The Supreme Judicial Court, the high court of the Commonwealth of Massachusetts, has answered a certified question from the Bankruptcy Court about the interpretation of Massachusetts’s fine art consignment law, G.L. c. 104A.  The case, Eve Plumb et al. v. Debra Casey, SJC-11519, originated with an art dealer’s bankruptcy and the claim by the trustee in that bankruptcy that the artwork in the dealer’s possession belonged to that bankrupt dealer, not the artists.  The SJC has interpreted the 2006 amendments to the law for the first time and clarified the roles of everyone involved.  In full disclosure, I did some work for two of the artists (Dylan Stark and Robert Stark) at an early phase of the Bankruptcy Court proceedings.  Eve Plumb, now an artist but also well known as the actress who played Jan Brady on The Brady Bunch, was another of the artist-claimants.  In sum, once an artist delivers a work of art for sale for the purpose of exhibition or sale, it is a consignment, and the seller/consignee holds it in trust for the artist, regardless of the consignee’s own circumstances.

Kenneth Wynne III and Allyson Wynne owned a gallery called Wynne Fine Art, Inc. in Chatham.  While in possession of a large number of artworks that had been delivered for consignment by various artists, the Wynnes, and the gallery itself, all filed for bankruptcy.  The gallery filed a Chapter 7 petition, meaning that the corporation intended to liquidate itself, rather than reorganize and emerge to try again.  As is typical in that scenario, a bankruptcy trustee is appointed to oversee the liquidation.

In a nutshell, when the gallery went out of business and the artists who had put their works there for consignment requested them back, that trustee (Debora Casey) took the position that the paintings were the property of the estate, and moved for permission to sell the art.  The downside to the artists was enormous: rather than receive the actual artwork back, which they could sell or treat however they want, the art would have been sold and the sales proceeds added to the overall bankruptcy estate, against which the artists would have claims as unsecured creditors (i.e., not secured by any specific collateral or priority), certain to get back pennies on the dollar of the art’s value, if that.

The trustee’s position was based on the interplay between the Uniform Commercial Code (the U.C.C.) and G.L. c. 104A.  In a general context, unless a consigner “perfects” its interest under the U.C.C. by filing a U.C.C.-1 statement with the Secretary of State of the state where the property is located, anything in the actual possession of a debtor becomes property of the bankruptcy estate when the petition is filed.  Casey argued that since none of the artists had filed U.C.C.-1 statements before the bankruptcy, all of the artwork was estate property.  She rejected the artists’ claims that the delivery was a consignment because of her interpretation of G.L. c. 104A, § 2(b), which states:

(b) A consignor who delivers a work of fine art hereunder shall, upon delivery of the work of fine art, furnish to the consignee a separate written statement of delivery of the work of fine art, which shall include at a minimum the following information:—

(1) the artist’s name and the name of the owner of the work of fine art;

(2) the title, if any, of the work of fine art;

(3) the medium and dimensions of the work of fine art;

(4) the date of completion of the work of fine art;

(5) the date of delivery of the work of fine art; and

(6) the anticipated fair market value of the work of fine art.

Thus, Casey argued, any of the artists who had delivered paintings to the Wynnes without such a written statement were not consignors, but rather unsecured creditors under the U.C.C.

Not surprisingly, the artists disagreed.  Citing the legislative history of the 2006 amendment (in which Arts and Business Council Executive Director Jim Grace, who testified on behalf of the artists at an early hearing in the Bankruptcy Court, had an important role in drafting), the artists cited the provision immediately prior, which states:

(a)  Notwithstanding any custom, practice or usage of the trade to the contrary, or any other language herein, whenever a consignor delivers or causes to be delivered a work of fine art to a consignee in the commonwealth for the purpose of exhibition or sale, or both, on a commission, fee or other basis of compensation, the delivery to and acceptance of the work of fine art by the consignee shall constitute a consignment, unless the delivery to the consignee is pursuant to an outright sale for which the deliverer of the work of fine art receives or has received compensation for the work of fine art upon delivery.

For the purposes of both of these provisions, “consignment” and “consignor” are defined in G.L. c. 104, § 1 as “a delivery of a work of fine art under which no title to, estate in, or right to possession of, the work of fine art superior to that of the consignor shall vest in the consignee, notwithstanding the consignee’s power or authority to transfer and convey to a third person all of the right, title and interest of the consignor in and to the work of fine art,” and “a person who consigns a work of fine art to a consignee, including but not limited to an artist who creates works of fine art, an artist’s heirs or legatees, or an owner of a work of fine art who holds title to the work of fine art,” respectively.

This distinction is critical, because G.L. c. 104A, § 3(b) dictates that if art is lent on consignment, then it becomes property held in trust for the benefit of the consignor.  Property held in trust creates fiduciary obligations on behalf of the consignee, chief among them in this case that he cannot use the property for his own benefit.  So, if the artwork was consigned, then it was trust property and the Wynne’s insolvency would be irrelevant.  The artists would be entitled simply to get the art back without waiting in line as bankruptcy claimants.  The stakes were obviously high.

As noted above, the trustee moved to sell the art, after which the artists responded with a number of procedural actions, including the filing of an adversary proceeding.  At that point, some federal-state structural quirks came into play.  In the federal system of the United States, federal courts (including bankruptcy courts) are often called on to apply laws of the fifty states, the District of Columbia, and the territories.  There are any number of federal court cases that will then be cited thereafter (by both federal and state courts) for their analysis.  Ultimately, the interpretation of a state’s laws rests with that state’s highest court.  So, to take the extreme, even if a case is before the United States Supreme Court, the Supreme Court has to look to the particular state high court for that statutory interpretation (unless the law conflicts with the U.S. Constitution, in which case the Supreme Court gets the final word again).

Sometimes, however, a federal court will be presented with a question that it cannot answer from researching state caselaw.  So it was here, because the 2006 amendments to G.L. c. 104A had not yet been interpreted by the SJC.  To get to the bottom of this state law’s meaning, the Bankruptcy Court “certified the question” to the SJC, which just means that it asked the SJC to tell it what the law means on this question.  The Bankruptcy Court framed the question this way:

Under Mass. Gen. Laws. c. 104A, the Massachusetts fine art consignment statute (‘Chapter 104A’), must a consignor transmit a written ‘statement of delivery’ to a consignee as a necessary prerequisite to the formation of a ‘consignment’; or, alternatively, under Chapter 104A does a consignment arise upon the delivery by a consignor, and acceptance by a consignee, of a work of fine art for sale on consignment, regardless of whether a written ‘statement of delivery’ is sent by the consignor?

The unanimous SJC determined that the statue does not require a written agreement to create a consignment.  The court looked at the passages of the statute quoted above, and started from the traditional interpretive concept that a statute cannot be read in such a way as to make part of it nonsensical.  The trustee’s view, the court said, would render meaningless the description of how a consignment comes into being.  The written agreement required is to protect the artists, not lay a trap for them.  That is, artists are supposed to accompany their consignment with a written agreement and thus create a recording system for fine art.  If they fall short, they will have problems of proof (potentially he said/she said about what was delivered), but they still have a consignment.  In this case, the trustee did not really dispute the circumstance of the delivery, so the result flowed from there.  The Court stated:

The Legislature thus intended the requirement of a written statement of delivery in G. L. c. 104A, § 2 (b), to facilitate a recording system that enhances protections for consignors of art work, and not to create a barrier to such protection.

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By delivering a written statement that is then kept on record by the consignee, the consignor reduces the risk that art work will be misidentified, become untraceable, or, in the worst case, be forfeited. . . .   A consignor who does not furnish a written statement of delivery thus jeopardizes the consignor’s own interest in the art work, but nevertheless effects a valid consignment under G. L. c. 104A, § 2 (a), so long as there is delivery of the art work and acceptance for the purpose of exhibition or sale on commission.

The SJC got this one right, and frankly it should never have come to this.  But the upshot is a bolstering of artists’ rights, and a strong encouragement for all sides to get the consignment agreement in place.  A prospective agreement protects everyone, by making the parties’ rights and obligations clear so there is nothing to argue about later.  Anyone on either side of such a transaction will do well to pay close attention and seek counsel about what it should include.