UK: News For Art Dealers, Artists And Artists’ Estates: New York’s Revised Artist Consignment Statute

In the United States, 33 states to date have enacted legislation governing the consignment of artwork by artists to dealers for exhibition or sale. At the core of most such statutes, including that of New York as set forth in the New York Arts and Cultural Affairs law (NYACAL), is the delineation of the fiduciary nature of the relationship between the artist and the dealer. That is, unless an artwork has been delivered to a dealer pursuant to an outright sale or the artist has received full compensation for the work, it is a delivery on consignment, with the dealer deemed the agent of the artist, the delivered artwork viewed as trust property and the sale proceeds deemed trust funds held for the benefit of the artist.

A major purpose of such consignment statutes is to provide a safe harbour for the artist against the claims of a dealer's creditors. The purpose of such a statute is undermined if artwork consigned by the artist to the dealer is subject to the claims of creditors of the consignee-dealer in the event the dealer files for bankruptcy. NYACAL's consignment provisions, as do some other states', grant automatic protection to the artist-consignor against the claims of a dealer-consignee's creditors. NYACAL's consignment provisions, in explicitly exempting the artist-dealer relationship from the effect of otherwise-applicable provisions of the Uniform Commercial Code (UCC) – current section 9-102(a)(20) and former section 2-326(3) – intended to give artists a statutory claim on their consigned works of art that is superior to any other claim. Since the consignment is outside the provisions of the UCC, the relationship between the artist and the dealer is more in the nature of an agency and bailment. Therefore, the dealer has no ownership or interests in the consigned works of art that can allow a trustee in bankruptcy to claim title to the consigned artwork. Or so it was thought until the bankruptcy filings of two prominent New York galleries: the Berry-Hill Galleries in 2005, followed by the Salander- O'Reilly Galleries in 2007.

Gallery bankruptcies reveal shortcomings in NYACAL's consignment provisions

Despite the wording of NYACAL's consignment provisions, many art dealers – whose commissions on a sale of artwork consigned by an artist generally range from 25% to 60% of the sale price – historically did not segregate the sale proceeds to be remitted to the artist from the sale proceeds to be retained by the dealer as a commission. Instead, as a practical matter, many dealers would commingle the monies and apply the commingled funds to pay the dealer's operating expenses. When Berry-Hill, housing some of the finest American paintings and occupying a plush neo- Classical townhouse on Manhattan's Upper East Side, filed for bankruptcy, it listed more than 100 creditors and debts ranging as high as $50 million. When the Salander- O'Reilly Galleries (SOG) ultimately filed for voluntary bankruptcy in late 2007 under Chapter 11 of United States bankruptcy laws, millions of dollars of sales proceeds due and owing to consignors, including artists, artists' heirs and artists' estates, went unpaid. As a bankrupt entity, SOG had hundreds of the consignors' artworks under its dominion and control, which deep-pocketed creditors, including SOG's principal bank, sought to claim through the use of creative arguments. For example, it was questioned whether the children of artists qualified as heirs under New York's art consignment statute, where the artist died and left his or her artworks to the spouse, rather than directly to the 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 SOG bankruptcy estate.

The havoc in the art world wrought by the bankruptcies of the Berry-Hill and Salander-O'Reilly Galleries served as the main impetus in amending NYACAL's consignment provisions to provide enforcement for its fiduciary mandates.

The amendments to NYACAL's consignment provisions

Accordingly, effective 6 November, 2012, Articles 11 and 12 of NYACAL have been amended to provide the following:

• the clarification of the statute's definition of 'heir' to ensure that an artist's children would qualify for the protections conferred by Article 12 of NYACAL. Specifically, NYACAL's revised Article 11 (Definitions) now includes the term 'successor in interest'. This term is defined to include heirs, personal representatives, testamentary beneficiaries and trustees or beneficiaries of lifetime trusts – and the definition specifically provides that the terms shall have the same meaning as the definitions set forth in the Estates, Powers and Trusts Laws (EPTL).
• a mandate that the trust property (artwork consigned by artists or their 'successors in interest' and trust funds (sale proceeds) be treated in accordance with the requirements of Section 11-1.6 of the EPTL. This means that the trust property must be kept separate from the dealer's own property. It also means that the trust funds cannot be deposited with a bank under the art dealer's own name: rather, the trust funds must be deposited under the dealer's name as fiduciary.
• a specific provision that the trust property and trust funds are not and shall not become the property of the art dealer or the dealer's bankruptcy estate. That is, the trust property and trust funds are property held in 'statutory trust'.
• a clarification that the trust property and trust funds will not be subordinate to any claims, liens or security interests 'of the consignee's creditors'.
• a mandate that any waiver by the consignor of the sales-proceeds-as-trust-funds provision (excluding the first US$2500 received in any 12-month period) be in writing clearly and specifically apprising the consignor of the right he or she is waiving.
• that any failure by the art dealer to treat the consigned property as trust property or the sales proceeds as trust funds in accordance with Section 11-1.6 of the EPTL shall subject the dealer to the penalties for violation of that Section of the EPTL – including the penalty of misdemeanor and criminal sentencing.
• a private right of action under the NYACAL consignment provisions, including injunctive relief, actual damages and, if the consignor prevails, costs, expenses and reasonable attorneys' fees.

The amended consignment provisions of NYACAL are directly responsive to the tragically extensive loss of both ownership of artwork and properly-remitted proceeds in the wake of the Berry-Hill and SOG bankruptcies. Art dealers doing business in New York are put on notice that breach of NYACAL's consignment provisions now carry penalties – including criminal sanctions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.