We typically believe that if we entrust our property to someone else to sell it, the property remains ours until it is sold. However, this may not always be true. If the party into whose hands property has been entrusted files for bankruptcy, the entrusted property may be deemed to be property of the debtor’s bankruptcy estate and the bankruptcy trustee may have the right to sell the property and the debtor’s secured creditors and judgment creditors may even have a higher priority to receive distribution of proceeds from the property’s sale.     

This type of transaction is a “consignment,” which the Uniform Commercial Code (UCC) defines as “a transaction. . . in which a person delivers goods to a merchant for the purpose of sale.” UCC § 9-102(a)(20). To qualify as a consignment, the consigned artwork must have a value of not less than $1,000 and must not be “consumer goods.” UCC § 9-102(a)(20)(B). “Consumer goods” are those which are “used or bought for use primarily for personal, family, or household purposes.” UCC § 9-102(a)(23). Although many artworks will be considered consumer goods, particularly those consigned by art collectors, artworks that are held for investment purposes or which are consigned by art dealers, corporate entities (i.e., corporate collections), or museums are not consumer goods. Also, the party to whom the artwork is consigned (the consignee) must deal in artwork of that kind, must not be an auctioneer, and must not be generally known to sell artworks owned by others. UCC § 9-102(a)(20)(A).     

If the transaction qualifies as a consignment, the UCC provides important protections for the owner (the “consignor”). The consignor’s right in the consigned artwork is deemed to be a purchase money security interest, which gives the consignor a superpriority right to it, superior to the rights of other creditors. UCC § 9-103(d). However, this protection does not arise automatically. The consignor must perfect its consignment interest by (i) filing a UCC-1 financing statement describing the artwork before delivering the artwork to the gallery, and (ii) sending a notice to the art gallery’s secured creditors describing the artwork and stating the consignor’s intention to retain a consignment interest. UCC § 9-324(b). Since a debtor’s bankruptcy estate has no interest in an artwork that is subject to a perfected consignment interest, the artwork will be abandoned and turned over to the consignor. However, an unperfected consignment interest is subordinate to the interests of the art gallery-debtor’s bankruptcy trustee, secured creditors, and judgment creditors. The consignor will have only an unsecured claim.     

However, if the consignor is the artist of the consigned artworks, or the artist’s heirs, estate, or representative, the UCC requirements may not apply. A number of states have enacted artist consignment statutes designed to protect artists in their dealings with art merchants. Thirty-one states (including California, Illinois, New York and Michigan) have enacted such artist consignment statutes, which override the UCC consignment rules and give artists consigning their works to an art merchant an automatically-perfected purchase money security interest in the consigned work. Such statutes generally provide that consigned works are held in trust by the art merchant for the consigning artist, as are the proceeds from the sale of consigned works.