As a global pandemic unfolds, the art world is facing unique hardships. Museums and institutions have closed, the economy has slowed, and all participants in the art ecosystem have had to adjust their operations.
Artists and galleries, in particular, are facing unique challenges. Some galleries are enhancing their online offerings, and others are exploring creative ways to keep people engaged with art and commerce. But with the art community’s event calendar essentially suspended, fewer people are buying and selling art, revenues are down, and some artists and galleries are already facing unsustainable financial pressures. Especially during this time of uncertainty, artists and gallery owners must understand their existing and continuing legal rights. (Other crises, such as Hurricane Sandy in 2013, have made that clear.) Below, a guide to some of the legal challenges that artists and their galleries may face right now.
Physical Artworks
In New York, a statute—the New York Arts and Cultural Affairs Law (NYACAL)—governs many important aspects of the relationship between artists and art merchants, including galleries. Under this statute, whenever an artist delivers her artwork to a gallery for exhibition or sale, a consignor-consignee relationship is automatically created, regardless of whether there is a written agreement in place. Through this relationship, the gallery becomes an “agent” of the artist, and her “fiduciary”; in other words, the law imposes a duty of loyalty that requires the gallery to put the artist’s interests ahead of its own.
One important result is that the gallery has a legal obligation to hold in trust, for the artist’s benefit, any artwork that the artist delivers to a gallery for consignment. This is true, even if the gallery makes a financial investment in the work or if there is an arrangement to share proceeds with the artist. To comply with its legal obligations, a gallery should keep regular records of the works in its possession, along with any related insurance documents. From the artist’s perspective, however, this doesn’t mean that an artist should simply hand works over to a gallery and walk away. NYACAL is, in many ways, protective of artists, but artists should keep their own records regarding their artworks, in case a dispute arises.
The current pandemic may raise other related questions regarding the physical handling of artworks between an artist and a gallery, especially in cases where consigned works are unlikely to be sold for the foreseeable future. Should these works be returned to the artist? Placed in storage? And who should bear the costs of any needed storage or transport? The answers may depend on the contracts existing between the artist and gallery. If the parties’ contract does not provide clear guidance, they may need to negotiate a fair and reasonable arrangement. These negotiations might consider a number of factors, including whether the consignment is actually ending, or simply being extended until works can be sold at a later date.
An artist might emphasize that taking care of logistical issues like these should be considered part of the value that a gallery provides in exchange for receiving a significant commission on each sale. From a gallery’s perspective, on the other hand, if the works are not in fact being sold, the gallery is not receiving the benefit of that bargain and it might argue that it should not be responsible for costs associated with the works going forward.
Proceeds of Sales
When a gallery sells an artwork on behalf of an artist, the gallery must hold in trust any proceeds owed to the artist resulting from the sale. That means a separate bank account for artist proceeds must be created. Most importantly, the trust relationship created by NYACAL is in place until payment is remitted in full to the artist, so the gallery may not commingle the artist’s share of any sale proceeds with its general operating account. And it certainly means that the gallery may not use any portion of the artist’s money, for any purpose; in the eyes of the law, that money belongs to the artist, not the gallery. This obligation is so essential that the NYACAL makes it a criminal misdemeanor for a gallery to commingle the artist’s share of any sale proceeds with its own funds.
In light of these obligations, a gallery should keep regular accounting records of the proceeds generated from sales. The statute does not specify how frequently an art merchant must provide an accounting or pay over proceeds to an artist, but it is good practice to provide a detailed accounting regularly and to pay the artist her share of sale proceeds promptly upon receipt.
While some legal proceedings in New York are currently on hold, the potential future legal consequences for a gallery that fails properly to manage trust property can be serious, ranging from the imposition of civil penalties, including damages and liability for the artist’s legal fees, to a criminal misdemeanor charge. Again, however, these rights are only helpful to the extent that the artist can prove there was a problem, so diligent record-keeping is important for artists as well.
Gallery Bankruptcy
In addition to artist consignments, galleries must be mindful of obligations to collectors who own works that are in the possession of the gallery (for example, because the owner has consigned a work to be offered for sale through the gallery, or because an owner has purchased a work through the gallery but has not yet taken possession of it). Sales of art and related transactions are typically governed by a set of laws known as the Uniform Commercial Code.
Certain provisions of the UCC were designed to protect potential creditors of a gallery or other merchant. They become especially important when a gallery declares bankruptcy, which can sometimes lead to multiple creditors competing to recover some of the gallery’s assets. (Given the recent market downturn because of the coronavirus, such situations are unfortunately all the more likely.)
Occasionally, the UCC rules may work in confusing or even surprising ways. For example, if a gallery files for bankruptcy, it is possible that property consigned to the gallery and physically in its possession can become part of the gallery’s bankruptcy estate and used to satisfy the gallery’s creditors. An important factor that will determine the rights of a gallery with respect to consignors and third-party purchasers is whether a consignor has “perfected” his or her security interest in an artwork. This can be accomplished by filing an appropriate UCC Form 1 financing statement—a simple one-page document naming the parties and describing the artwork—and can provide the consignor with a legal advantage over other unsecured creditors of the gallery. A gallery can determine whether it has been named as a debtor in New York for any property consigned to it by running a debtor search on New York’s Department of State website.
The 2017 bankruptcy of the gallery run by disgraced Manhattan art dealer Ezra Chowaiki provides a harrowing example of the complications that can occur in bankruptcy proceedings when multiple creditors as well as the bankruptcy estate seek to claim ownership of the same artworks. After the gallery filed for bankruptcy, many creditors asserted claims for both money and art. Additionally, Chowaiki pled guilty in a federal criminal proceeding, forcing him to forfeit the proceeds for numerous artworks. Courts have been adjudicating the tangle of competing claims, some of which are still ongoing.
As for an artist whose gallery enters bankruptcy, NYACAL provides artists with certain rights with respect to artworks or sale proceeds that are held by the gallery in trust for the artist. Because of this, those assets should not be “up for grabs” to satisfy other gallery creditors’ claims. Thus, the artist will likely be in a strong position—at least as compared to, say, a general unsecured creditor. But an artist will still have to participate in the bankruptcy process, which can be slow and complex, with many creditors seeking a share of what likely are insufficient assets.
Event and Real Estate Contracts
Many in the legal world are now debating a topic relevant to artists and dealers right now: Does the global Covid-19 pandemic qualify as a “force majeure,” or an unforeseen disaster that may allow a party to get out of contractual obligations? Many types of contracts, including event-related ones as well as some leases, contain “force majeure” clauses, and such provisions may become important to galleries and artists, especially when it comes to real estate leases for gallery and studio spaces; contracts related to exhibitions, art fairs, and other special events; and a variety of other types of contracts.
A global shutdown has kept many artists from entering their studios and many dealers from visiting their galleries. But even if operations are halted and a tenant effectively cannot occupy its premises, a tenant operating under a commercial lease may still have to pay rent. Indeed, some clauses in commercial leases may expressly shield the landlord from liability for denying access as a result of a force majeure, or may expressly exclude relief from rent-payment obligations. A tenant’s first task should be to carefully inspect their lease to understand whether and how it addresses force majeure events.
Despite the fact that leases are often landlord-friendly, artists and galleries can take some comfort knowing that they can’t be evicted from residential and commercial properties in New York due to the pandemic. As it stands right now, no housing cases (with minor exceptions), including eviction actions, may proceed until further notice. And Governor Andrew Cuomo has placed a moratorium on rental evictions that remains in effect through August 20.
Sales Tax
Galleries should continue to be aware of and abide by their obligations with respect to remitting sales tax. Authorities have, in recent years, demonstrated a strong commitment to investigating tax irregularities in the art market; indeed, a reminder of this came just last month, when auction giant Christie’s agreed to pay over $16 million in fines in connection with improper sales-tax procedures. The same caution must be taken by any artist who sells work independently (for example, through a website or Etsy shop).
Possible Options for Financial Assistance
Federal, state, and local governments are working hard to provide assistance to struggling citizens during this time, and depending on an artist or gallery’s unique situation, some financial assistance may be available. On March 27, Congress passed a $2.2 trillion emergency relief package designed to support the U.S. economy and to help communities contend with the Covid-19 outbreak. Recognizing that the arts community is struggling, the federal relief package appropriated $75 million to the National Endowment for the Arts, of which 40 percent is directed to state and regional arts organizations. And there are other provisions within the bill that could also benefit members of the arts community, both as individuals and as business owners, including loan forgiveness for companies that retain workers and an expansion of unemployment benefits. A petition for relief specifically for New York City–based galleries, artists, and art workers has also gained momentum online. A helpful, comprehensive list of Covid-19 resources for members of the arts community can be found on the National Assembly of State Arts Agencies website.
Even with that form of aid and the others mentioned earlier, it’s likely that artists and galleries will continue to face financial difficulties well after this pandemic ends. It is vital for art galleries and artists to be mindful of their legal rights and obligations, because the actions businesses take during this turbulent time may have legal repercussions months or even years from now.
Judd Grossman is the founder and managing partner of Grossman LLP, a New York–based firm specializing in art law. Catherine K. B. Lucas is a senior associate at the firm, and Sarah E. Schuster is an associate. Michael Straus is a collector who is also involved in various arts-related organizations. The views expressed in this article are shared in Straus’s private capacity and without attribution to any such organizations.
