Time To Take The Risk Out Of Consignments

"A picture imperfect" is how Hilary Jay, writing in the Duke Law Journal in 2009, described the application of the consignment rules in Article 9 of the Uniform Commercial Code ("UCC") to artwork. In her paper, Ms. Jay noted that most consignments of artworks to dealers may well fall outside the scope of a "consignment" as defined in revised Article 9 (effective in New York as of July 1, 2001). This means that the protections available to consignors under Article 9 (both the rights of a secured party and the ability to perfect a super-priority purchase money security interest in items they have consigned) are likely unavailable to consignors of art, potentially leaving them vulnerable to claims of an art dealer's/consignee's creditors. In and of itself, that seems to be an unjust result, but there is also a second problem caused by Article 9's apparent exclusion of most art consignments: potential working capital lenders to art dealers are unable to run a simple search of public records that will identify all encumbrances on the title to their borrowers' assets. I am advocating for a change in the UCC that will protect consignors from a risk that most of them do not even realize they are taking, and will enable lenders to easily determine which items of ostensible dealer inventory are, in fact, owned by third-party consignors.

The Problem

Under Section 9-102(a)(20) of the UCC, in effect in New York State, a consignment is defined as follows:

"Consignment" means a transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and: (A) the merchant: (i) deals in goods of that kind under a name other than the name of the person making delivery; (ii) is not an auctioneer; and (iii) is not generally known by its creditors to be substantially engaged in selling the goods of others; (B) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery; (C) the goods are not consumer goods immediately before delivery; and (D) the transaction does not create a security interest that secures an obligation.

The problematic requirements, for our purposes, are (i) that the consigned goods not constitute "consumer goods" immediately prior to their delivery to the consignee, and (ii) that the consignee must not be generally known by its creditors to be substantially engaged in selling the goods of others.

No one knows with certainty if, or under what circumstances, art that is part of a personal collection constitutes consumer goods. Section 9-102(a)(23) of the UCC defines "consumer goods" as goods "used or bought primarily for personal, family or household purposes." Arguably, the ownership of any fine art of substantial value carries an investment dimension, whether or not the owner/consignor has a history of trading art. However, if art worth millions of dollars has been displayed in a family's home for decades, the "personal, family and household purposes" are surely present, as much as with some decorative fireplace tools or a wall sconce. One might say that at a certain price point the investment aspect becomes primary and that goods (art or otherwise) cease to be consumer goods. But the UCC offers no guidance on what that threshold would be, and the only meaningful way to determine if a particular item would meet such a value test, if there were one, would be to conduct an appraisal immediately prior to delivery to the consignee, however impractical that might be.1

If the question of value were all that was involved, there might be a reason to consider a price point test as a solution to the consumer goods problem. However, there are many collectors who buy and sell art with varying degrees of frequency. Determining how much trading is too much for an artwork to constitute...