New York Art Law Lawyer & Attorney : Fox Rothschild Law Firm : Theft, Intellectual Property, Institutional Negotiation : Manhattan, New York City

In recent months, the Wall Street Journal (“WSJ”) has reported that art loans are subject to the credit crunch that is affecting the economy-at-large. For example, an article in the April 27, 2008 edition of the WSJ noted that many art lenders, including banks, who typically loan funds backed by fine art, are “reining” in these loans. The WSJ noted that significant question remains about what will happen if these loans go “sour” due to the possibility of the diminishing value of the fine art that is being used as collateral for the loans. 

In a December 30, 2007 article in the Washington Post, Ian Peck, chief executive of the art-finance firm Art Capital Group, was quoted as saying that the art market trails the Dow Jones industrial average and other market indexes by about six to eight months. Since October 9, 2007, when the Dow hit an all-time high of 14164, the average has since dropped to around 13,000 and has remained volatile since that time.

If the art market does go in the direction of the stock market, many banks and lenders may be looking to recover on their loans and the borrowers may be looking to protect themselves from the onslaught of potential litigation.

The 2002 case of Christie's Inc. v. Davis, 247 F.Supp.2d 414 (S.D.N.Y. 2002) may be an indication of what’s to come. There, the court granted summary judgment to Christie’s when it sought to collect on multiple loans made to defendants. The loans were secured by hundreds of pieces of fine and decorative art and antique furniture (the “art”), most of which the defendants kept in their house in Greenwich. After the defendants defaulted on the loans, Christie's filed the action, seeking repossession of the collateral, pursuant to the New York recovery of chattels statute, C.P.L.R. Article 71. The court found that the language of the loan documents permitted Christie’s to foreclose on the art, notwithstanding the fact that the art was worth twice the value of the loan.

Art lenders and borrowers are strongly encouraged to review their rights with an attorney. This is especially true in the current credit crunch.

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One way that the New York legislature has attempted to protect unwary artists is through the enactment of the New York’s Arts and Cultural Affairs Law Section 12.01.[1] This statute is particularly relevant in today’s uncertain economy because it prohibits an art merchant from taking a security interest in an artwork that is loaned to the merchant by the artist, thereby prohibiting the artworks from being subject to the claims of the merchant’s creditors, in the event that the merchant goes out of business and/or files for bankruptcy protection.

The statute provides, in part:

1. Notwithstanding any custom, practice or usage of the trade, any provision of the uniform commercial code or any other law, statute, requirement or rule, or any agreement, note, memorandum or writing to the contrary:
(a) Whenever an artist or craftsperson, his heirs or personal representatives, delivers or causes to be delivered a work of fine art, craft or a print of his own creation to an art merchant for the purpose of exhibition and/or sale on a commission, fee or other basis of compensation, the delivery to and acceptance thereof by the art merchant establishes a consignor/consignee relationship as between such artist or craftsperson and such art merchant with respect to the said work, and:
(i) such consignee shall thereafter be deemed to be the agent of such consignor with respect to the said work;
(ii) such work is trust property in the hands of the consignee for the benefit of the consignor;
(iii) any proceeds from the sale of such work are trust funds in the hands of the consignee for the benefit of the consignor.

For example, in Zucker v. Hirschl & Adler Galleries, Inc., 170 Misc.2d 426, 648 N.Y.S.2d 521 (Sup. Ct., N.Y. Co. 1996), the Court granted partial summary judgment for the plaintiff-artist Joseph Zucker on the basis that the statute expressly precluded the claim by the defendant art gallery that Zucker’s works were subject to the gallery’s security interest.

In plain terms then, in the event of the merchant’s bankruptcy, under New York’s law, an artist’s work should not be subject to the claims of the merchant, the merchant’s estate, or its creditors. Not all states, however, may protect artists the way New York does. If you are an artist, you should find out what state’s law applies to you before consigning your work, and whether or not your works will be protected.

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The recent chapter 11 bankruptcy of the Salander-O’Reilly art galleries (located on New York City’s Upper East Side) shows that the financial distress of a consignee of art is not always readily apparent.   In today’s credit crunch, sadly, consignors may not recognize how their failure to take adequate steps to protect their interests in art prior to entering into a consignment arrangement may result in tragic consequences should the consignee end up in bankruptcy.

In both In re G.S. Distribution, Inc., No. 331 B.R. 552 (Bankr. S.D.N.Y. 2005) and In re Morgansen’s Ltd., 302 B.R. 784 (Bankr. E.D.N.Y. 2003), aff’d in part, No. 04-CV-0268, 2005 WL 2370856 (E.D.N.Y. Sept. 27, 2005), parties who consigned their goods did not file financing statements to protect their interest in these items. After the consignee ended up in bankruptcy, the consignors fought vigorously to prevent their consigned goods, in the consignee’s possession, from being subject to the claims of the consignee’s general creditors. This is because, as explained by the court in In re G.S. Distribution, Inc., “property acquired under a consignment arrangement, even if it is not paid for, may be subject to the claims of the consignee’s creditors,” and a debtor in possession or a bankruptcy trustee “may be entitled to exercise these rights under the Uniform Commercial Code (“U.C.C.”) for the benefit of the estate and its creditors.” 331 B.R. at 561. 

Specifically, the In re G.S. Distribution, Inc. court explained that if the transaction is a consignment as contemplated by New York’s U.C.C. - Secured Transactions (“New York’s Article 9”), the consignor must ordinarily file a financing statement to protect its interest in the property from the claims of a bankruptcy trustee or a debtor in possession acting on behalf of the estate. Id. at 361. However, if the consignment relationship does not satisfy the definition in New York’s Article 9, the consignor is not automatically free from the claims of the consignee’s creditors. Instead, In re G.S. Distribution and In re Morgansen’s Ltd. explain that the parties’ relationship will be evaluated under New York’s U.C.C. – Sales (New York’s Article 2) and common law principles of bailment to determine whether, in the absence of a financing statement, the consigned goods are subject to the claims of the consignee’s creditors.  

In today’s distressed market, these two decisions are important. These cases show that, in the absence of an enforceable financing statement at the outset of a relationship, a party may later be at the mercy of a court’s ad hoc determination because although the parties may describe the relationship as a “consignment,” the law may treat it differently. This could result in a court order that consigned art is subject to the claims of the consignee’s creditors, and thus, the loss of extremely valuable property.  

If you are considering consigning art, it is important to consider whether a financing statement makes sense for you, and if so, where and how it should be filed, and how often it must be updated. For general information on financing statements in New York, see N.Y. Department of State: Uniform Commercial Code, http://www.dos.state.ny.us/corp/ucc.html. 

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