Consignment Catastrophes: Lessons from New York's Art Gallery Fraud

• Jurisdiction: New York,United States
• Publication year: 2014
• Citation: Vol. 10 No. 2

Washington Journal of Law, Technology and Arts Volume 10, Issue 2 Fall 2014

Consignment Catastrophes: Lessons from New York's Art Gallery Fraud

Megan Haslach(fn*) © Megan Haslach

ABSTRACT

The 2007 collapse of Salander O'Reilly Gallery in New York City caught the attention of New York's state lawmakers after artists and their heirs lost nearly $120 million in gallery owner Lawrence Salander's schemes. This scandal ultimately led lawmakers to enact major changes in the state's art consignment statute. The changes bolstered existing protections while adding additional safeguards for artists who choose to consign their works through galleries rather than selling them wholesale.

This Article will examine the relationship between consignors and consignees, highlighting major vulnerabilities that current consignment statutes create for artist consignors. In Section I, this Article will examine the benefits of consignment to both artists and dealers. In Section II, this Article will discuss the most common provisions in art consignment statutes that tend to leave artists unprotected in consignment deals. In Section III, this Article will examine New York's amended consignment statute, which alleviates all major concerns for artists, and will argue that New York has provided a model statute that all states should implement in order to provide a fairer balance in the relationship between artists and art dealers.

Finally, Section IV will briefly examine the potential benefits the statute can provide for artists asserting claims to protect their consigned works.

TABLE OF CONTENTS

Introduction .................................................................................. 126

I. Why Consign? ...................................................................... 127

II. Vulnerabilities in Consignment Statutes .............................. 128

A. Property Held in Trust ..................................................... 128

B. Attorney's Fees ................................................................ 129

C. Written Agreements ......................................................... 130

III. New York's Statute ............................................................... 130

A. Property Held in Trust ..................................................... 131

B. Attorney's Fees ................................................................ 132

C. Written Agreements ......................................................... 133

D. Other Notable Provisions ................................................. 134

IV. Future Effects ........................................................................ 135

Conclusion ................................................................................... 135

INTRODUCTION

In 2010, the art world watched as Lawrence Salander, the owner of the former Salander O'Reilly Gallery in New York City, was sentenced to six to eighteen years in prison after pleading guilty to 29 counts of grand larceny. (fn1) In 2007, a judge ordered the gallery closed.(fn2) That order was preceded by several lawsuits from Salander's investors and artists claiming, among other things, that Salander fraudulently sold multiple works of art and failed to pay back a number of loans.(fn3) All told, Salander's scheme had racked up nearly $120 million in damages.(fn4)

While many of Salander's investors suffered their fair share of monetary losses, perhaps most affected were many of the artists Salander had worked with.(fn5) When the gallery's finances became imperiled, Salander began selling a number of paintings given to him on consignment without permission from the artists.(fn6) He often sold these pieces at prices that were well below what the pieces were actually worth in order to satisfy his other debts. A number of artists and their families also alleged that Salander had sold multiple pieces that were given to him for storage purposes only, leaving the original owners without their works of art or compensation for any of them. Those parties claimed that they never authorized Salander to sell the pieces. They only accepted Salander's offer to hold the artwork in his gallery for safekeeping.

News of the gallery's collapse caught the attention of New York lawmakers, who quickly worked to amend the state's art consignment statute to prevent such harm to other artists in the future.(fn7) The amendments passed in 2012 provided a number of protections to artists selling their works on consignment against dealers using techniques like Salander's.(fn8)

I. WHY CONSIGN?

Consignment has become more prevalent in the art world after the recent global economic crisis. Galleries with little cash on hand often prefer to obtain works on consignment because purchasing pieces to sell can be prohibitively expensive. Consignment allows galleries to save their cash reserves and pay the artist only after their works sell.

Consignment is often an attractive option for artists as well. Many artists who cannot or simply do not want to spend their time selling their works will often turn pieces over to galleries for consignment. These agreements give artists the opportunity to have their pieces sold by professional sellers, thus giving the artist more time to create rather than run a business. In addition, artists are often able to obtain favorable fee splits with galleries that ultimately net the artists more money than they would have made selling their works wholesale to dealers.

However, consignment agreements can also leave artists quite vulnerable in many ways. Notably, as will be discussed in more detail below, many states do not afford sufficient protections to artists who consign their works. Thus, artists without access to legal counsel often do not know what to look for or what questions to ask when entering such agreements. This lack of knowledge ultimately places artists on unequal footing when contracting with savvier dealers and galleries.

II. VULNERABILITIES IN CONSIGNMENT STATUTES

To date, 33 states have art consignment statutes.(fn9) Though the statutes vary widely, many address the same key issues. In addition, such statutes frequently create the same vulnerabilities for artists. Three significant weaknesses are often present in such statutes: little to no regulation of how dealers are to place works and profits in trust for the artist; a lack of attorney's fees for prevailing plaintiffs; and no requirement for written consignment agreements. These issues can create significant problems for artists when consigning their works.

A. Property Held in Trust

One common provision in many states' consignment statutes is a requirement that galleries hold the artist's works and any profits from their sale in trust for the artist, thus creating a fiduciary duty to the artist.(fn10) However, most statutes are silent on how the consignee is to handle the property they hold in trust.(fn11) In most states, galleries are able to comingle their business funds with consignment profits without being subject to penalties.

Though some states do specify that the consignment proceeds must be protected from the gallery's creditors,(fn12) most statutes do not include this provision. Without this protection, artists' profits in those states are vulnerable to seizure by third parties if the gallery goes bankrupt. While there certainly are remedies for breach of fiduciary duties, the high cost of legal counsel can often limit many artists' ability to seek help, especially in such disputes where their expected profits from completed sales are being held from them. Even if artists are able to afford legal counsel, they are often limited to seeking restitution from a failing gallery or through impending bankruptcy proceedings. This makes it extremely unlikely that the artist will recover much, if anything, for their previously sold or lost works.

B. Attorney's Fees

Of the states that have art consignment statutes, most do not address the issue of attorney's fees.(fn13) While the traditional American rule, where each party pays their own legal costs and fees, is generally the default when statutes are silent on the issue,(fn14) this requirement can create a significant burden for artists seeking to enforce prior agreements or protect their works in a dispute. Many artists choosing to consign their works are not highly paid; they create art as a hobby or side project. Thus, when faced with the choice between paying costly legal fees or simply dropping the matter, many artists may think twice about using the courts to settle their disputes.

C. Written Agreements

Though some states, such as Georgia,(fn15) require that all or portions of consignment agreements be reduced to writing, most do not have this requirement.(fn16) Informal verbal agreements that take the place of written agreements put both parties to an agreement at risk. However, artists in particular, especially those without experience selling their own works, can be taken advantage of in this context. Like most of the general population, inexperienced artists are not always aware of what their rights are in a contract negotiation. A savvy gallery owner or dealer who is more familiar with consignment practices and transactions could...