Fine Art Consignment in the time of COVID-19: How safe is your Art?

As COVID-19/ SARS-CoV-2 slithers insidiously among us, and fine art galleries, auction houses, and fine art storage facilities shutter, the fine art market finds itself under considerable pressure.

Fine art galleries and consignment: How safe is your art?

Fine Art Galleries and Consignment: How Safe Is Your Art?Institutions as seemingly solid as the

With no end in sight, the financial implications for art market professionals could be dire.

Artnet reports that top-tier galleries are already implementing furloughs or layoffs, with Lévy Gorvy and David Kordansky Gallery among them.

Institutions as seemingly solid as the Metropolitan Museum of Art are struggling. Coronavirus is set to cost the Met a staggering $100 million and keep it closed until July, with layoffs on the horizon.

While many are turning to online alternatives, the loss of in-person interaction and the shuttering of physical spaces will, no doubt, cut very deep into revenue streams and the longer it persists, the prospect of business failure looms large.

Fine Art Consignment Practices in the United States

With fine art galleries, it is unusual in the United States, at least, for galleries to purchase their inventory outright, with most taking works on consignment to avoid the otherwise heavy overhead.

The result is a considerable amount of fine art owned by others inventoried in galleries and storage facilities across the United States.

What Happens to Consigned Art if a Gallery Fails?

If these businesses fail, what happens to the stores of fine art in their possession?

If a gallery were to fail, who would be entitled to its inventory? The artist or collector who owns the work or the gallery's creditors?

This is an issue, particularly at this time, which underscores the need to be aware of your rights, as a collector, artist, or other fine art owner in consigning works and in relation to works of fine art already consigned and sitting in gallery inventories.

In parts of the United States, the answer to this question may depend, to some extent, on the law governing the consignment and the identity of the consignor.

Consignment

What Is Consignment Under the Uniform Commercial Code (UCC)?

But, let's first look at what we mean by 'consignment'.

To understand its meaning, our first port of call is the Uniform Commercial Code (UCC).

The UCC is widely adopted into state law in the United States, and it is the first point of departure for determining rights and obligations under fine art sales and consignments.

Article 9 of the Uniform Commercial Code (UCC) defines 'Consignment', in material part, as "...a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and...the merchant...deals in goods of that kind...is not an auctioneer...and is not generally known by its creditors to be substantially engaged in selling goods of others...with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery...".

In basic terms, then, consignment has a two-fold character.

The Legal Nature of Fine Art Consignment: Agency and Bailment

The first is agency. In placing the works with a gallery, the gallery becomes the consigning artist or the collector's agent and fiduciary, having the obligation to offer the work for sale and to account to the consignor for the proceeds of the sale, less any commission or fee agreed to be paid to the gallery.

The second is that of possession, or what, in legal speak, is called 'bailment'. Her,e the work of fine art is 'given' to the gallery for a specific purpose, i.e to hold for, display, exhibition, and sale.

The artist, collector, or other consignor retains ownership, but 'entrusts' the work to the gallery.

Sale on Approval vs Sale or Return in Fine Art Transactions

When we talk about 'possession' in this context, there are two types. UCC Article 2 calls one a 'sale on approval', and the other, a 'sale or return'.

A 'sale on approval' is the situation where goods are bought for your own use, and even though the goods as delivered conform to the description of the goods purchased, you have the right to return the goods if you don't want them. Not particularly on point here for gallery consignments, which generally take the work for on-sale.

Where works of fine art are consigned for the purpose of on-sale, we call it a 'sale or return'. The gallery or dealer is entrusted the work for the purpose of sale, and, if sold, a commission or fee is taken, with the balance of the proceeds being trust property, returned to the artist, collector, or other person consigning the work. If no sale, then no risk to the gallery: the work is returned to the consignor.

Why Gallery Creditors May Have Claims on Consigned Art

So, since consignment, as we have now discovered, does not result in a transfer of ownership in the artwork to the gallery, you may be asking why there would be a risk of gallery failure, to begin with. What rights would the gallery's creditors have in your art?

The UCC exception: all is not what it seems

That would be a good question indeed.

Except for UCC § 2-326.

The UCC Exception: When Consigned Art Is at Risk

This Section specifically provides that on a 'sale-or-return' the goods (in this case, works of fine art) would be subject to the claims of the consignee's (here, the gallery's ) creditors, if "....[the consignee]... maintains a place of business at which he deals in goods of the kind involved, under a name other than the name of the person making delivery...".

UCC § 9-319 adds to this with, "...for purposes of determining the rights of creditors of, and purchasers for value of goods from, a consignee, while the goods are in the possession of the consignee, the consignee is deemed to have rights and title to the goods identical to those the consignor had or had power to transfer..."

Moreover, the UCC clarifies that this would apply even if there were a written contract reserving title to the artist, collector, or other consignee.

Gallery Bankruptcy and Loss of Consigned Fine Art, but all is not doom and gloom

So, you, as an artist or collector, place your works of fine art with a gallery. You sign the gallery's consignment contract. You've delivered the art. The gallery goes bankrupt. You lose your art. More precisely, your fine art is used to pay the gallery's creditors. You may not see a penny.

This unfortunate conclusion is the result of a compromise made in the UCC between the rights of creditors and good-faith buyers of goods in the ordinary course of business, on the one hand, and the owners of goods on the other.

The rights of creditors and ordinary-course buyers should prevail where they finance or purchase from businesses which are known to deal in goods of that kind; so the argument goes, that commerce would come to a standstill if consignees, like galleries holding works of fine art on a 'sale-or-return' could not give good title or adequate security to their buyers or creditors.

UCC Protections for Artists and Collectors Consigning Art

But all is not doom and gloom.

UCC § 2-326, itself, qualifies this result if the collector, artist, or other consignee does any of the following:

"...(a) complies with an applicable law providing for a consignor's interest or the like to be evidenced by a sign, or (b) establishes that the person conducting the business is generally known by his creditors to be substantially engaged in selling the goods of others, or (c) complies with the filing provisions of the Article on Secured Transactions (...[ UCC]...Article 9)."

Since (b) would, generally, be an after-the-fact, last-ditch attempt to recoup your work of fine art, being forewarned and prepared would, one would think, be the better approach.

Nevertheless, one wouldn't want to rely much on (a) either, after all, galleries, particularly at the higher end, turn their nosesup at vinyl labels on their walls, let alone a big one saying "...this one, it isn't owned by us...".

Filing a UCC Financing Statement to Protect Consigned Art

So the primary means of protecting yourself as an artist, collector, or other consignor of fine art would be (c).

(c) entails filing a UCC financing statement (with the Secretary of State in whose state the gallery is located; the state of incorporation, where the gallery is an entity, or where the gallerist resides, if an individual) in respect of the work of fine art, an act which we call 'perfecting' the consignor's 'security interest' in the work.

'Perfecting the security interest' in essence means that the consignor is given a secured right in the work, with the objective of the consignor ranking ahead of the gallery's other creditors and so saving the day for the artist, collector, or other consignor in the event of the gallery's bankruptcy.

And, before any talk of 'perfection', it goes without saying that a written consignment agreement is a must.

The Importance of Written Fine Art Consignment Agreements

Consigning work without a properly drafted written agreement could be fatal to your rights. We only have to look at the current litigation between Robert Blumenthal Gallery, LLC and Derek Fordjour, the subject of another post, which you may read here, where the very dispute relates to whether an agreement was for an outright sale or the consignment of twenty Fordjour works of fine art.

But it is not just defining the fundamental nature of the transaction that necessitates a clear and well-drafted consignment agreement, but most of the numerous other terms that go unstated when trust is simply left to a handshake. Included in this is the gallery's express grant to the consignor of the all-important security interest, which the consignor perfects by filing the financing statement.

But as we know, it is not all the case that an artist has the luxury of properly documenting the transaction. It is here were a number of states stepped in to aid the artist.

The states step in: state fine art consignment statutes

State Fine Art Consignment Laws: New York, California, and Beyond

Given the spectre of unscrupulous galleries and the chance of falling subject to gallery creditor claims, state legislatures in certain states, most notably New York and California, but also Michigan, Illinois, and Texas, and a number of others, have stepped in to regulate this position.

§12.01 of the New York Arts and Cultural Affairs Law (ACAL), New York’s fine art consignment statute, deems works delivered to art merchants (for example, galleries) "...for the purpose of exhibition and/or sale on a commission, fee or other basis of compensation..." to be a consignment.

Moreover, ACAL, expressly over-writing UCC Article 2, dispenses with the need to file a financing statement and deems the delivered work of fine art and proceeds of its sale to "... be considered property held in statutory trust, and no such trust property or trust funds shall become the property of the consignee or be subject or subordinate to any claims, liens or security interest of any kind or nature whatsoever of the consignee's creditors...".

So, even if no financing statement is filed to perfect the artist's security interest, the work of fine art delivered, and the proceeds of the sale of the work are to be trust funds in the hands of the gallery, free of the claims of the art gallery's creditors.

Contrast §§1738.5 through 1738.9 of the California Civil Code, which contains similar provisions, but is not clear from its wording whether it would, in each case, supersede UCC Articles 2 and 9.

Other states, for example, Arizona and Florida, require the consignment agreement to be in writing.

Notably, both ACAL and the California statutes only cover artists in the consignment of works of fine art of their own creation.

So in these states, consignors other than artists consigning their own works would not be protected by this safe harbor, and the UCC provisions exposing non-artist consignors to the claims of the gallery's creditors would apply.

Moral of the story: get the agreement in writing, and file

Key Takeaway: Protect Your Fine Art with Contracts and Filings

There are potentially a very large number of works of fine art hanging on gallery walls or sitting in gallery inventories.

Coronavirus has left us all exposed in some form or another. Blue-chip galleries, only weeks ago thought of as very resilient, may not be. And they are the upper echelon of galleries.

Sometimes the playing fields are not even, or urgency or practicalities prevail, leading to artworks being consigned but not papered adequately, or at all.

While artists may have better protection under state law, it shouldn't be assumed that that is the case.

When a potential financial collapse happens, there will no doubt be many works of fine art and artists, collectors, and other fine art consignors left in the cold.

So, get it in writing, check which law applies, and file. We do not all have the benefit of New York's ACAL.

** This article is intended to be informational only and does not constitute legal advice. Competent, specific legal advice from a suitable, licensed attorney should always first be obtained before taking any action, and the information in this article should not be relied upon independently of that advice.