What if your gallery goes bankrupt?

A lot of misfortunes can befall an artist: His studio burns down, her work is stolen, one or more pieces are damaged in transit. Here’s another, the artist’s dealer declares bankruptcy, and the artworks in the dealer’s possession are part of the assets that creditors are claiming. Banks, suppliers and contractors all get in line to assert their right to have their debts paid off first, and artists (and artists’ heirs) who have consigned their work to the dealer have to jockey for position. Will an artist have to cross swords with a bank?

No. Under New York State’s Arts and Cultural Affairs law (and similar laws of 30 other states around the country), the consigned artwork is deemed to be held in trust, beyond the reach of the dealer’s creditors, and the artists or their heirs have priority to their work. It should not be used to pay off the dealer’s debts. The process by which that would happen is that the artist or artist’s heir files a proof of claim with the bankruptcy court, stating that he or she is the artist or the heir of the artist whose work was consigned. Helpful in the process is a signed and dated consignment agreement between the artist and the dealer, which identifies the particular artworks being consigned to the dealer. More about consignment agreements.

The Arts and Cultural Affairs law also stipulates that if any consigned pieces were sold, the proceeds of the sale also must be held in trust, and the artist or artist’s heir has priority over other creditors in retrieving that money. If no escrowed money is found or the money has been spent by the dealer, the artist or heirs may join the list of creditors in the bankruptcy process.

(Consignors to an art gallery who are not the artist or the heir of an artist may gain that priority standing if they have filed a Uniform Commercial Code form, which exists on the state level in every state, in person or online through the Department of State of the particular state in which the gallery is located at the time in which the object was consigned. The cost of filing the form is usually under $50. There is no need to fill out a separate form for each artwork, as multiple pieces may be identified on a single form.) Here is an example of a UCC form from Texas.

Unfortunately, the process of retrieving one’s artwork is not immediate. Bankruptcy courts establish an elaborate and formalized protocol by which creditors can put forth their claims, some of which take precedence over others, and the process can take years. Banks, generally, are first in line to be reimbursed (theirs are “secured” claims), followed by suppliers and others (who have “unsecured” claims). The telephone company might be the last to get paid, and its bill might not be paid at all if the dealer’s assets have been exhausted. New York’s Arts and Cultural Affairs law, however, places artists and their heirs ahead of the banks.

What also may hold up the process, as far as artists and their heirs are concerned, is if any of the other creditors raises an objection to the artist receiving priority. If that occurs, the dispute will need to be resolved in front of the judge. Another delay may occur when the dealer places artworks in a fine art storage warehouse before declaring bankruptcy.  The artist’s pieces cannot be retrieved until the warehouse is paid, and that payment may remain tied up in the overall bankruptcy process, and in the end there may be no money left to pay the warehouse. The artist him- or herself may just have to pay the warehouse to get the artworks back.

The other 30 states with art consignment statutes are Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Florida, Georgia, Idaho, Illinois, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Hampshire, New Jersey, New Mexico, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Texas, Washington and Wisconsin. New Jersey’s consignment law is described here.

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