FINE ART CONSIGNMENT AGREEMENTS

1 I. Basic Types of CONSIGNMENT Agreementsa. Collector-Dealer Agreementsb. Artist-Dealer Agreementsc. Auction House AgreementsThe focus below is on Collector-Dealer Basic Legal Terminology and Principlesa. Collectors are usually Consignors giving the art to Consignee /Dealers to The legal relationship between Consignor and Consigneefalls under the law of Agency. c. Agents (Dealer-Consignees) owe a fiduciary duty to theirPrincipals (Consignors).i. A fiduciary duty is the highest form of duty in the high? Here is a famous formulation by the late,great Justice Cardozo. He called it the duty of the finestloyalty and went on eloquently in a famous case:Many forms of conduct permissible in a workaday worldfor those acting at arm's length, are forbidden to thosebound by fiduciary ties.

2 A trustee is held to somethingstricter than the morals of the market place. Not hon-esty alone, but the punctilio of an honor the most sensi-tive, is then the standard of behavior. As to this therehas developed a tradition that is unbending and inveter-ate. Uncompromising rigidity has been the attitude ofcourts of equity when petitioned to undermine the ruleof undivided loyalty .. Only thus has the level of conduct for fiduciaries been kept at a level higher thanthat trodden by the This was applied to art agents most dramatically backin the 1980 s in Cristallina v. Christie s:[The Agent] has a fiduciary duty to act in the utmostgood faith and in the interest of .. its principal ..d. Agents can, however, modify that is, lessen their fiduciary duties by ART CONSIGNMENT AGREEMENTSP resented by John R.

3 Cahill, Lynn & Cahill LLP I love the gallery, the arena of representation. It's a commercial world, and morality is basedgenerally around economics, and that's taking place in the art gallery. Jeff Koons I wish to be cremated. One tenth of my ashes shall be given to my agent, as written in our contract. From the Last Will and Testament of Julius Groucho Marx LYNN & CAHILL LLP 2009*For Educational Purposes Not a Substitute for Legal Advice*III. Subjects That Should Be Addressed in ConsignmentAgreementsa. Basic Business Termsi. Sale Priceii. Commission (percentage or net ?)iii. Length of Consignmentiv. Expenses (Shipping, packing, advertising, etc.)v. Selling methods ( , exhibition, limited private showings, shopping, etc.)1. Use of images (copyright)vi. Returnb. Basic Legal Issuesi.

4 Risk of Physical Loss and Damage (Insurance)1. Storage and Exhibition considerations (light, temperature, etc.)2. Authorization for cleaning, conservation, framing,relining, Risk of Legal Loss or Damage ( , title claims,seizures, etc.)1. There should be representations & warranties about:a. Titlei. Liens and Encumbrancesb. Authenticityc. Conditiond. Authority to Sell (Agents, estates, corporations, couples, etc.)e. Import/Exportf. Cultural Property Lawsg. Commissions payable to others2. In general, Consignees want indemnification andConsignors don UCC Filingsiv. Right to Research and Consult Expertsv. Right to Terminate ( , bankruptcy, material breach)vi. Dispute Resolution1. Arbitration or Court lawsuit2. Controlling law3. Attorneys feesvii. Notices and Record Keepingviii. Confidentiality1.

5 Price2. Parties3. When Confidentiality may be breacheda. Subpoena or other legal processb. Claim by buyerIV. Issues to be Carefully Considered by Dealer-Consigneesa. Conflictsb. Multi-dealer issuesc. Competence to handle consignmentd. Due Diligencei. ALRii. Lien Searchesiii. Interpoliv. Researchv. Conservators LYNN & CAHILL LLP 2009*For Educational Purposes Not a Substitute for Legal Advice*e. Sales Taxf. Money Launderingg. Insuranceh. Right to disclose principal under certain circumstancesV. Issues to be Carefully Considered by Consignorsa. Consignee Solvencyi. UCC filingii. Due Diligenceb. Purchaser Solvencyi. Conditions to Release ( , payment in advance, escrows)c. Consignee Competenced. Commissionsi. Double-Dipping ii. Conflictsiii. Net Pricinge. Restricting Shopping and Assignment f.

6 Disclaimers ( , authenticity and the best of my knowledge )g. Taxesi. Salesii. Capital Gainsiii. Resale Royalties (California)h. Insurance (including being an additional loss payee andcancellation notice)VI. What Can Go Wrong: A Few Examplesa. Bankruptcy (Berry Hill and Salander )b. Damagec. Deal Breakers (W rth)d. Crooks (Michel Cohen)e. Consider using an attorney before you need one. PerCosmo Castorini,2 There are three kinds of pipe. There'saluminum, which is garbage. There's bronze, which ispretty good, unless something goes wrong. And somethingalways goes wrong. Then, there's copper, which is the onlypipe I use. It costs money. It costs money because it savesmoney. So too with lawyers: they cost money becausethey save money. At least some of the to Mr. Salander, Our society now values a Warhol for threetimes as much money as a great Rembrandt.

7 That tells me that we Some of those who consigned works to Mr. Salander without filinga UCC-1 have been heard to utter similar (1987). LYNN & CAHILL LLP 2009*For Educational Purposes Not a Substitute for Legal Advice* LYNN & CAHILL LLP 2009*For Educational Purposes Not a Substitute for Legal Advice*a. UCC refers to a group of laws, passed in every statebased on the recommendations of a panel of expertlawyers, called the Uniform Commercial Code. b. The UCC can vary a bit from state to state, but the generalidea is to give everyone who does business certainty and con-fidence about the outcome of their commercial Art sales are generally treated no differently from othercommercial transactions and art is generally treated aspersonal property under the UCC. Artists and their heirsare treated differently and are, to put it simplistically,exempt from the UCC when consigning works to Annie Leibovitz is finding out, a UCC can also be filedand give a security interest in intellectual property, suchas the right to reproduce images of fine The UCC is divided up into different articles.

8 Article 9 dealswith security interests, which are basically the right of anowner or lender to have their interest in property protected. e. What most people think of as a UCC is a form called aUCC-1 that is filed with a government agency (often at thestate level) to give the public notice of the filer s interest inthe property. Some people find it helpful to think of theUCC-1 as a kind of mortgage on personal property including on fine First in time, first in right is the rule. In other words, thefirst person to file a UCC-1 form has priority over the nextperson. If there is a bankruptcy, for example, and theproperty on which there are UCC s (aka the collateral ) issold, the person who filed the first UCC gets paid first outof the proceeds of the sales. g. People who file UCC s are called secured creditors.

9 In manybankruptcies, only secured creditors recover much UCC s can expire, typically after five years but they canbe UCC s have to be filed in the right jurisdiction, where theart is Foreign countries do not always have similar laws. There is, forexample, no UCC system in Switzerland. There, it is best tomaintain a security interest by taking possession of the UCC s can be amended, for example, to lower the amountor change the collateral that is identified as the UCC s should describe the property in which there is asecurity interest, , a painting by Jackson Pollock entitled Drip (1953), UCC s can be filed without the signature of the consigneeif there is a CONSIGNMENT agreement that reflects the consignor s security UCC forms are public and can usually be viewed on In a bankruptcy, as happened, for example, in the In reMorgansen s Ltd.

10 Case on Long Island and as is now beingplayed out in the Salander-O Reilly bankruptcy, those whoconsigned property to sell without filing UCC s are left tofight over what is left in the bankrupt consignee s estateafter the secured creditors are Dealers need to make sure that any UCC-1 s on consignedworks are terminated at the time of the sale. UCC S : THE BASICS YOU NEED TO KNOWP resented by Ralph Lerner, Withers Bergman LLP LYNN & CAHILL LLP 2009*For Educational Purposes Not a Substitute for Legal Advice*1. Get it in writing. As Sam Goldwyn said, A verbal con-tract is not worth the paper it is printed on. 2. Make it clear. Doing so is harder than you think. SayethGroucho Marx: I cannot say that I do not disagree with you. 3. Do your homework. Do the due diligence. Per the oldBritish socialist Roger Tawney, Not all property is theft,but a good deal of theft becomes property.