Consigning Art Under New York’s Amended Arts and Cultural Affairs Law

Editor’s Note

This is Volume 4, Issue No. 2 of Spencer’s Art Law Journal. This issue contains three essays, which will become available by posting on artnet.com, starting in November 2013.

This first essay (A Seller Should Have Reasonable Grounds for His Unqualified Authenticity Opinion…) discusses whether a seller’s opinion based on “mixed” (positive and negative) facts needs to be qualified as “probably,” and whether the negative facts must be disclosed.

The second essay (Consigning Art Under New York’s Amended Arts and Cultural Affairs Law…) examines the new law on art consignment for artists and their estates, and, as well, raises issues for owners and collectors consigning art for sale.

The third essay (Lien Searches May Not Always Tell You Much…) addresses the use of lien searches to discover claims against art and the inherent limitations of these searches.

Three times a year, issues of this journal address legal issues of practical significance for institutions, collectors, scholars, dealers, and the general art-minded public.

— RDS

For inquiries or comments, please contact the editor, Ronald D. Spencer, at Carter Ledyard & Milburn LLP, 2 Wall Street, New York, NY 10005, by telephone at +1-212-238-8737, or at [email protected]

 

CONSIGNING ART UNDER NEW YORK’S AMENDED ARTS AND CULTURAL AFFAIRS LAW: LESSONS FOR ARTISTS, THEIR ESTATES, AND COLLECTORS

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Judith Wallace

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The New York law governing relations between artists and their art galleries has recently been amended to give more protection to artists and their estates. This should give collectors and other owners some ideas when they consign their artwork to their dealers.  — RDS

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Judith Wallace is a member of the Art Law Group at Carter Ledyard & Milburn LLP. She represents collectors, foundations, artists, and scholars in matters of art ownership, authenticity, authorship, consignment and sales, foundation governance, and other art-related matters.

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For more than 45 years, Article 12 of the New York Arts and Cultural Affairs Law (NYACAL) has—at least on paper—protected artists (and their estates and heirs) in their dealings with art merchants (dealers). Under the New York statute, art merchants have trust responsibilities and a host of specific obligations when they take art on consignment from an artist. The law was further strengthened last year in response to the spectacular collapse of the Salander O’Reilly Gallery. But these provisions are of little practical assistance if artists do not know enough to insist on their rights, and if dealers are not aware that there are legal obligations that are not subject to negotiation. Time and time again, this statute comes as a surprise to both the artist and the dealer long after their relationship begins. They tend to learn of it when a dispute arises, after the parties have already exhausted efforts to resolve their differences and one finally contacts an attorney who happens to be familiar with the law.

This lack of awareness of the trust provisions of the Arts and Cultural Affairs Law is particularly unfortunate because the New York Arts and Cultural Affairs Law does much more than prohibit blatant misappropriation of art or sales proceeds from artists from the small minority of art merchants who are dishonest. Article 12 provides generally applicable requirements that govern the ordinary course of business between artists and dealers, which cannot be overridden, even by a written agreement. The result is that the terms of a consignment may be different than both parties believe them to be.

The New York Legislature Recognizes the Need to Protect Artists

Since 1966, New York has required art merchants to treat artists as fiduciaries. The New York legislature explained this was intended to recognize that the arts are a vital and significant state resource, and “to give a long overdue measure of protection to the artist in his relationships with the dealer who sells his work,” and safeguard against misappropriation of art and sale proceeds. (There are other provisions of the law that protect art purchasers, as well.)

Key Terms that Distinguish Artists from Other Consignors

The most important feature of Article 12 of the NYACAL is that it creates a trust (that is, fiduciary) relationship between artists and art merchants. This gives rise to a heightened duty of loyalty and care by the art merchant to the artist—it is not an arms-length business relationship.

The law sets basic contract terms that govern the relationship, even if the parties never enter into any oral or written agreement. Art delivered by an artist to an art merchant for exhibit or sale is deemed to be on consignment. The gallery is deemed to be the artist’s agent. Both the art and any proceeds from its sale are trust funds for the benefit of the artists. The legislative history stated that the proceeds should be segregated in a trust account and the artist is entitled to payment of her portion of the sale price on demand.

Artists are also entitled to an accounting of sales of their art, including backing documentation, the actual sale price, and the name and address of the purchaser.1 In contrast, an art merchant selling work for non-artist consignors might expect to be able to keep his or her client names and prices confidential as the gallery’s stock in trade, but artists can insist on complete transparency, due to the fiduciary relationship. Demanding and obtaining regular accountings can also keep galleries from falling behind on paying the artist. Unfortunately, in one recent dispute, the gallery would not open its books to its artist without a lawsuit, and did not compile its unorganized records into a report until a court order required it to do so. This delay can be costly to the artist.

This statute trumps any other applicable law or agreement to the contrary between the parties.2 In fact, contract terms that are at odds with the law are void and are not enforceable.3 The only portion of the law that the parties may waive (by a written and signed contract) is the requirement for the art merchant to treat sale proceeds as trust property.4 Yet even this waiver cannot be used for artwork that the gallery purchases for its own account, and the artist will always be given preference over other of the dealer’s creditors.

Criminal Penalties and Attorneys’ Fees

The 2012 amendments to Section 12.01 of the NYACAL strengthen these protections, and create criminal penalties for art merchants failing to meet these requirements.

Perhaps of greatest lasting importance is that they allow artists and estates to recover attorneys’ fees in a lawsuit to enforce the law’s requirements, and extends the statute’s obligation to artists’ estates. Some of these additional terms would have been fair to conclude from generally applicable fiduciary principles, and from the 1966 legislative history, but the 2012 revisions remove all doubt.

The newly added right for artists to recover attorneys’ fees, in addition to amounts owed, may also help to promote awareness and enforcement of the NYACAL. When parties bear their own attorneys’ fees (the norm), they tend not to hire attorneys to recover smaller amounts. The result is that there are surprisingly few judicial decisions enforcing the NYACAL’s terms and promoting awareness of its requirements for those earning a modest living from their art and who need the law’s protections the most.

The revised law more explicitly requires art merchants to deposit the proceeds of sales on behalf of an artist directly into an artists’ trust account, and incorporate the requirements that apply to other fiduciaries in the New York Estate Powers and Trust Law. A gallery may not accept payment and deposit the proceeds in its own general account (possibly making the proceeds available to the dealer’s creditors) and then forward the artist’s share. Even if the gallery deposits a check in its general account and immediately turns over an artist’s portion, it would technically be in violation of the law.5

For dealers, it is important to be aware of the expanded requirements of the law. Even dealers who treat funds responsibly may commit technical violations of the law. Prosecutors will (and do) certainly exercise discretion in asserting criminal violations. In one recent case, prosecutors were reluctant to step in, and viewed an artist’s claim as an essentially private contract dispute, since the public was not being defrauded, even though that particular gallery had a history of nonpayment to artists that was documented in judicial decisions. A greater risk to dealers is the exposure to attorneys’ fees for violations, which can have outsized significance if there is a contract dispute.

Cautionary Tales

These provisions of the Arts and Cultural Affairs Law apply only to artists and their estates when they consign the artist’s own work, to art merchants, under New York law.6 Therefore, the dealer cannot claim to own the art based on his investments in gallery shows, promotion of the artist, or even loans of money to the artist. However, the law does not protect an artist who may have come to expect these terms based on the NYACAL, and then consigns works by other artists that the artist happens to own. Artists dealing with Salander O’Reilly found this out the hard way.

The NYACAL does not specify how frequently an art merchant must provide an accounting or pay artists’ proceeds. To monitor and ensure that the merchant is in compliance, the artist should (preferably by contract) require that payments for the sale of art be made promptly (ideally within days), and that regular accountings are required and provided. Without an accounting (at least once a year), we have seen that an artist might not find out a work has been sold until the artist hears of the sale by word of mouth. In one recent dispute, the artist did not begin to learn the scope of the problem until buyers contacted her when—in addition to not paying the artist—the gallery began failing to even deliver the purchased art to the buyers. Unfortunately, the dearth of case law means that judges sometimes do not feel comfortable bringing down the hammer on stonewalling galleries early in a lawsuit. Artists should also be sure to specify by contract that the accounting must tell the artist if some of the art has been re-consigned by the dealer to another dealer.

The statutory provision for attorneys’ fees in an action by an artist to enforce rights under the NYACAL also has practical limits. A judgment for attorneys’ fees is a hollow victory if the gallery has raided the artists’ proceeds and has no resources to pay a judgment. The NYACAL is no substitute for due diligence in selecting a gallery that is trustworthy and transparent. An artist is unlikely to learn that funds have not been kept in segregated accounts until they are dissipated, and a claim for attorneys’ fees is little help if the art merchant has dissipated the artist’s proceeds and has no other assets. Insurance covers only physical loss, not financial loss due to an art merchant’s bankruptcy.

Because the NYACAL is a New York state law, artists need to be sure that New York law governs the relationship. This might seem obvious when the gallery has a physical location in New York and the artist is a resident of New York. Even so, it is best to state that both New York and the NYACAL apply.

Lessons and Options for Collectors

How can collectors obtain some of these protections? Art transactions are notable for their relative informality, compared to other transactions for the sale of assets of comparable value. It is not unheard of for a transaction for millions of dollars in art to change hands by a simple invoice, and for works to be consigned without a contract or the degree of due diligence common in corporate transactions. Fewer dealers than one would think will provide a simple and clear written agreement. In other cases, the owner will hand over the artwork and discuss a target price.

Fortunately, collectors who consign works for sale can learn from the statutory protections for artists and employ similar contract terms to ensure the security of art. The Salander bankruptcy serves as a reminder that a contractual right to make a Uniform Commercial Code (UCC) filing is needed, so that the owner can put potential creditors of the dealer on notice that the dealer does not own the consignor’s art. Failing to do so can risk having consigned art treated as an asset of the merchant in bankruptcy to be allocated among competing creditors.

Collectors can limit the art dealer’s ability to hand over artwork to other galleries or send works out on approval to potential buyers, require the dealer to inform the owner when it does so, and make the gallery responsible for full payment if the buyer does not pay. A few years ago, an owner was forced to track down an artwork and found it had been handed over to someone located in Lichtenstein, a country that is unfriendly, if not hostile, to the United States legal process, and was only able to recover his art because the possessor had a related United States business that was motivated to comply with American law. In another recent case, the collector was exceedingly lucky, and the European gallery the work was consigned to acted responsibly (in fact, more responsibly than the United States dealer), and returned the work to the collector without incident.

Collectors should also be aware that artists have preference (by virtue of the NYACAL) over other creditors. Therefore, if a gallery has commingled funds and falls behind, collectors will be in line behind the artists—and possibly other creditors who have a higher priority. To minimize this problem, collectors can require prompt handover of sale proceeds, and can also require (at least annual) accountings when they are turning over art to a dealer.

If a collector would like transparency, he will need to negotiate that with the dealer. A dealer may justifiably guard this information, especially if he or she feels at risk of being circumvented on future deals between the collector and the buyer. Others will have a more relaxed attitude, especially in the context of a longstanding client relationship with a collector.

Finally, there is no substitute for clarification of the specific terms in advance to ensure that the two parties have the same understanding of the relationship. In order to have any measure of protection, collectors will need to overcome any sense that there is something insulting or unsophisticated about insisting on the protections of a simple written agreement when turning over valuable artwork for sale.

New York, NY
October 2013

Judith Wallace
Carter Ledyard & Milburn LLP
2 Wall Street
New York, NY 10005
Email: [email protected]
Website: www.clm.com

Notes

1 See Hirschfeld v. Margo Feiden Galleries Ltd., 7/26/2000 N.Y.L.J. 27 (col. 5) (Sup. Ct. N.Y. County July 26, 2000).
2  NYACAL § 12.01 (emphasis supplied).
3 See Wesselmann v. Int’l Images, Inc., 259 A.D.2d 448, 449 (1st Dep’t 1999) (citing NYACAL § 12.01(1)(a)(v) and Zucker v. Hirschl & Adler Galleries, Inc., 170 Misc. 2d 426, 427 (Sup. Ct. N.Y. County 1996).
4 See NYACAL § 12.01(1)(a)(v) (except for the first US$2,500 per year).
5 EPTL 11-1.6
6 Other provisions of the Arts and Cultural Affairs Law are applicable to non-merchants for the terms of warranties for their purchases from art merchants.