New legislation is introduced in New York requiring galleries to hold sale proceeds owed to artists on a separate account.

Galleries do not always segregate the percentage of sale proceeds due to the artist from the percentage of sale proceeds owed to the gallery. Instead, they place total sale proceeds in a single account and use them to pay for the gallery’s operating expenses. If the gallery is in financial distress, it may be unable to pay the artist because it has used the sale proceeds owed to the artist to run its business.

The collapse of New York gallery Salander O’Reilly brought this issue sharply into perspective. Prior to filing for bankruptcy protection in 2007, Salander operated as a gallery for more than 20 years. The gallery had relationships with artists, artists’ heirs and artists’ estates. It co-mingled sale proceeds due to them with the gallery’s own funds. By 2007, Salander ceased paying consignors entirely. The gallery went bankrupt, and both its principal and its director were convicted of fraud. Millions of dollars belonging to artists, their heirs and estates were never paid. Sale proceeds owed to them were gone, having been spent by the gallery on its own operating expenses. The gallery had possession of thousands of artworks by these artists. However, as its liabilities far exceeded its assets, the gallery’s creditors sought to claim the artworks. Unable to pay legal fees to resist those claims, the artists were often unable to reclaim their artworks. This led the New York legislature to intervene to afford greater protection to artists.

As a matter of New York law, the percentage of sale proceeds due to the artist belongs to her, and the gallery has no discretion to use those proceeds for its own purposes. The law recognises this principle by providing that sale proceeds are trust funds in the hands of the gallery for the benefit of the artist. However, until recently, New York law did not include any measures to enforce this principle, or any penalties if the gallery failed to hold such sale proceeds in trust for the artist. Some galleries took advantage of the situation by using the proceeds due to the artist to fund their business. This meant that artists were paid late or not at all, and in the event of the gallery’s insolvency, the artist might well fail to recover any of the funds he was entitled to.

The New York legislature recently amended the statutory provisions governing the consignment of art by artists to galleries (Articles 11 and 12 of the New York Arts and Cultural Affairs Law). These amendments, which became effective on 6 November 2012, strengthen the position of artists.

First, galleries must keep sale proceeds held on trust for artists separate from their own funds. Galleries may not deposit such funds on a bank account in their own name. They must place proceeds held on trust in a separate account held by them as trustee.

Secondly, if a gallery fails to separate trust funds from their own, they may be prosecuted. A gallery who misuses trust funds will be guilty of a misdemeanour (a fine and/or County jail time for up to 1 year).

Thirdly, New York law now affords the artist a private right of action against the gallery. The artist may seek injunctive relief and damages from the gallery, and she may recover reasonable legal fees if her claim against the gallery is successful.

Fourthly, the class of persons qualifying for protection is extended to include heirs who acquire the work from the artist or from another heir or beneficiary of the artist (e.g. children who acquire the artist’s works through the deceased spouse of the artist, rather than the artist directly).

Finally, until New York law was amended, galleries could seek from the artist a waiver of the provision establishing that sale proceeds constitute trust funds, provided that the waiver was clear, conspicuous, in writing and signed by the artist or his successor. The artist or his successor may still waive his rights, but he must now be clearly and specifically told that he is waiving rights to which is entitled by law. This marks an improvement on the prior version of the law because a gallery can no longer obtain a waiver from the artist without disclosing to him that he has statutory rights with respect to sale proceeds to which he is entitled.

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