The Art Law Report Providing timely updates and commentary on legal issues in the museum and visual arts communities

Change to New York Art Consignment Statute Adds Protections, Risks

Posted in Collections, Consignment, Legislation, Trusts

New York has passed an amendment to its Arts & Cultural Affairs law, N.Y. Arts & Cult. Aff. Law §12.01(2012), that is important for artist, galleries, and dealers alike.  It affects the consignment relationship and creates critical new duties—and liabilities, for the dealer on consignment.  Most importantly, it makes using any form of agreement drafted under the old law risky, particularly for the gallery or consignee.  Signed by Governor Cuomo this week, the law takes effect November 6, 2012.

Among the more notable art world scandals in recent memory is the collapse of the Salander O’Reilly Gallery, “one of city’s largest private galleries [] housed in an ornate, historic mansion on East 71st Street.”  Lawrence Salander and his gallery were charged with numerous counts of fraud, accused of “closing on fictitious sales—sometimes of works he did not own—and then using the money to pay off his sizable debt.  He sold the same piece to multiple parties or sold works without telling the owners, who had consigned them to Mr. Salander.”

The new law attempts to address this risk head-on by amending the provisions that deal with consignment.  Consignment as a general principle, whether of art, clothing, or other property, merely means that the consignor (here, the artist) entrusts the property (here, the art) to the consignee (here, the gallery) for sale under agreed-upon conditions, first and foremost the distribution of any resulting revenue.  This law addresses the consignment dynamic in the context of art.

First, the amended statute broadens the scope of the law itself, defining “successor in interest” of the artist considerably, to include categories like personal representative, testamentary beneficiary, trustee of a trust, heirs, and the like.  The upshot is that the class of persons who can enforce the rights under the statute has broadened.

Second, and most critically, it clarifies that under no circumstances can the artwork or proceeds that are held in trust be reached by the consignee’s (i.e., a gallery’s) creditors.  That is to say, even if an artist’s work is sold for $10,000,000, the gallery has no assets, and the creditors swoop in the very next day before the artist is paid her share, the creditors cannot touch that amount.  That cannot prevent outright fraud, but once a gallery/consignee is going underwater, it can protect the artists/consignors who have not yet settled up.

Lastly, even though the previous version of the law used language of “trust” to describe the property held by the consignee, the new law makes clear that any failure to obey the statute’s directives is not merely a breach of the contractual relationship between the parties, it is a breach of fiduciary duty, misconduct that generally entitles a plaintiff to a greater scope of damages, and which bars the defendant/consignee from raising certain kinds of defenses when self-dealing may be involved.  Moreover, a prevailing artist/consignor will recover her attorneys’ fees, a substantial risk and the exception to the traditional “American Rule” that all parties bear their own attorneys’ fees in civil cases, regardless of who wins.

As before, the protections of the statute cannot be waived prospectively, but that safeguard has been bolstered now to bar any waiver absent “words which clearly and specifically apprise the consignor that the consignor is waiving rights under this section with respect to proceeds from the sale of the consignor’s work. . . .”

Taken together, these changes affect any consignment situation in New York in important ways.  Clearly, the consignee/gallery party has a heightened duty and far greater risk in the event of a failure to adhere to the new provisions.  Artists and their successors now have additional tools to vindicate their rights.  And, most importantly, almost any standard contract form being used (not actual contracts already in existence, which are not affected) will be obsolete on November 6, 2012, when the law goes into effect.  Whatever protections galleries in particular thought they had about waiver and liability may no longer be effective.  Anyone involved in these kinds of transactions should review and consider their rights carefully with an attorney.