Wednesday, July 18, 2012

If you consign a work to a gallery, and the gallery goes bankrupt, can the gallery's creditors reach your work? (UPDATED)

Answer:  yes, according to a recent Southern District ruling, involving the Salander-O'Reilly bankruptcy, discussed here.

The holding is that "a creditor could obtain a security interest in a consigned item senior to that of a consigneee who does not file a [UCC] financing statement":  "The law operates as follows: a consignor delivers goods to a [gallery], but does not file a financing statement, and thus the consignor's security interest is unperfected.  The [gallery] then grants a security interest in the consigned item to a creditor, who perfects [the security interest] by filing a proper financing statement."  In those circumstances, "the creditor's rights are senior to" the consignor's unperfected security interest.

The idea behind the rule is "to protect general creditors of the [gallery] from claims of consignors that have undisclosed consignment arrangements with the [gallery] that create secret liens on the inventory. To a general creditor of [Salander-O'Reilly's] such as the Bank, which could base the amount of a loan on the inventory possessed by a consignee, consigned property appears to be property wholly owned by the consignee unless the consignor files a UCC-1 financing statement, which notifies creditors of the status of a consigned item."

UPDATE:  I should have mentioned that this doesn't apply to consignments by artists (at least in New York), which are given special statutory protection.