Lessons From History: Protecting Artists And Art Owners From Losing Their Art - BB&K Attorneys Cathy Ta And Alexander Brand Write In Riverside Lawyer Magazine

Artists and art owners (“Owners”) commonly exhibit artwork through consignment agreements with art galleries. However, when Owners fail to protect their interests in consigned pieces, they stand to lose all of their interests as well as all of their entitlement to their own artwork, particularly in the event the gallery files for bankruptcy. Accordingly, it is imperative that Owners understand the risks associated with consignment agreements and the steps Owners can take to protect their interests.

A Case Study: The Salander-O’Reilly Galleries Bankruptcy
In April 2006, Salander-O’Reilly Galleries (“Gallery”) entered into a loan agreement with First Republic Bank (“Bank”), whereby the Gallery granted the Bank a security interest in the Gallery’s personal property including its art inventory.[1] The Gallery specifically represented and warranted that it was the sole owner of such personal property, which was free and clear of all liens and claims, and that it was authorized to pledge it as collateral.[2] The Bank perfected its security interest in the collateral by filing a UCC-1 financing statement.[3]

A few weeks later, the Gallery and Kraken Investments Limited (“Kraken”) entered into a consignment agreement, whereby Kraken delivered to the Gallery a Botticelli called “Madonna and Child,” which was worth at least $8.5 million. Under the consignment agreement, the Gallery would have a term of years to sell the painting.[4] Unlike the Bank, Kraken failed to file a file UCC-1 financing statement and failed to perfect its security interest.[5] When the consignment agreement expired, the Gallery refused to return the painting.[6]

Ultimately, the Gallery encountered financial difficulties and was forced into bankruptcy. Later, the bankruptcy court approved a plan to liquidate the Gallery’s assets including the Botticelli.[7] Kraken then engaged in a series of legal maneuvers to try and remove the Botticelli from the sale of the Gallery’s assets.[8] On appeal, the district court found that each of Kraken’s legal maneuvers was improper and affirmed the bankruptcy court’s decision in including the Botticelli in the asset sale.[9] A key reason why the bankruptcy court’s decision was upheld was because Kraken had failed to perfect its security interest in the Botticelli.[10] As a result, Kraken lost all of its interest and entitlement to the Botticelli.

Steps Owners Can Take to Avoid Becoming the Next Kraken in a Gallery Bankruptcy
The Salander-O’Reilly Galleries bankruptcy case illustrates an Owner’s worst consignment...