Things go missing. Who hasn’t lost a pair of eyeglasses or their keys? No one is perfect, and so let’s be forgiving of others, right? Maybe not, when what goes missing is artwork consigned to a gallery or auction house. Unsurprisingly, gallery owners and auction house staff have little interest in recalling instances of lost consigned items, but the many lawyers who represent collectors in art transactions are all too familiar and willing to speak to the frequency and the consequences. Galleries, in particular, handle a large volume of inventory—some on display, some in the back room, some in onsite storage, some offsite fine art warehouses—and tracking isn’t always foolproof. What if an employee miscoded a work in the database? What happens when two paintings are accidentally crated together?
The good news is that “most galleries and auctioneers have good inventory systems,” Michael McCullough, a partner at the New York law firm Pearlstein & McCullough, told Observer. “It’s more likely that objects are stolen, and that’s why they are missing.”
Bad behavior is, of course, not unheard of in the gallery world. “We have handled a number of matters for collectors and investors where their work was sold under a consignment agreement, but the gallery or dealer simply failed to turn over the proceeds due to the owner,” said Kate Lucas, special counsel at Grossman LLP in New York. “We have represented numerous collectors who entrusted artwork they own to a gallery to be sold, but the gallery subsequently—and without the owner’s permission—pledged that artwork as collateral on a loan for the gallery’s own benefit. When this happens, the lender often takes actual physical possession of the supposedly collateralized artwork.”
In 2010, an art dealer in Illinois claimed he placed an original 1893 Toulouse-Lautrec poster in a mailing tube that was either misdelivered or discarded. Investigators later found that his home was in foreclosure at the time the lithograph vanished. A few years earlier, in 2006, the Philadelphia Museum of Art consigned two paintings—Maurice Prendergast’s 1919-23 oil, The Harbor, and Arthur B. Davies’ undated watercolor Mountain Landscape—to New York’s Salander-O’Reilly Galleries. Gallery owner Lawrence Salander sold them within weeks to Davis & Langdale Co. for $1.5 million. He never informed the museum, which only learned of the sale in 2009 after the gallery declared bankruptcy.
Larry Salander went to jail, as did Inigo Philbrick, who was convicted for selling artworks or using them as loan collateral without owner consent. But the consignors involved with those dealers were never paid, and this is where things get tricky.
A dealer who sells consigned artwork and fails to remit proceeds to the original owner is guilty of “conversion.” Yet, as Dorit Straus, an advisor to art insurance clients, told Observer, “some insurance companies will not consider it a theft and will not indemnify the owner because when giving a work to a dealer on consignment the original owner actually ‘passes’ title to the dealer, and so it’s regarded as a business transaction and not a theft that would be covered by insurance.”
If an artwork is lost or damaged while consigned to a gallery, that gallery’s insurance should cover the loss, according to Dean Nicyper, a partner at New York’s Withers Bergman. Still, he recommends consignors maintain their own insurance “as a back-up, in case the gallery doesn’t have enough coverage or its policy has exclusions.” He recalled a case in which a large-scale Frank Stella was destroyed in transit—“there were four insurance companies involved.”
Diana Wierbicki, who chairs the art and cultural property division at Loeb & Loeb, agreed that owners should maintain their policies even when artworks are out of their possession. When buying fine art insurance, she advised, “it is important to review the insurance policy to make sure that there are not any insurance exclusions that would prevent you from making an insurance claim. Exclusions like ‘inventory shortage’ need to be explored further to make sure coverage still applies when a work goes missing.”
How insurance companies treat these claims is rarely straightforward, and policies can often be negotiated. In 2007 and 2008, longtime art collectors Sam and Helen Zell sent three paintings to L.A. dealer David Tunkl—Balthus’ 1989-94 The Cat with Mirror III, Fernand Léger’s 1923 Study for the Tugboat and the 1930 Mona Lisa with Keys (First State)—with the understanding that he would seek offers for their approval. Instead, Tunkl sold the works outright, only informing the Zells in 2009. He later claimed he had already spent the money and couldn’t repay them. Fortunately, the Zells had coverage through New Jersey-based Chubb and received $5,775,000.
In contrast, the Philadelphia Museum of Art’s insurer, AXA Art Insurance, denied its $1.5 million claim regarding the Salander-O’Reilly consignment. According to AXA’s attorney, the works weren’t stolen or damaged. “Good title passed to the new buyer. The problem was that Salander-O’Reilly didn’t pay the museum what it was supposed to, and for that, it should sue the dealer, not the insurance company, which didn’t cover this eventuality in its policy.”
Consignors may sue for negligence or breach of fiduciary duty, but if the dealer has declared bankruptcy, there may be little left to recover. Lucas recommends filing a UCC-1 financing statement when handing over valuable objects, which publicly establishes the consignor as the rightful owner, even if the dealer has physical possession. Filing the form is inexpensive—in New York, it costs $20, and in New Jersey, $25—and can be done online. It puts the consignor first in line in bankruptcy court to reclaim the artwork or receive compensation.
Fewer artworks go missing from auction houses than from galleries, mostly because auctioneers sell items on fixed dates and don’t hold them for months or years. Gallery consignments tend to linger, which increases risk. Collectors who want quick sales tend to stay in close contact with dealers, reducing—but not eliminating—the chance that things simply vanish. Artists, however, are the most frequent victims of missing consigned work.
Artists often consign numerous pieces at once, especially for exhibitions, and their relationships with dealers can last decades. “Artists don’t always keep track of what they’ve consigned,” said Ralph Lerner, a New York lawyer specializing in art law. “They most often find that things are missing when they break up with a dealer.”
Resolving such disputes is rarely simple. “The artist says, ‘I gave you that painting,’ and the dealer says, ‘I gave it back to you’ or ‘I never received it,’” Lerner said. Inconsistent memories, lack of documentation, or outright dishonesty often hinder resolution. Lawsuits may be filed—though Lerner noted that “the cost of litigation may be greater than the value of the art”—or passed along to a gallery’s insurer.
Insurance, however, is no cure-all. Leila Amineddoleh, founder of Amineddoleh & Associates LLC, a New York City-based law firm specializing in art, cultural heritage and intellectual property law, explained that “lost art is valued like other art, appraised according to comparables. The sad reality is that emerging artists may not have comparables, and so proving the value of their works can be challenging, and thus they may not receive the appropriate compensation from a gallery.”
Valuing lost artwork is further complicated by auction house consignment agreements. Daniel Weiner, head of litigation at Hughes Hubbard & Reed, told Observer that “auction houses usually limit by contract their liability for lost works. Christie’s, for example, typically limits it to the proceeds of sale (if the work is lost after its sale) or the mid-point between the high and low estimates (if the work is lost prior to its sale at auction).”
Unlike collectors, artists in New York and thirty-one other states are not required to file a UCC-1 form to assert their rights in a gallery bankruptcy. They receive automatic priority over creditors. Still, that doesn’t protect against poor documentation or misplaced trust.
Amineddoleh recalled one client who lost multiple works after trusting a longtime dealer friend without a formal agreement. “The problem was that she had a close friendship with the dealer, and so they never entered into a formal agreement. What’s more, the dealer concealed information from the artist for years, concocting excuses about her health and not having access to her storage unit. By the time the artist realized there was a problem, the statute of limitations had expired, and there was nothing to be done. We were able to recover some of the value of the art that went missing, but we couldn’t recover the full amount because the artist did not have a contract with the dealer, the prices were not clearly assigned to the works, and details of their agreement were in dispute.”
As always, an ounce of prevention is worth a pound of cure. Consignors—and artists, too—should assume little, document everything and insure what matters.
More for art collectors
