The Art of Bankruptcy: Consigned Artworks and Bankrupt Galleries

By Laurel Wickersham Salisbury.

When commercial art galleries display works of art for sale, they are either purchased by the galleries from artists or collectors outright or accepted on consignment. Due in large part to financial considerations, including sharing in the risk and reducing financial exposure, consignment has become a favored way for galleries to maintain their stock. Consignment is largely the moda operandi of commercial art galleries today. Whether dealing in works on the primary or secondary market, artists and collectors looking to sell artworks often entrust a dealer or gallery to sell the work on their behalf by taking possession of the art until the work is sold, at which time the former owner receives payment of an agreed-upon percentage of the sale price. This business arrangement tends to work often to the benefit of all involved, but there are times when consignment agreements become complicated: the art market and its businesses often face unsustainable profits and some galleries will have to file for bankruptcy. The question then arises: What happens to an artwork held on consignment when an art gallery files for bankruptcy? Consignors might expect that their unsold property would be returned to them, but bankruptcy law and the Uniform Commercial Code (“UCC” or “the Code”) may disappoint trusting and hopeful consignors. In fairly recent years, the bankruptcy proceedings of prominent galleries such as New York’s Berry-Hill and Salander-O’Reilly as well as Los Angeles-based ACE Gallery controversially demonstrate that repaying creditors may take precedence over compensating consigning artists and collectors.^[1]

Laying Down the Basics

As a rule, in a bankruptcy proceeding, the goal of one creditor is, essentially, to establish priority over the claims of other creditors. The applicable laws governing the ways in which claims are ranked tend to favor more business-savvy creditors and, thus, who gets the return of their assets first. With respect to consignors of artworks, artist-consignors and collector-consignors are not necessarily treated the same with regard to the status of their claim to their consigned artwork in a bankruptcy proceeding. In fact, thirty-one states^[2] have enacted statutory legislation to protect artists-consignors from the claims of creditors, while collector-consignors receive no such legal benefit. However, as a collector-consignor, if the proper paperwork is filed and maintained, this consignor too should feel confident in their right to seek the return of their artwork.