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December 21st, 2012
New York Strengthens Law Governing Consignments From Artists to Galleries
The New York Legislature recently enacted amendments to the statutory provisions governing the consignment of art from artists and their successors to galleries. These amendments, which became effective Nov. 6, 2012, strengthen the provisions requiring galleries to separate and hold in trust the artwork and sales proceeds owed to consignors. Galleries that disregard these obligations may now be criminally sanctioned, and may have to pay attorney fees to artists in civil suits.
Prior to its amendment, Article 12.01 of the New York Arts and Cultural Affairs Law (NYACAL) provided that the consignment of artwork by an artist, her heirs or her personal representative to a gallery creates a trust relationship as to the unsold artwork and the proceeds of sold works. Under this trust relationship, the gallery/consignee owes fiduciary obligations to the consignor, including the obligation to hold the artwork as trust property and the sales proceeds as trust funds for the benefit of the consignor.
Additionally, the statute provided that neither such trust property nor such trust funds would be subject to or subordinate to any claims, liens or security interest of any kind. The statute provided that, except with respect to the first $2,500 of sales proceeds each year, the obligation to hold sales proceeds in trust could be waived by a clear, conspicuous waiver signed by the consignor.
Although the pre-amendment NYACAL required galleries to hold artists' works and sales proceeds in trust, it did not include any enforcement or penalty provisions. The lack of such provisions enabled galleries to commingle trust funds with their operating accounts and use consignors' sales proceeds for the galleries' operating expenses. See New York City Bar, Report on Legislation by the Art Law Committee, A.8604-B & S.4988-B (May 2012) (NYCBA Report) at 1-2. When such galleries failed financially, consignors were unable to recover the amounts owed to them, and were also vulnerable to claims to the consigned works by the galleries' creditors. Unable to pay legal fees to challenge the creditors' claims, artists and their heirs in many cases had to pay the galleries' bankruptcy estates to buy back the artwork.
In an effort to curb these statutory violations, the amendments to the NYACAL add teeth to the statute. The amendments also clarify certain provisions to prevent unintended interpretations that conflict with the purpose of the statute.
First, the amendments specify the fiduciary obligations of the consignee. The amended statute provides that galleries must treat trust property and trust funds in accordance with the requirements of fiduciaries as set forth in Section 11-1.6 of New York's Estates, Powers and Trusts Law (EPTL). See NYACAL §12.01(2). That law requires fiduciaries to keep fiduciary property separate from the fiduciary's individual property, and prohibits the fiduciary from depositing with a bank any such property under the fiduciary's own name, rather than under her name as fiduciary. See EPTL §11-1.6(a).
Second, the amendments criminalize certain statutory violations. See NYACAL §12.01(2) and EPTL §11-1.6(d). The pre-amendment NYACAL did not provide that a violation of the statute could subject a consignee to criminal penalties. Therefore, galleries that commingled funds or misused funds were not criminally charged for violating the statute. See NYCBA Report at 2. The amendments incorporate by reference the criminal sanctions provided in Section 11-1.6 of the EPTL, and therefore a consignee who fails to treat trust property in accordance with the requirements of Section 11-1.6 of the EPTL shall be guilty of a misdemeanor, and subject to criminal sentencing.
Third, the amendments provide an aggrieved consignor civil remedies. See NYACAL §12.01(3). Prior to amendment, one court noted that the lack of such remedies, including the right of a consignor to recover attorney fees, "appears to be a gap in the protections afforded to artists under [NYACAL] Section 12.01." Koeniges v. Woodward, 183 Misc.2d 347, 358, 702 N.Y.S.2d 781 (N.Y. Civ. Ct. 2000). The statute as amended provides a private right of action for those injured by a violation of the law, whereby the injured party may seek injunctive relief and damages, and attorney fees may be awarded to a prevailing plaintiff.
Fourth, the amendments clarify the beneficiaries of the law by defining the class of persons that qualifies for protection under Article 12 of the NYACAL. See NYACAL §§11.01(20) and 12.01(1)(a). The pre-amendment NYACAL provided that the statute applied when an "artist or craftsperson, his heirs or personal representatives" delivered a work of the artist's or craftsperson's own creation on consignment. Prior to the statute's amendment, gallery creditors challenged the rights of children of artists who consigned works, arguing that they did not qualify as "heirs" under the statute because they did not acquire the art directly from the artist, but rather acquired it from the artist's surviving spouse. See NYCBA Report at 2-3.
The Legislature specifically addressed this issue in the amendments, which delete the reference to "his heirs or personal representatives" and replace that language with the following: "or a successor in interest of such artist or craftsperson." "Successor in interest" is defined by the amendments to include a "personal representative," "testamentary beneficiary," trustee or beneficiary of a "lifetime trust" or an "heir" (including heirs who acquire the work from the artist or from another heir or beneficiary of the artist), as those terms are defined in the EPTL. NYACAL §11.01(20).
Fifth, the amendments clarify that the trust funds and trust property shall not be subject to claims by a gallery's creditors. See NYACAL §12.01(1)(a)(v). They expressly provide that the trust funds and trust property shall not be subordinate to any claims, liens or security interests "of the consignee's creditors." Id.
Finally, the amendments require a waiver to be based on informed consent. Per the amended statute, any waiver of rights by a consignor must "clearly and specifically apprise the consignor that the consignor is waiving rights…with respect to proceeds from the sale of the consignor's work." NYACAL §12.01(1)(b). Some claim that, by only modifying the statute's waiver provision rather than striking it, the amended statute still provides a loophole for galleries—they can avoid their fiduciary obligations by simply including a waiver provision in their consignment agreement, which artists, who generally lack sufficient bargaining power, will sign. Others claim that the amendments mark an improvement on the prior version of the law because a gallery can no longer obtain a waiver from a consignor without disclosing that the consignor has statutory rights with respect to sales proceeds.
In sum, the amendments to the NYACAL are significant for those involved in the consignment of fine art. They strengthen the provisions governing trust funds and trust property by adding civil enforcement and criminal penalty provisions. Additionally, they clarify the parties' respective rights in the context of fine art consignment, and foster artists' awareness of such rights.
Amelia K. Brankov is counsel to Frankfurt Kurnit Klein & Selz, and a member of the firm's art law and litigation departments.
This article first appeared in the December 21st, 2012 issue of the New York Law Journal. © 2012 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.
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