Mitigate the risk of bankruptcy of art shipments in the United States – Media, Telecommunications, Computers, Entertainment

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United States: Mitigate the risk of bankruptcy of art shipments to the United States

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The onset of the global COVID-19 pandemic in early 2020 has spurred significant changes in the art market, including a sharp shift to digital-only forms of engagement following the cancellation of art fairs. in-person art, gallery exhibitions and auctions. Compared to other sectors, the art market is perceived as opaque; artistic transactions are often conducted privately and / or informally by commercial actors, some of the largest and most influential of which are private companies rather than listed on the stock exchange.

Market uncertainty over pandemic-induced disruptions was exacerbated in March 2020, when news broke that leading auction platform Paddle8 had filed for Chapter 11 bankruptcy protection. was further compounded in May 2020, when an independent audit of another leading auction house found “substantial doubt” about the company’s ability to continue in business.

In this context, sophisticated senders sought to better understand the potential impact of bankruptcy on their art shipments.

This was especially the case for senders with fiduciary duties, such as trustees, executors, family office heads, and private banking art advisers.

In the United States, one of the fundamental purposes of bankruptcy law is to protect creditors from interest in a debtor’s property that they could not reasonably have known about: what is called “secret privileges”. . If a shipper has not made a consignee’s creditors aware of the former’s interest in the consigned property and the consignee sees bankruptcy protection, the consigned property may be considered to be part of the estate. bankruptcy. In this scenario, the sender effectively loses ownership of it and may be relegated to general creditor status, potentially limiting the sender’s collection to a pro-rata distribution (usually at a rate of pennies on the dollar). after the liquidation of the bankruptcy estate the assets.

The risk of this worst-case scenario can be mitigated under certain circumstances.Fiduciary shippers may be required to explore common law, statutory and contractual protections for their consignment goods., the availability of which depends on several factors, including the type of sender, the type of recipient, and the location of the shipment.

Common law protections

  • U.S. bankruptcy courts apply state law to determine the nature and extent of a debtor’s interest in the property. Some states have developed relevant common law precedents relating specifically to auctions.
  • For example, New York common law imposes a principal agent relationship between auctioneers and their shippers, which continues throughout the sale of the property until the auctioneer has delivered the product. net due to sender. Under this precedent, if an auctioneer does not separate the products from the shipper, the shipper can benefit from the court’s imposition of a constructive trust on those funds. Likewise, the agency of an auctioneer can be presumed under New Jersey law so that the proceeds of the sale are held in a constructive trust for the benefit of the sender even when the contract recording of the parties is verbal.
  • However, common law precedents vary from state to state, and other precedents are less favorable to shippers than in New York and New Jersey. For example, bankruptcy courts applying the laws of Nebraska and Oregon have found that the principal agent relationship between an auctioneer and a shipper may end when the consignment property is sold, if the written agreement of the parts does not require separation of the sender’s products. In these cases, the senders are not entitled to constructive trusts and instead to collect (if any) alongside other general creditors.

Read the transcript of the full discussion on page 308 of the Deloitte Art & Finance Report 2021. The report can be accessed via the link below.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

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