The Supreme Judicial Court of Massachusetts has answered a lingering  question about the interpretation of Massachusetts’s fine art consignment  law, G.L. c. 104A, § 2. Laying to rest any doubts about whether a written  agreement is required at the time of delivery to create a consignment  under the statute, the SJC has interpreted the 2006 amendments to the  law for the first time and clarified the roles of everyone involved. Once an  artist delivers a work of art for the purpose of exhibition or sale, it is a  consignment, and the seller/consignee holds it in trust for the artist with  all attendant fiduciary responsibilities. The decision also makes clear the  advantages and importance of a well-drafted prospective agreement for  everyone involved.

THE FINE ARTS STATUTE

The fine art consignment statute was originally enacted in 1978 as St.  1978, c. 286, and was amended in 2006, (St. 2006, c. 353, at 10). The  2006 amendments to the fine art consignment statute were enacted in the  wake of the insolvency of two large art galleries in Boston that generated  wide-spread public concern about the difficulties faced by artists seeking to  reclaim their art work.

The provision at issue, G.L. c. 104A, § 2, reads:

Section 2. (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.

(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.

(c) The consignee shall maintain a copy of  the consignor’s written statement as an  acknowledged acceptance of delivery of the  art work. If the work of fine art is sold, the  consignee shall record the date it sold, for  what amount it sold, and name and contact  information of who purchased the work of  fine art. If the consignor is the creator of  the work of fine art or the artist’s heirs or  legatees, the consignee shall disclose the  name and contact information of the  purchaser of the work of fine art to the  consignor with payment of the funds owed  to the consignor.

The consignee shall make all records  pertaining to that consignee, including  records of accounts, available for the  consignor to review during consignee’s  normal business hours, within a reasonable  time after consignor’s request, and shall  provide copies of the account records to the  consignor when requested. The consignee  shall keep copies of all books and records  for at least 4 years after completion of the  consignment.

“Consignment” and “consignor” are defined in G.L. c.  104A, § 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.

Initially, the 2006 proposal did not include the  phrase “any other language herein” after the term  “[n]otwithstanding” in the first paragraph above.  The Legislature did not adopt this version, however,  but instead adopted a revised bill that added both  the provision in § 2(b) requiring that a consignor  furnish a written statement of delivery, and the  qualification that § 2(a) is to apply  “[n]otwithstanding . . . any other language herein.”

THE TEST CASE

The SJC’s involvement arose on a somewhat unusual  bankruptcy posture. 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. That trustee  took the position that the paintings were the  property of the estate, and moved for permission to  sell the art and use the proceeds for the debts of the  estate. 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 even 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 financing statement, anything in the  actual possession of a debtor becomes property of  the bankruptcy estate when the petition is filed. The trustee argued that since none of the artists had filed  U.C.C.-1 financing statements before the  bankruptcy, all of the artwork was estate property.

She rejected the artists’ reliance on c. 104A, § 2,  because they had not provided a statement of  delivery. Thus, she argued, there was no  consignment, and the artists were merely unsecured  creditors under the U.C.C.

Citing the foregoing legislative history, the artists  pointed the SJC to the provision immediately prior to  § 2(b), the “Notwithstanding any custom, practice or  usage of the trade to the contrary, or any other  language herein,” provision added late in the  process.

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.  After the trustee moved the Bankruptcy Court for  permission to sell, the court certified the previously  un-interpreted provision to the SJC for an answer  under Massachusetts law. 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 SUPREME JUDICIAL COURT’S  CLARIFICATION

The unanimous court found for the artists.  Considering the purpose for the amendment against  its actual language, the SJC concluded that “it is  apparent that the directive of G. L. c. 104A, § 2(b),  to provide a written statement of delivery was  designed as part of a recording system for consigned  art work, and not as a prerequisite for a  consignment. General Laws c. 104A protects  consignors' interests in their art work by providing  that consigned works of art are not the property of  the consignee, but are rather held in trust for the  consignor.”

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 upshot of this decision is a bolstering of artists’  rights, and a necessity for all sides in an art sale to  get the consignment agreement in place ahead of  time. 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.