Nasser David Khalili, the billionaire property developer and collector of Islamic art, has won a court case against a Dubai-based businessman, Farbod Dowlatshahi, his former associate and a one-time member of the board of his family trust. The case has revealed that he lent large amounts of money to Dowlatshahi for art deals that never materialised, among them an attempt to sell the Khalili collection to Abu Dhabi.

Last month, in the High Court in London, Deputy Judge Robin Knowles QC sentenced Dowlatshahi to 12 months in prison for flouting a court order freezing his assets after Khalili had obtained a judgment against him for around £2.75m. Dowlatshahi was not in court, and the judge was told that he owed £360,000 in fees to his former solicitor, Stewarts Law, and was unable to find another firm to represent him. “His absence is voluntary and deliberate,” Knowles said. Dowlatshahi told The Art Newspaper that he is appealing the sentence and the judgment.

Professor Nasser David Khalili is a London-based businessman whose fortune derives from real estate and from art, notably Islamic art. He is considered to have one of the best private collections in this field. It is held in the Liechtenstein-based Khalili Family Trust, and parts of the collection have been exhibited throughout the world, most recently at De Nieuwe Kerk in Amsterdam, the Netherlands (December 2010-April 2011).

The sentencing of Dowlatshahi to prison was the final nail in the coffin of an already defunct “close business and personal relationship” dealing in art, which started in 2004. The relationship began to unravel after the global financial crisis.

Khalili first encountered Dowlatshahi at a charity dinner in 2004, and afterwards, the two met a number of times to discuss joint investments in the United Arab Emirates. Dowlatshahi then joined the advisory board of the Khalili Family Trust. Khalili says he lent cash and credit worth a total of $55m to Dowlatshahi for their joint investment venture, through a company owned by Khalili called Nour Collection Ltd. This involved buying art as an investment as well as, according to Dowlatshahi, seeking the sale or long-term loan of the Islamic art collection to a museum in the Middle East.

Dowlatshahi claimed that Khalili stated in 2005 that it could be sold for $2bn to $4bn, which Khalili’s lawyers deny. They also state that, while Khalili did not have any definite intention to sell, he might do so “under certain strict circumstances that would ensure an enduring legacy in a public museum (which circumstances never materialised)”. In 2008, Dowlatshahi claimed that he had an agreed commission of 11% for the sale or lease of the collection and a flat fee of £50m even if no contract were signed with Abu Dhabi—“for all your hard work in promoting the Islamic collection in the Middle East”. A letter saying this and purporting to promise these sums was said by Khalili to be a forgery, but Dowlatshahi maintains that it is genuine.

Khalili paid or credited a total of just over $55m to Dowlatshahi between 2006 and 2009, said his lawyers; this included $27.5m for a 17th-century Shahnameh, an important Persian illustrated album. The plan was to transfer it to the Tehran Museum of Contemporary Art, Iran, in exchange for a number of “extremely valuable” works of art including a Picasso, a Rothko and a Lichtenstein. As part of this project, Khalili (via Nour Collection) sold the Shahnameh to Dowlatshahi for $47.5m, of which the $27.5m was paid in cash and the remainder in assets. The paintings would be split: the Rothko and the Lichtenstein for Khalili, the Picasso for Dowlatshahi.

The deal, which never happened, would have echoed the swap that was carried out in 1994, organised by the Islamic art dealer Oliver Hoare. The Tehran museum owned De Kooning’s Woman III, 1952-53. No longer considered in accordance with Islamic principles, the painting was exchanged, in a dramatic meeting at Vienna airport, for 118 pages of the “Houghton” Shahnameh of Shah Tahmasp.

In 2008, the exhibition “Treasures from the Nasser D. Khalili Collection” (22 January-22 April) was shown at the Emirates Palace hotel in Abu Dhabi, with Dowlatshahi claiming that this was through his efforts (which Khalili denies). In September 2008, an agreement was signed by Sheikh Sultan bin Tahnoun Al Nahyan on behalf of the Tourism Development and Investment Company (TDIC) to explore the valuation of the collection with a view to a possible purchase, but the global financial crisis intervened and the deal went dead.

Dowlatshahi used other loans from Khalili to build up a collection of contemporary art as an investment and, according to Khalili’s claim, Dowlatshahi owed him a total of $86.75m by 2010. “We lost some of [the money] due to the 2008 crisis in Dubai and one of [the deals] has been in dispute since 2007 in the Dubai courts,” Dowlatshahi says. Khalili started pressing him to pay back some of the debt and Dowlatshahi issued two cheques. When the first—for Dh190m (around $52m)—was presented, it bounced. After protracted negotiations, Khalili’s lawyers filed a complaint with the Dubai authorities and, in March 2011, Dowlatshahi was imprisoned for eight weeks. By that time, he had been removed from the trust’s advisory board.

The criminal case was withdrawn, Dowlatshahi was released and an agreement was signed under which he would pay just over £2.2m and return 300 works and the Shahnameh. Khalili’s lawyers said that Khalili accepted the loss to resolve an “unpleasant dispute” with someone “whom he had previously trusted and regarded as a close friend and tantamount to a son”. Dowlatshahi maintains that he agreed to the settlements under duress, in order to be released from prison. The art was returned but a cheque for £2.2m also bounced, Khalili’s lawyers said.

In February this year, Khalili obtained a High Court judgment for £2.75m (the bounced cheque plus various costs). “The [Khalili Family] Trust generously agreed to compromise its much larger claim against Mr Dowlatshahi… in respect of monies advanced for investments Mr Dowlatshahi had purported to make on the Trust’s behalf, none of which was realised,” say Khalili’s lawyers, Jones Day.

Asked how the 12-month jail sentence could be imposed, since Dowlatshahi does not live in the UK, Khalili’s lawyers say that they will be vigorously pursuing “methods by which this judgment can be enforced”.

One interesting aspect of the case is the extraordinarily wide valuations put on the collection and the manuscript. According to a document submitted by Khalili’s lawyers, the market value in 2006 of the Shahnameh was “between £7m and £15m” but Khalili “would not have been prepared to part with… [it] for less than £25m to £30m (and even then only on the conditions set out… and/or possibly to an established museum)”. The same document said that the manuscript was acquired by the Nour Collection in 1989 for £275,000. But Khalili gave its value, in 2006, at $47.5m, “on the assumption that this was the price that the Islamic Republic of Iran was willing to pay in kind for the work”.

As for the Islamic collection, its value inevitably fluctuates with the economy and the market for Islamic art. In 2006, The Sunday Times estimated it at £500m, before promoting it to “a tentative” £4.5bn in 2007: the higher valuation was made a year before the Abu Dhabi exhibition and it has never been clear on what it is based, since not all of the collection has yet been published. In 2007, the exhibition “Treasures from the Nasser D. Khalili Collection” (22 June-23 September) at the Art Gallery of New South Wales, Sydney, was insured for £400m. In May 2007, The Art Newspaper commented: “As this is the cream of the collection, it is hard to see where the extra £4bn comes from.” Asked in 2007 whether he was considering selling the collection, Khalili’s press representative replied: “The Trust and Professor Khalili have not spent the past 40 years collecting, conserving, researching, publishing and exhibiting the collections only to disperse them.”

Friends no more

Nasser David Khalili, 67, is a Jewish-Iranian property developer, art collector and co-founder of the Maimonides Foundation, a charity that promotes inter-faith understanding. Forbes recently estimated his fortune at $1bn. Khalili left Iran in around 1979. On his arrival in London, he first ran an antiques shop—his father was also an art dealer—and also invested in property. Today, his collections comprise Japanese Meiji art, Spanish metalwork, enamels and Swedish textiles. The jewel in his crown is the Islamic collection, the outstanding treasure being a 14th-century Iranian world history by Rashid al-Din Fadlallah, which he bought for £12m in 1990. The collections are being published gradually, with 17 sumptuous catalogues (of the intended 27) already in print.

Farbod Dowlatshahi, 50, is an Iranian-born businessman who founded Delwood, a sporting and cultural events company in Dubai. An excellent sportsman with film-star looks, and always impeccably turned out, he became a familiar figure in the Dubai art world as a partner, with Isabelle van den Eynde, in the gallery B21, founded in 2005. He was also a major buyer of Middle Eastern contemporary art, particularly by Iranian artists, and a nominator for the 2011 Magic of Persia prize. His partnership in B21 ended in around 2010 and the gallery was renamed Isabelle van den Eynde.