Dealers in New York can no longer use works consigned to them for sale by artists – or monies raised from their sale, beyond their own commissions – as debt collateral.

The change in law comes in a bid to prevent galleries' creditors claiming works or funds in settlement from dealers that in reality belong to artists.

Under amendments to the New York Arts and Cultural Affairs Law (NYACAL) introduced in November last year, consigned works or ensuing payments due to be paid out to consignors must be treated as being held in trust and kept entirely separate from galleries' own assets.

Those who fail to follow the new rules risk criminal prosecution as well as having to pay costs and damages to successful aggrieved parties in the event of being sued.

Withers Worldwide, the international law firm, highlight the changes in their latest Art and Cultural Assets newsletter, explaining how New York State followed 32 other states across the US in making the changes after two high-profile gallery bankruptcy cases, Berry-Hill Galleries in 2005 and Salander-O'Reilly Galleries two years later.

Creditors Claims

NYACAL already held provision for consignment protection when the two galleries went out of business, explained Withers, but as dealers traditionally did not keep separate client accounts, the galleries' creditors laid claim to works on consignment and payments due to artists.

Matters were further complicated when some creditors questioned whether the children of artists qualified as heirs under the statute, where an artist had died and not left their estate directly to their children.

"Unable to afford the legal firepower required to refute this and other creative arguments, many of the artists' children were impelled to buy back their artwork from the Salander-O'Reilly Galleries bankruptcy estate," the law firm explained.

The amendments now also make provision for claims from artists' children to stop this happening again.