they have since gone their separate ways, business-wise), acted as the agent for Martinez and his firm Studio Capital in the purchase, and are a co-defendant. (Some related motions in the case are still pending.)

However, on September 4, in a detailed 57-page ruling, Chief Judge Sidney A. Fitzwater wrote: “The court holds the jury could not have reasonably found that L&M acted with actual or apparent authority to enter into the Letter Agreement on behalf of Studio Capital or Martinez. Accordingly, the court grants the renewed motion of Studio Capital and Martinez for judgment as a matter of law and dismisses Hoffman’s actions against them with prejudice.” Translation: L&M signed the confidentiality agreement, not Martinez; therefore, Martinez can’t be legally at fault.

Responding to the new ruling, the Dallas Morning News called it a “major blow” to Hoffman, while another report was headlined “Billionaire Bites Back: Judge All But Tosses Dallas Art Collector’s Suit.”

Hoffman’s attorney did not respond to a request for comment from artnet News.

Jonathan Blackman, a New York–based attorney representing Martinez said in a phone interview, “Mr. Martinez is very pleased by the decision, which supports the position that he has taken from the outset. Mr. Martinez did not breach any contract with Marguerite Hoffman, and her claims, as the court found, had no merit.”

Blame the Middleman
Although Martinez is now not liable for any damages, L&M still owes her $500,000; however, the judge also slashed that from the original $1.2 million that Hoffman sought. According to the ruling, when L&M Arts discovered that Martinez “intended to auction the Rothko painting at Sotheby’s…it did not inform Sotheby’s of the confidentiality clause.”

For Judge Fitzwater, the decision seemed to hinge largely on the fact that L&M, acting as agent for Martinez, served as a buffer of sorts and that Martinez himself “never saw” the contracts between Hoffman and the gallery: “Without evidence that…Martinez had knowledge of the material fact that L&M had actually purported to enter into the February Agreement on [his] behalf, a reasonable jury could not have found that [he] conferred apparent authority on L&M to enter into” an agreement on his behalf.

Of the $19 million price brokered in the original 2007 sale, Hoffman received $17.4 million and paid $700,000 to her dealer, Greenberg Van Doren, and $700,000 to L&M Arts, Martinez’s representative.

High Stakes
As part of her claim, Hoffman said she was damaged as a result of having sold the Rothko privately, because she herself could have sold it publicly and raised more money, if secrecy hadn’t been so important to her.

Because the public auction market for Rothko is so robust, the stakes are high: The record for a painting by the artist is $86.9 million, achieved at Christie’s New York in May 2012 for Orange, Red, Yellow (1961) on an estimate of $35–45 million. Meanwhile, according to the artnet Price Database, no fewer than six Rothko paintings have sold for more than $50 million each and 17 have sold for more than $20 million each.

At one point, Hoffman’s attorney, Roger Netzer, told the Dallas Morning News that his client sold the painting reluctantly, doing so only after her husband’s death in 2006, when she realized that her “family’s financial circumstances were not what she had believed them to be.”

The new ruling includes details underscoring Hoffman’s seemingly diligent efforts to keep her attempts to sell the Rothko confidential. In fact, on a previous occasion, she had completely called off the transaction after discovering that word was starting to leak out.

The Changing Definition of “Irrevocable Gift”
But why the secrecy, besides Hoffman’s desire to keep up appearances in Dallas society?

One source of embarrassment was the fact that the “red Rothko” was, at the very moment Hoffman was negotiating the sale, hanging in a 2007 exhibition at the Dallas Museum of Art (DMA) entitled “Fast Forward.” That show was marketed as a showcase of 300 works of art promised to the DMA from a trio of local high-profile collectors including Howard and Cindy Rachofsky and Rusty and Deedie Rose, as well as Marguerite Hoffman and her late husband Robert.

Consequently, the inclusion of the Rothko painting in Sotheby’s spring 2010 contemporary evening sale immediately set art world tongues wagging. Sneakily, the provenance did not list either Martinez or the Hoffmans as former owners—in fact, it listed L&M Arts as a previous owner, coming between two unnamed “private collections.” Sotheby’s did, however, tout the previous exhibition of the painting at the Dallas Museum “Fast Forward” show. Given the nature of that show, it didn’t take much sleuthing to figure out who the likely owner was.

So how could a painting that was promised as part of an “irrevocable gift” to the DMA by the Hoffmans suddenly become a star of a Sotheby’s evening sale in such short order?

In a sign of the intense wrestling over this particularly sensitive issue, when the Wall Street Journal ran a story about the courtroom battle between Martinez and Hoffman, they were later obliged to run a correction saying: “An earlier version of this article incorrectly said that Marguerite and Robert K. Hoffman had pledged the red Rothko to the Dallas Museum as a broader gift.” Commentators on the article fired back, demanding a retraction of the correction and insisting that the original report had been accurate, that is to say, that the Hoffmans had clearly promised the Rothko to the institution before it “was quietly sold off the walls” of the DMA (according to D magazine).

A more recent Dallas Morning News report points out that although the DMA described the bequest as “irrevocable,” donors later insisted that they still have the opportunity to “refine and edit” their collections before they’re given to the museum.