Decade(s) Later: New York Arts & Cultural Affairs Law 12.01

October 23, 2023

Reprinted with permission from the NYS Bar Association, this article first appeared in the EASL Journal, 2023, vol. 34, no. 1.

By Atreya Mathur, Dean Nicyper and Irina Tarsis^[1]

Since 1966, Article 12 of New York Arts and Cultural Affairs Law (“NYACAL” or the “Statute”) has protected the rights of artists, their estates, and their heirs in their dealings with art merchants, at least in theory. The law changed over the decades and most recently was strengthened in 2012 after a major art gallery, Salander O’Reilly Galleries, was found to have sold many consigned works without paying consignors (artists and collectors), spent the sale proceeds, and ended up in bankruptcy. Today, under the Statute, art merchants are required to act as fiduciaries regarding art consigned to them by artists. Dean Nicyper, one of the attorneys instrumental in drafting and lobbying to pass the 2012 amendments to the law and a co-author of this article, has been quoted as saying “What we found in New York was that the galleries were not respecting [the law] … Galleries sold paintings and they did not separate the sale proceeds as trust funds, but the legislation did not include any penalties. It said, ‘galleries may not use artist’s sale proceeds for the gallery’s operations,’ but it did not say what would happen if they did.”^[2]

Legislative History

The legislature’s intention in enacting Article 12 was to provide a measure of protection to artists in their relationships with dealers who sell their artwork, including safeguarding artists against misappropriation of art or of the proceeds from the sale of that art.

Article 12 creates standards and obligations that govern certain aspects of the business relationships between artists and dealers. Whereas the artist and their dealer are free to determine the specifics of their relationship, such as the amount of the dealer’s commission, the duration of consignment, nature of the representation – exclusive or not, or how specific production, insurance and shipping expenses might be shared, Article 12 focuses on terms designed to ensure that unsold works of art are returned to the artist and that proceeds from the sale of the consigned art are paid to the artist. Most of these statutory provisions cannot be waived, even by a written agreement. Since artists and/or dealers may be unaware of this law, certain enforceable terms of a consignment agreement may be different from negotiated terms that parties unaware of the statute believe to be in place. Whereas most relationships between artists and dealers are mutually beneficial and devoid of conflicts, multiple instances of violations of the law have been recorded and even litigated. The negotiation powers of artists and dealers (historically) have varied depending on reputation, name brand recognition, and many other factors. A valid and enforceable contract between the two parties, however, is the solution for protecting the interest of the artists who need galleries to show and sell their works and the interests of galleries that invest in cultivation and study of artists’ works. It is essential for both artists and galleries to understand their rights established by the laws, and for dealers to be aware of the legal obligations imposed on them by these laws which are not subject to negotiation.

When enacting Article 12, the New York Legislature recognized the inevitable imbalance of power between artists and their galleries. Developing artists often have little bargaining power in negotiating terms with their dealers and enforcing those terms through the close of that relationship. While the vast majority of these relationships proceed without serious problems, there have been many publicized and non-publicized instances in which galleries have used their on-average superior bargaining position to the detriment of certain artists. Worse yet, there are ample examples of galleries that have failed to return consigned works to their creators or failed to pay artists their share of sale proceeds.^[3]

Before NYACAL, consignments in New York were governed by New York’s General Business Law. Prior to Article 12 of the General Business Law, sales on consignment between an artist and a dealer were regulated largely by the Uniform Commercial Code (UCC). Under the UCC, as a general rule, all types of goods held on consignment (not just art) are subject to claims of the consignee-dealer’s creditors while in the consignee’s possession unless the consignor has complied with the UCC’s requirements of publicly filing a notice stating that the consignor holds a security interest in the consigned work of art. For example, many dealers rely on a revolving line of credit with a bank to balance the inconsistencies in cash flow in the dealers’ business. To protect itself from a dealer’s default on the line of credit, the banks commonly require that the dealer give the bank a security interest in all of the dealer’s inventory as collateral for the loan. Under the UCC, that inventory includes not only the goods the dealer owns, but also includes goods that are on consignment to the dealer.^[4] The UCC therefore provides that where a consignor delivered goods to a dealer on consignment, and the dealer subsequently becomes bankrupt, the dealer’s creditors are entitled to sell goods that the dealer owns as well as goods on consignment with the dealer to cover any amounts remaining on outstanding debts. In certain instances, consignors may file UCC-1 notices to demonstrate their perfected interest in the consigned property in order to protect themselves from having their property included in the bankruptcy proceeding. In other instances, consignors need to negotiate with the gallery’s bank to exclude the art they consign from the bank’s loan collateral.

In 1966, the New York Legislature enacted Article 12, which was originally part of the General Business Law of New York. At that time, the Legislature strived to protect artists from dealers’ misappropriating artists’ consigned works of art. In the initial statute, a violation of its provisions guarding against misappropriation by the dealer constituted larceny under New York’s penal laws. Initially, Article 12 did not focus on the fact that under the UCC, works of art consigned by artists were subject to banks’ creditor claims. In 1969, however, the statute was amended to protect an artist’s interest in the proceeds from the sale of the artist’s art in addition to the artist’s interests in the art itself. The amendments at that time deemed the art to be trust property and the sales proceeds to be trust funds in the hands of the gallery for the sole benefit of the artist. In 1975, the New York legislature clarified that an art gallery’s creditors do not hold an interest in works of art consigned by artists or the proceeds from sale of those works, which they otherwise would have held under the UCC’s consignment laws. Article 12 therefore made art consigned by artists an exception to the UCC rule regarding consigned goods.

Since 1975 and through today, Article 12 has granted a special status to artists, as compared with other consignors (e.g., art consigned by collectors is not excluded from the rights given to banks under the UCC), and imposes greater responsibilities on dealers with respect to artist-consigned works of art. But, while the statute in the early 2000s set forth clear obligations and standards, it contained no enforcement mechanisms. The statute’s original 1966 criminal provisions were removed from the statute decades ago and no penalties or enforcement provisions were put in place to replace them. The closure of the Salander O’Reilly Galleries and its subsequent bankruptcy proceedings between 2007 to 2010 brought into clear focus the fact that the statute lacked penalties and enforcement procedures to deter dealers from absconding with artists’ works of art or their sale proceeds.

The Closure of the Salander O’Reilly Gallery

In 2007, Salander O’Reilly Galleries was a high-profile gallery that had been in operation for over 20 years in New York. The gallery built relationships with several artists, artists’ heirs and artists’ estates and had possession or control of hundreds of works of art consigned by them all. The gallery sold many of those works of art and co-mingled the sales proceeds that belonged to the artists, artists’ heirs, and artists’ estates with the gallery’s own funds.

In the early to mid-2000s, Salander O’Reilly Galleries (the “Gallery”) had the appearance of being enormously successful. However, at an increasing frequency in the early to mid-2000s, when the Gallery sold art pieces, it spent the sale proceeds on its own operating expenses even though the gallery had been required by Section 12.01 to keep those artist sale proceeds as “trust funds”. By spending the sale proceeds elsewhere, the gallery was unable to pay its artists and other consignors the sales proceeds owed to them. These facts came to light through the many lawsuits filed against the Gallery and in the Gallery’s bankruptcy proceedings.

Lawsuits began to be filed against the gallery in 2006 and 2007. An involuntary bankruptcy petition was filed in October in 2007, which the gallery subsequently converted into a voluntary bankruptcy petition under Chapter 11 of the U.S. bankruptcy laws. The gallery’s principal, Lawrence Salander, was indicted and pleaded guilty to fraud and larceny charges.^[5] Gallery Director, Leigh Morse, was convicted on April 6, 2011 of defrauding artists’ estates.^[6] The gallery itself, however, was not charged with co-mingling or misuse of funds belonging to artists, their heirs, or estates. “Millions of dollars owed to artists, their heirs or estates went unpaid. Since the gallery’s debts far exceeded its assets, creditors attempted to claim the consigned works of art in the gallery’s possession or control as assets of the estate.”^[7] The gallery’s bank also argued that artists’ estates had no standing to assert the artists’ right to art as trust property and to sales proceeds as trust funds.

The Salander O’Reilly Galleries debacle highlighted the fact that valuable substantive provisions of Section 12.01 were not accompanied by any penalties or enforcement mechanisms if galleries failed to comply with its substantive provisions. It was this irreversible loss of many artists’ art and sales proceeds that led the New York Legislature to amend Section 12.01 of the NYACAL in 2012 to strengthen protections for artists, and to reintroduce criminal penalties for art merchants that failed to meet their fiduciary obligations that were recognized under the statute’s provisions.

First, the Legislature addressed who has standing to enforce the law governing consignments, clarifying that those who are successors to the artist’s interests through the administration of the artist’s estate could pursue claims against breaching galleries. It expressly provided that the terms “heirs” and “personal representatives” as used in Section 12.01 referred to those same terms as they are defined in New York’s Estates, Powers and Trust Law.

Second, the 2012 Amendments strengthened the fact that works of art consigned by artists, crafts persons, or their heirs or personal representatives to art merchants are property held in “statutory trust” that shall not become the property of the consignee or become subject to the claims or security interests “of the consignee’s creditors.” It provided the same clarification regarding the proceeds from sales of art consigned by artists, specifying that those sales proceeds were “trust funds” not subject to claims, liens or security interests “of the consignee’s creditors.”

Third, the Amendments provided that galleries and artists could not agree to waive the trust fund provisions of the statute.

Fourth, the Amendments provided that if a gallery failed to comply with the trust property and trust fund provisions of the statute, the failure to comply would constitute a violation of both Article 12 and also of Section 11-1.6 of the Estates, Powers and Trusts Law, which clarifies obligations of fiduciaries and includes criminal misdemeanor penalties.

Fifth, the 2012 Amendments clarified that persons injured by violations of the statute had a private right of action.

Sixth, the Amendments provided that if an artist established a prima facie case that the artist had delivered art to a gallery and demanded return of the art or sale proceeds, the gallery would have the burden of proving its defenses to that claim.

Seventh, and maybe most importantly, the 2012 Amendments provided that artists who prevailed in bringing claims against breaching galleries could recover the legal fees they incurred in bringing such claims.

The Amendment did not alter the statute’s specification that it expressly overrides contrary provisions of other law, including New York’s Uniform Commercial Code, but it added a specification that the statutory trust property/trust funds are not subordinate to claims, liens or security interests of an art dealer’s (or other consignee’s) “creditors.” The Amendments thereby reinforced and clarified the statute’s trust property and trust fund provisions.

An important feature of Article 12 of the NYACAL is that it creates a strong fiduciary relationship between artists and art merchants, which gives rise to a heightened duty of loyalty and care by the art merchant to the artist. The law sets basic terms that govern the relationship, even if the parties never enter into any oral or written agreement. Both artist-consigned art and any proceeds from its sale are trust funds for the benefit of the artists. “Traditionally, most deals between artists and dealers are sealed with a handshake. The NYACAL protects artists even in the absence of a consignment agreement.”^[8] The imbalance of power and the need to adequately protect the artist were key factors in strengthening the provisions of NYACAL.

Impact of Legislation on Case Law

Since the 2012 Amendment, several courts have ruled on Article 12’s Section 12.01 provisions, developing a body of case law that further clarifies the extent of the law. For example, several courts have held in favor of artists who have taken advantage of the 2012 Amendments’ attorneys’ fees shifting provisions. Recently, in Miriam Dougenis v. Peter Marcelle Project, (Judge Andrew Borrock), the court granted plaintiff’s motion for attorney’s fees pursuant to NYACAL 12.01[3] and transferred the case to a special master to determine the amount. The parties then agreed by stipulation to set the amount of attorney fees at $56,345.21.^[9] The award for attorney fees was an amount in addition to the award for damages for the missing art that Plaintiff Dougenis, now a nonagenarian artist, consigned to her gallerist years earlier.

Another court, in Stacy Leigh v. Castor and Pollux Ltd, (Judge Arlene Bluth), awarded damages, including $78,000 in attorneys’ fees and expenses in an inquest after a default judgment was granted against the defendant. The court also found punitive damages in the amount of $100,000 was appropriate because of “defendants’ egregious conduct in taking artwork on consignment and then ignoring all duties and statutes pertaining to said relationship.”^[10]

Courts construing the statute after 2012 have also emphasized the strength of the trust property and trust funds provisions. For example, in Paula Scher v. Stendhal Gallery, Inc., an artist consigned paintings to the gallery and licensed the gallery to publish prints of the artist’s “Maps” works.^[11] The artist terminated the contract with a gallery, and retrieved some original works, but the gallery refused to return unsold prints and two signed artist proofs. The artist contended that she owned all prints and that the gallery held all prints and sale proceeds as trust property under the NYACAL. The gallery refused to return the prints on the ground that the artist had allegedly breached obligations to the gallery and that the gallery was in perpetuity entitled to 90% of the sale proceeds of any prints. The court held that case law construing Section 12.01 confirms that “the artist is the owner of artwork consigned for sale with an art gallery and is entitled to possession after the parties terminate their relationship.”^[12] The court explained that the defendants, just like the defendants in Wesselman v. International Images, Inc., could not be successful in arguing that their financial investments in publishing prints rendered the consignment and trust provisions of Section 12.01 inapplicable. ^[13] Nor could the defendants succeed with their argument that there had been no “delivery” of the prints to the gallery as required by Section 12.01. Contrary to the gallery’s arguments, the court found that an artist’s approval and signing of finished prints before they were sold constituted delivery under Section 12.01 and that the gallery’s financial investment in publishing the prints did not render the consignment and trust provisions of Section 12.01 inapplicable.^[14] The court held that the appellate court’s decision in Wesselman compelled a ruling that the artist was the owner of the prints.

Since the last set of NYACAL amendments ten years ago, courts have also made clear that the Section 12.01 law applies not only to artists while they are alive but also to their estates and beneficiaries after their death, applying the 2012 Amendment’s broader scope of parties having standing to pursue claims against art merchants.

For example, in Mesbahi v Blood, a case brought by the executor of an artist’s estate, the Third Department referred to Section 12.01 and its trust property and trust funds provisions to hold that provisions in a consignment agreement that specified that the agreement continued after the death of the artist and that all of the artist’s works were to be transferred to the dealer after the artist’s death did not transform the consignment agreement into an agreement creating a trust, as the dealer had argued. Instead, the court emphasized statute’s clause providing that “no such trust property or trust funds shall become the property of the consignee” and ruled that the estate executor could terminate the agreement and retake possession of the art.^[15]

In Khaldei v Kaspiev, the heir of a deceased photographer sued the photographer’s agent for possession of photographic prints and negatives. The agent argued that he had paid $7,500 for a half interest in all 261 photographs consigned by the photographer as well as 3031 negatives, and therefore was a co-owner of all of them. The Court explained that “under the [NYACAL], an art merchant’s financial investment in an artist’s work does not transform an otherwise valid consignment into an outright sale unless and ‘until the price [of such work] is paid in full.’”^[16] The court also quoted the statute’s provision that any waiver of the statutory protections is absolutely void. When the agent argued that some prints were missing, the court ruled that where “‘a Bailee fails to return a bailor’s properly, there is a presumption of liability, and if the property cannot be found, a prima facie case of negligence exists.’”^[17] Plaintiff alleged that the agent wrongfully withheld the negatives until 2011, years after her 1999 demand for them, and that during that period, the agent tried to sell them to obtain 50% of the sale proceeds. Although the agent argued he was entitled to withhold the negatives until he was paid his $7,500 investment, the court explained that “[u]nder the [NYACAL], artwork held by an art merchant as trust property is not subject ‘to any claims, liens or security interest of any kind or nature whatsoever.’”^[18] In addition, under the faithless servant doctrine, the court dismissed the agent’s counterclaim for a share of the royalties from sales of negatives which had occurred during the period the agent had refused to return the negatives to the artist’s heir.

Conclusion

The sampling of court decisions above, issued since the 2012 Amendments demonstrates that artists are indeed taking advantage of Section 12.01 to protect their rights and reduce legal costs. Additional cases brought under NYACAL Section 12.01 also show that some artists who do not neatly fit within the statute’s provisions have asserted creative arguments to try to come within the protections of Section 12.01. Artists entering into consignment agreements with dealers will benefit from specifying that the agreement is governed by New York law. Where the artist and dealer reside in New York and the consignment is in New York, the NYACAL provisions should automatically apply. Even if the artist and dealer do not reside in New York, if their consignment agreement specifies that New York law applies and that New York courts are the exclusive forum for resolving disputes, the artist still should be able to benefit from the application of the NYACAL provisions. Litigation is an expensive dispute resolution mechanism and plaintiffs who rely on litigation often have to wait years to get justice and to recover their art or sale proceeds under Section 12.01 together with any attorney fees. Nonetheless, the NYACAL statute offers much needed protection for artists whose comments on our human condition enhance so many people’s lives in so many ways. Caveat venditor.

About the Authors

Atreya Mathur is the Director of Legal Research at Center for Art Law.

Dean R. Nicyper is a partner in the litigation and arbitration team at Withers Bergman LLP, New York. Dean provided the leadership as chair of a bar association sub-committee that drafted and lobbied for the enactment of New York legislation detailing the rights and obligations of dealers and artists in art consignment relationships.

Irina Tarsis is the Founder & Managing Director of Center for Art Law. She represented multiple artists in court in connection with violations of NYACAL Section 12.01.

Sources:

1. The authors would like to thank Louise Carron and the Center for Art Law research efforts in preparation for this article. ↑
2. Tarsis, Irina, Cave Consignor! NY Art Consignment Law Muscles Up (2012), Center for Art Law, available at https://itsartlaw.org/cave-consignor-ny-art-consignment-law-muscles-up/. ↑
3. See for example, Scher v. STENDHAL GALLERY, 117 A.D.3d 146, 983 N.Y.S.2d 219 (App. Div. 2014). or ART WORKS, INC. v. AL-HADID, 2022 N.Y. Slip Op 31522 (Sup. Ct. 2022). ↑
4. See generally Nicyper, Dean and Gipson, Lissa, Rights of Lenders Accepting Works of Art as Collateral, N.Y. STATE BAR ASSOC. ENTM’T, ARTS, AND SPORTS L. J., Vol. 17, No. 1 (Spring 2006). ↑
5. In re Salander O’Reilly Galleries, 453 B.R. 106 (Bankr. S.D.N.Y. 2011) ↑
6. Reuters, Ex-director of New York art gallery guilty of fraud, Reuters (Apr. 6, 2011), available at https://www.reuters.com/article/us-crime-art/ex-director-of-new-york-art-gallery-guilty-of-fraud-idUSTRE7356KF20110406; also see Boroff, Philip, Leigh Morse, Convicted in Salander Ponzi Scheme, Denied Restitution Reprieve, ARTnews (Jul. 17, 2015), available at https://www.artnews.com/art-news/market/leigh-morse-convicted-in-salander-ponzi-scheme-denied-restitution-reprieve-4564/. ↑
7. Prowda, Judith, Significant Legal Developments in Visual Art: Looking Back, Looking Forward 25 Years, NYSBA Entertainment, Arts and Sports Law Journal (Spring 2013, Vol. 24, No. 1), available at https://nysba.org/NYSBA/Publications/Section%20Publications/EASL/PastIssues2000present/Spring2013/Spring2013Assets/EASLJSpr13.pdf. ↑
8. Id. ↑
9. Miriam Dougenis v. Peter Marcelle Project, No. 652133/2018 (NY Supreme decision filed 7/9/20) ↑
10. Stacy Leigh v. Castor and Pollux Ltd, 654923/17 (Sup Ct NY Cnty.) ↑
11. Paula Scher v. Stendhal Gallery, Inc., 2011 N.Y. Slip Op. 34078 (N.Y. Sup. Ct. 2011) ↑
12. Id. ↑
13. Wesselman v. International Images, Inc., 172 Misc.2d 247 (Sup. Ct., NY County 1996), aff’d 259 A.D.2d 448 (First Dep’t 1999) ↑
14. Scher v. Stendhal Gallery, 117 A.D.3d 146 (N.Y. App. Div. 2014) ↑
15. Mesbahi v Blood, 172 A.D.3d 1580 (3d Dept 2019) ↑
16. Khaldei v Kaspiev, 135 F.Supp.3d 70 (SDNY 2015) ↑
17. Id. ↑
18. Id. ↑