Since online auctioneer Paddle 8 filed for bankruptcy protection in March, creditors of the company have begun filing their notices of claim in the bankruptcy case. One thing on which the creditors all seem to agree is that the current assets of Paddle 8 will be insufficient to cover its debts by a considerable margin. Paddle 8’s lenders and commercial landlord are by far the largest creditors, and standing out from the crowd will be difficult. The key for many consignors, therefore, will be whether they can convince the Bankruptcy Court that the money they seek is somehow distinct from the unsecured claims of the bulk of creditors. Based on filings to date, there is already considerable disagreement about the limited scope of New York’s consignment statute (N.Y. Arts & Cult. Affairs Law § 12.01) (NYACAL), the interpretation of which will be important to this and presumably many other bankruptcies to come. NYACAL protects consignment sale proceeds under certain circumstances when the artist of the work in question is the consignor—but not otherwise. For the charitable consignors, they may end up holding the bag.
The bankruptcy was preceded by a lawsuit and New American Cinema and Penumbra Foundation, cinema-related charities, that invoked the consignment statute. Since then, other creditors/consignors have made similar arguments. On April 29, 2020, the UN Women National Committee UK filed an objection to Paddle 8’s proposal to use some its existing cash for expenses. UN Women National Committee UK had consigned works of art for sale to Paddle 8 pursuant to a written agreement governed by New York law. UN National Women National Committee UK argued that its sales proceeds should be segregated from the bankruptcy estate because “the proceeds from the sale of consigned artwork are held in statutory trust by the consignee for the benefit of the consignor. See [NYACAL]”.
On the same day, a charity named Lift Los Angeles filed a similar objection. Lift LA argued that “[a]s established by [the written consignment agreement], Lift LA entered into a consignor-consignee relationship with Debtor prior to the Petition Date. Pursuant to the NYACAL, the Sales Proceeds were, and continue to be, held in a statutory trust for the benefit of Lift LA, and neither the Debtor nor any other party in interest has any rights or interest in the Sales Proceeds.”
Clearly this would be a far better outcome for UN Women National Committee UK, Lift LA, and any other creditor/consignor. Paddle 8’s lender alone has a secured interest worth millions of dollars; unsecured creditors may get absolutely nothing. If the consignors can convince the court to treat any part of Paddle 8’s accounts separately, it may be their only chance.
Unfortunately for the consignors, it probably overstates the case considerably. Unless New American Cinema, Penumbra, UN Women National Committee UK, or Lift LA were the artist or craftsmen of the works consigned, it is hard to see how the statute could apply. NYACAL does not create a fiduciary relationship between any consignor and consignee (the way, for example, that the Massachusetts consignment does). It only covers artists. While auctioneers do owe consignors a fiduciary duty and can be liable for breaching it, that is different than segregating the funds from the bankruptcy estate.
As such, only those Paddle 8 consignors who were actually the artists of the works in question could rely on the statute. For New American Cinema and Penumbra, at least, it appears from their allegations that the auction involved works provided directly by artists, so there may be a foundation for such an argument depending on the circumstances. The rest may end up at the back of a very long line of unsecured creditors.