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More than seven years is a long time to wait for a loaned painting to be returned. But after such a long wait, Sandro Botticelli’s Madonna and Child (1485) is being returned to its owner, Kraken Investments Limited (Kraken).   Kraken had consigned the painting to a gallery for sale, but the gallery’s bankruptcy intervened. For a time, it seemed that the painting would never be returned to Kraken, and that instead the gallery’s lender’s security interest would take priority, leaving Kraken within only an unsecured claim in the bankruptcy case. That dispute has only recently been resolved, with a reversal giving the Botticelli back to Kraken. [See Kraken Investments Ltd. v. Jacobs (In re Salander-O’Reilly Galleries, LLC), Case No. 14-cv-03544 (S.D.N.Y. Nov. 25, 2014)] It has been, for many, a cautionary tale.

Recent years have seen the collapse of several major art galleries, some from financial conflicts with lenders or other parties, other from shady business practices and outright fraud. Perhaps the most spectacular was the collapse of Salander O’Reilly Galleries, LLC (SOG). In 2007, SOG was facing numerous lawsuits alleging that SOG and its founder and principal Larry Salander (Salander) had double-pledged works, and had sold others but failed to pay their consignors the proceeds from the sales. Several of SOG’s creditors filed an involuntary bankruptcy petition against the gallery in the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court), which was subsequently converted to a voluntary petition under chapter 11 of the Bankruptcy Code. At the time of the bankruptcy petition, SOG possessed more than 4,000 artworks, some of which it owned (in whole or in part), but many were not owned by SOG, and had been consigned to SOG by artists, artists’ estates, collectors, or other dealers. SOG’s victims included Earl Davis, who consigned more than 90 of his father, Earl Davis’s paintings (Davis v. Carroll) , Robert De Niro, Jr., who consigned 12 of his father, Robert De Niro, Sr.’s paintings, and John McEnroe, who had entered into a joint-ownership arrangement with Salander to acquire two paintings by Arshile Gorky, only to find himself a victim of double-dealing. The fall of SOG presents, in microcosm, almost every possible way in which a secured transaction, consignment or entrustment of art or cultural property can go awry, and it spurred amendments to the art consignment provisions of New York’s Art and Cultural Affairs Law. [1]…

Continue Reading Botticelli’s ‘Madonna and Child’: The Risks of Art Consignment

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).      …
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