Getting Good Title To Art You Purchase, As (A) Collector, Or (B) An Art Dealer, Or (C) A Bit Of Both

Of course, a dealer to whom art has been consigned for sale does not own the art, having only the contractual right to transfer the owner's title. This essay is about the art dealer's obligation to perform buyer-due-diligence in the face of "red flags" about the authority of a consignee/dealer to deliver good title. Where the consignee/dealer is selling to another dealer, and there are questions about the consignee/dealer's authority to deliver good title, the dealer/buyer, will need to exercise real due diligence about these title questions to defeat a claim by the owner for return of the owner's art. On the other hand, under the Uniform Commercial Code, a collector, who is not also a dealer, does not have a due diligence obligation. - RDS

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Ronald D. Spencer is Chairman of the Art Law Practice at the New York law firm of Carter Ledyard & Milburn LLP. He is expert in the legal aspects of art authentication issues and has written and edited, The Expert Versus the Object: Judging Fakes and False Attributions in the Visual Arts. (Oxford University Press, 2014).

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As one would confidently suppose, the art collector purchasing in the customary manner from an art dealer acquires good title to the art so long as the collector buys in good faith and without actual knowledge that the sale violates the rights of a third party. (Unless, of course, the art has been stolen, in which case, under American law, no subsequent buyer can get good title.) That is to say, the collector is under no obligation to exercise due diligence to determine that the selling dealer has authority from the owner, via a consignment agreement, to pass the owner's title to the collector.1

The essence of a typical art consignment agreement between a selling owner and an art dealer gives the dealer the right to transfer the owner's title to one who buys from the dealer. These contractual terms are amplified by Uniform Commercial Code Section 2-403 which provides that a buyer from the dealer in the ordinary course of business will prevail over a claim of the owner who entrusted the art to the dealer. As a New York appellate court explained:

[t]he "entruster provision" of the Uniform Commercial Code is designed to enhance the reliability of commercial sales by merchants (who deal with the kind of goods sold on a regular basis) while shifting the risk of loss through fraudulent transfer to the owner of the goods, who can select the merchant to whom he entrusts his property. It protects only those who purchase from the merchant to whom the property was entrusted in the ordinary course of the merchant's business.2 The drafters of the Uniform Commercial Code intended to enhance confidence in commercial transactions by protecting the innocent purchaser who buys from a "merchant" (the dealer) dealing in goods of that kind (even if the dealer acts unscrupulously, or indeed, contrary to the express limitations, say, a minimum sales price, imposed on the dealer by the owner). Of course, if the dealer has violated the consignment agreement limitation, the entrusting art owner would have a breach of contract claim against the dealer, but the entrusting owner has no claim against the dealer's buyer for the return of his art.

A buyer "in the ordinary course of business" means a person who buys from a person in the business of selling goods of that kind "in good faith" without actual knowledge that the sale violates the rights of another. A person buys "in the ordinary course" if the sale comports with usual or customary practices of business in the art market. Dealer Buying From Dealer

But if the buyer from the consignee/dealer is not a collector but another dealer, the Uniform Commercial Code applies a higher standard of "good faith" to the buyer. Buying art "in good faith" means something more when the buyer is an art dealer rather than a collector. In effect, the Code requires the dealer in "certain circumstances" to perform a due diligence investigation to confirm the selling dealer's ownership (or right to transfer title under a consignment agreement with the owner). These "circumstances" or indications of title questions are usually referred to as "red flags". The definition of "good faith" is modified for art dealers ("merchants") to mean honesty in fact and the observance of reasonable commercial standards of fair dealing in the trade. Merchants are thus held to a higher standard of "good faith" then the non-dealer. "In other words, to prevent lackadaisical standards in the art business from affording a shield to either misconduct or fraud-conducive indifference, New York Courts will not allow a merchant buyer who conducts trivial due diligence to insist that failure to look into a [dealers] authority to sell a painting was consistent with the practice of the trade.3 "Thus, under New York law, compliance with custom is relevant, but not dispositive, because a customary practice might fall short of what a reasonable commercial standard would require for fair dealing".4 Rather, as Judge Oetken stated in year 2013 in Davis v. Carroll, a dealer might be required by the Uniform...