Purchase Price Paid Over Time: “Title Does Not Pass Until Payment in Full”

Editor’s Note

This is Volume 4, Issue No. 1 of Spencer’s Art Law Journal. This issue contains two essays, which will become available on artnet.com, starting June 2013.

As previously noted in this Journal, the legal structure we call art law (an amalgam of personal property law, contract, estate, tax, and intellectual property law) supporting the acquisition, retention, and disposition of Fine Art, often fits uneasily with art market custom and practice. The result is that 21st-century art market participants are frequently unsure of their legal rights and obligations.

The two essays in this spring issue deal with sales of visual art. The first essay (Provenance: Important, Yes, But Often Incomplete…) looks at the issue of provenance listed in a contract of sale. A lack of clarity about what should be or must be in provenance leads to uncertain legal results for the buyer and seller.

The second essay (Purchase Price Paid Over Time: “Title Does Not Pass Until Payment in Full”) addresses a very common provision in contracts for the sale of art with installment payments. But, surprising to many art sellers, the Uniform Commercial Code probably makes this provision unenforceable, with consequences for the seller getting his art back.

Three times a year, issues of this Journal continue to 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]

 

PURCHASE PRICE PAID OVER TIME: “TITLE DOES NOT PASS UNTIL PAYMENT IN FULL.” BUT THE UNIFORM COMMERCIAL CODE may have OTHER IDEAS.

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Aaron R. Cahn

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This essay is about a common provision in contracts for the sale of art, namely, that legal title does not pass to the buyer until the purchase price is paid in full. The drafters of the Uniform Commercial Code, always concerned to facilitate the free flow of goods, provide that legal title passes when the art is delivered to the buyer–probably, even if the parties say otherwise. — RDS

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Aaron R. Cahn, is a member of Carter Ledyard & Milburn LLP’s Insolvency and Creditors’ Rights Group where he often advises on art related matters.

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In the art world, as in many other areas of commercial activity, it is not uncommon for works to be sold on a so-called “conditional sale” basis; i.e., in which the purchase price is not fully paid on or before delivery of the work, but rather is made in periodic installments. It is customary for conditional sale agreements to provide that legal title will not be transferred to the buyer until the full contract price has been paid, but what has appeared to escape notice by many art sellers, among others, is the fact that a specific statute (Article 2 of the Uniform Commercial Code) effectively negates that provision. Section 2-401 of the Code provides that title passes to a buyer upon delivery in a conditional sale transaction, even where the sale agreement specifically provides that title isn’t transferred until all payments have been made.1 In place of title, the Code gives the seller a security interest, which means that the seller has the right to repossess the piece from his buyer if the payments are not made as specified.

As close readers of Spencer’s Art Law Journal are no doubt aware, almost any transaction in which an art owner or consignor parts with possession of a work prior to receiving payment in full presents the owner who relinquishes possession with the risk that subsequent events may impair the owner’s rights. A conditional sale is no exception.

What could happen? For example, a conditional sale buyer with title to the work, even though he may have paid only a fraction of the purchase price, can then legally resell the piece. While the original (owner) seller retains a security interest in the work as against his buyer, a subsequent purchaser with no notice of the nature of the original sale transaction will take free of that security interest, and if the original (conditional sale) buyer then defaults on his installment obligation to his seller, the seller may no longer have any right to recover the work and may be left with a worthless claim for the balance of the purchase price against his (conditional sale) buyer.

How then does a seller guard against this possibility? The answer is to perfect the security interest by filing a financing statement—Form UCC-1—with the appropriate state authorities. A UCC-1 may not be filed without having an underlying security agreement, but the conditional sale agreement will suffice for that purpose. If this rather simple step is taken, then all subsequent purchasers will be deemed to have notice of the original seller’s security interest.

Major caveat: if the buyer in the original conditional sale is a dealer or someone else who could be considered a “merchant” under the Code, even filing the financing statement will not protect the original seller by giving him a security interest in the art, since a buyer from a merchant in the normal course of that merchant’s business will take title to the art free of even a perfected security interest.

A financing statement should nevertheless be filed, since perfection protects secured parties in many different circumstances, but that topic has been treated in other issues of Spencer’s Art Law Journal and is beyond the scope of this essay.

New York, NY
May, 2013

Aaron R. Cahn
Carter Ledyard & Milburn LLP
Two Wall Street
New York, NY 10005
Email: [email protected]
Website: www.clm.com

Notes

1 Although many provisions of the Uniform Commercial Code are designed to be “default” provisions, subject to variation by agreement between the parties, it appears that this is not one of them. While the statute is hardly a model of clarity here, and can be subject to different possible interpretations, it appears, upon a close reading, that once the piece is delivered to the buyer, regardless of the financial terms, legal title will pass and the seller will be left with only a security interest.

We should note that the statute (2-401(2)) does provide for the possibility that a carefully-drafted provision can delay the passing of title post-delivery, but case law interpretations are sufficiently muddled that a seller cannot depend on contract drafting alone to protect his or her interests. The cases are Subaru Distributors Corp. v. Subaru of America, Inc., 2002 WL 188473, NYSD 2002; Diesel Props S.R.L. v. Greystone Business Credit II LLC, 07 Civ. 9580(HB), NYSD 2008, At Last Sportswear, Inc. v. Newport News Holding Corporation, 2010 New York Slip Opinion 32792(U), Supreme Court, New York County 2010.