01 April 2020 - Podcast
If, as a collector, you wish to sell your art in New York, you generally deliver it for that purpose to a private dealer. When the dealer takes custody of your art, the relationship that arises between you and the dealer is one of consignment: that is, you, the seller/consignor, retain ownership of the art, you may retrieve the art, and you participate with the dealer/consignee in setting the sale price for the art. When the art is then sold, the dealer receives a sales commission – but not the profits of the sale.
But what happens to your ownership rights in the art if the dealer becomes insolvent or files for bankruptcy while the art is in his possession? Or if the dealer pledges your art as collateral for a loan?
In New York, as indeed in practically all states of the United States, consignments by collectors to art dealers are governed by the revised Uniform Commercial Code (UCC). Collectors often do not realize that under the UCC, the mere delivery of an artwork to a dealer may imbue the dealer's secured creditors with rights in the artwork superior to those of the collector himself. This priority of values favouring the creditor is in consonance with one of the purposes of the UCC: to enhance the reliability of commercial transactions by encouraging those with ownership interests in goods to proclaim such interests publicly, thereby protecting lenders against secret reservations of ownership interests in goods.
How then, in view of the UCC, do you as a seller/consignor protect your ownership interests in your consigned art? The solution is to memorialize your relationship with the dealer in a signed agreement setting forth the parameters of the consignment. This consignment agreement should address, among other provisions, the following terms:
- Establishment of the principal-agent relationship authorizing the dealer to complete the sale of the work(s) on your behalf within a specified time-frame and territory;
- The sales price of each work you consign;
- The amount of sales commission payable to the dealer;
- Warranties by you, the seller, of clear and marketable title to the work;
- Allocation of expenses, between you and the dealer, for the art's shipment, packing, insurance, advertising, condition reports and related matters;
- Terms of payment from the buyer; and, most pertinently here,
- The granting by the dealer to you of a security interest in each of the artworks you consign to the dealer.
Specifically, the consignment agreement should provide that the dealer grants you, the owner, a security interest in each work of art you consign (and any proceeds thereof) until the artwork is sold, at which point the resultant sale proceeds are held by the dealer on your behalf and delivered to you (minus the dealer's sale commission) as specified in the agreement.
The consignment agreement should also provide that upon its execution, the dealer authorizes you to file a Form UCC-1 Financing Statement without the dealer's signature. Your filing of the Form UCC-1 serves to provide notice to the public of your security interest in your art, and in the event the dealer defaults under the consignment agreement, you will have all of the rights of a secured party under the UCC. Additionally, the consignment agreement should require the dealer to inform any other secured creditor as well as any purchaser of your art of the existence of your security interest in the art (and in the resultant proceeds). You, in turn, should agree to file a Form UCC-3 terminating your security interest in the art once you receive from the dealer your proceeds from the sale of the art.
Finally, because the legal effect of the filing is only state-wide the consignment agreement should require the dealer not to remove your artwork(s) from the state in which it is filed without your prior written consent. Note also that the filing is made, as a rule, in the state where the debtor (dealer) is located.
Both the Form UCC-1 and the Form UCC-3 are standardized. Law firms and lien search companies are able to fill them out on your behalf – or you yourself can do so by following the directions set forth on the forms themselves. One website which offers such forms for purchase and provides some information in general about UCC filings is www.blumberg.com/forms/uccletter.html. Filing Forms UCC-1 and UCC-3 as part and parcel of consignment transactions is a relatively simple and inexpensive procedure that should be done as a matter of course to protect your interests in your art assets.