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<em>Authored by: <a href="http://www.bakerlaw.com/dennisocohen/">Dennis Cohen</a> and <a href="http://www.bakerlaw.com/lindseyashoshany/">Lindsey Shoshany</a></em>

Art galleries have long been an outlet for artists to display their work.  For some artists, they provide a means to earn a living.  Ordinarily, a gallery owner delivers an artist’s proceeds upon sale of the artist’s work.  Galleries themselves are also compensated from the sale of these works by taking a percentage of the sales proceeds as commission.  Many galleries, however, do not maintain separate accounts for the percentage belonging to the gallery as differentiated from the proceeds that belong to the artist.  Because certain galleries regularly commingle these two pools of funds, it is the artist that takes the financial hit first during times of financial hardship for the gallery.  However, the recently passed amendments to the New York Arts and Cultural Affairs Law (NYACAL) provide measures to enforce and penalize galleries that take these unfair measures.

As a matter of law under the prior and existing version of the NYACAL, the sale proceeds are property of the artist and galleries may not use such proceeds.  Specifically, the language of Article 12 of the NYACAL notes that the sales proceeds are “trust funds in the hands of the consignee for the benefit of the consignor.”  This language creates an effectual trust fund relationship with the artist as consignor and the gallery owner as consignee.  Notwithstanding this language in the law, there was no reliable mechanism for artists themselves to enforce this trust fund principle.  Without enforcement, some galleries were able to use the sales proceeds of an artist’s work to pay a gallery’s operating expenses during times of financial difficulty and face no consequences.  And in the instance where a gallery as such completely failed, it meant no future remedy for the artist at all.

This exact scenario was played out in the Salander O’Reilly Galleries case in 2007, where the Upper East Side gallery was found to be operating a $120 million dollar scam by selling works without paying, or at times even informing, the artist consignor.  The owner, Lawrence Salander, came under such financial hardship that he eventually filed for bankruptcy.  Because Salander had commingled artist proceeds with the gallery’s operating expenses, creditors of the bankruptcy estate were able to seize these proceeds as security.  The proceeds belonging to the artists were deemed part of the bankruptcy estate, to the detriment of the artists whose work had been sold.

In light of the new amendments to the NYACAL, artists now have legal power to enforce their trust fund relationship with gallery owners.  If a dealer breaches the fiduciary obligations to an artist, he or she can be convicted of a criminal misdemeanor, which can mean both fines and jail time.  More importantly, the law makes clear that an artist can sue the dealer to enforce the law, and even to recover damages.  The law further provides for recovery of attorney fees where the artist is successful in enforcing their rights under the new version of the NYACAL, providing a mechanism whereby even an artist without means can afford to protect his or her rights.

The Art of the Deal