I was chatting to a New York lawyer who acts for a number of galleries after successfully completing a contract concerning a consignment of art to a client of hers.
She mentioned difficulties that art dealers and auction houses are experiencing in the present environment and outlined one issue which was particularly troubling her.
As many will know, in the US there is federal (nationwide) law, and separately, state law.
This can present problems for businesses selling across state lines so the Uniform Commercial Code (UCC), a set of provisions applying nationwide, was enacted to provide a standard legal and contractual framework. The UCC laws have been fully adopted by most US states.
The lawyer’s concern, heightened by the present level of risk of business insolvencies, was as follows.
A consignment to a dealer or auctioneer can often fall in ambiguous territory between UCC Article 9 (consignments) and UCC Article 2 (sales) among others.
The problem is that under the UCC, consigned work is considered the “inventory” of the consignee, and so could be used to repay creditors.
She went on to explain that UCC 9 provides some level of protection against creditor claims by excluding several categories of goods, but at the same time UCC 9 requires filing of what is known as a UCC 1 prior to delivery of the consignment to protect the goods against subsequent creditor claims, a practice which she advised was seldom done. If the transaction is found to really be under UCC 2 (sales) then the art is “reachable by creditors”, in her words.
So, she explained, this opens up a space in a bankruptcy setting for creditors of a gallery or an auction house to argue that consigned goods that are part of the inventory of the bankrupt party (as well as “comingled funds” resulting from the sale of consigned goods held in a general operating account), are fair game for claims.
If the consignor has not taken other action to protect itself, the typical consignor is relegated to the bottom of the food chain in bankruptcy, as a general unsecured creditor. Under these circumstances the owner will not be entitled to the return of their artwork, and may stand to receive little to none of the proceeds in the event that the artwork is ultimately sold by the debtor.
She advised that the New York Cultural Affairs Law changed to protect artist-consigned property, after the high-profile bankruptcy of Salander O’Reilly Galleries, but there is no similar protection for non-artist consignors.
So, if you are a potential consignor of art to a US gallery or auction house, and you have concerns about a particular firm’s financial viability take careful advice before going ahead.
I was very surprised to learn of all the above since, while there are always dangers in bankruptcy, the specific pitfalls she advised of above, happily do not apply in English law. Put simply, over here you have a much better chance of getting the consigned work back, especially if you set it up correctly beforehand.
Milton Silverman is senior commercial dispute resolution partner at Streathers Solicitors LLP, London.