In the Summer 2009 issue of the Legal Canvas, we wrote about the wisdom of filing a UCC financing statement when art work is consigned to a gallery. Specifically, we said that the filing of a financing statement that reflects the consignor’s interest in the work provides protection against the gallery’s creditors. Financing statements take no time to prepare and cost less than $50 to file.
It could be money well spent.
On July 9, 2012, a federal court issued a ruling relating to the Salander-O’Reilly Galleries bankruptcy proceedings. When Salander-O’Reilly went into bankruptcy, it was in possession of artwork that it had on consignment. According to the opinion, the Bankruptcy Court issued a protocol that, among other things, established a Working Group that was charged with making initial decisions as to which of those works would be considered part of the bankruptcy estate and therefore available to satisfy the claims of the gallery’s creditors. If a consignor had “perfected” his security interest in his artwork by filing a UCC financing statement, the work was excluded from the bankruptcy estate.
The consignor of a 16th Century work by Botticelli titled Mother and Child and valued at $9.5 million had not filed a financing statement, and the work was included by the Working Group as an asset of the estate. The consignor of the work subsequently moved to have the question of whether the work was part of the estate determined in arbitration in Jersey, the Channel Islands, under an arbitration clause in his consignment agreement. The Bankruptcy Court denied the motion, and the federal district court agreed, leaving the consignor enmeshed in the bankruptcy proceeding.
We will provide a more thorough discussion of the opinion in the next issue of the Legal Canvas. But the bottom line here is that if the consignor had filed a financing statement at the time he delivered the painting on consignment, his involvement in the bankruptcy (and his legal bills) might already be over. Instead, his saga continues and his stake in his Botticelli remains at risk.