Can Art Owners, Consigning Or Lending Their Art, Protect Themselves In A Bankruptcy Proceeding Of The Gallery Or Borrower By Specifying Arbitration And A Choice Of Law In Their Consignment Or Loan Agreement? Probably Not.

This essay is about an art owner who sought to protect himself from the consequences of a bankruptcy by his consignee art gallery. Ordinarily, of course, courts will enforce a contractual choice of law and forum, but apparently not in a bankruptcy proceeding . -- RDS

AARON R. CAHN, is a member of Carter Ledyard & Milburn LLP's Insolvency and Creditors' Rights Group where he often advises on art related matters.

The art community has been slow to react to the intrusion of modern commercial concepts into a world traditionally ruled by the handshake. But financial difficulties, resulting in such events as gallery bankruptcies and sales by museums of significant portions of their collections, have brought home to all who delight and deal in art the perils inherent in parting with possession of a work. To help protect owners against some of these perils, lawyers who advise clients contemplating consigning or loaning art have built in extra protections in the event of a dispute with the consignee. Such items as arbitration clauses (requiring that disputes be arbitrated rather than the subject of possibly lengthy and expensive court proceedings) and choice of law and forum provisions (requiring that disputes be decided in a the consignor's home state, province or country, and according to the law of that jurisdiction) can give comfort to a consignor that a legal issue that may arise will not be subject to an unfamiliar body of law in an inconvenient locale.

In many situations, these types of protections work well. But in the context of a bankruptcy proceeding initiated by or against a consignee, enforceability of these protections may not be permitted. The function of a bankruptcy case is to bring together in one forum all the issues relating to the financial condition and future prospects of a debtor, and the U.S. federal policy of ensuring the efficacy of bankruptcy proceedings may sometimes operate to curtail the rights of other parties.

In 2011, this Journal discussed how the failure of a consignor to file a one-page financing statement (form UCC-1) can result in the effective loss of ownership of a work if the consignee files a bankruptcy case.1 In this essay, we review one consignor's unsuccessful attempt to maneuver around the consequences of this omission.

One of the most notorious art-related bankruptcy cases in recent years was that of Salander-O'Reilly Galleries.2 Salander-O'Reilly Galleries, which was operated in an historic townhouse...