Caveat Consignor

by Sheppard Mullin Richter & Hampton LLP

Auction houses typically do not disclose the identity of the seller on their sales contracts. A recent New York trial court decision may drastically change that longstanding practice.

The auction trade is supply-driven. As such, it heavily depends on sellers - and those sellers usually want to remain anonymous. Consignors have various motives for keeping their identity anonymous. They may want to avoid having relatives or creditors know they sold family valuables, or do not want the public knowing what is "none of their business". Dealers may not want the public to know they are selling stock. There may also be unsavory motives at play, though reputable auction houses carefully vet both the seller and the goods.

Unfortunately, and though these slumbering statutes are unknown to most in the art trade, the desire for anonymity in a sales transaction conflicts with some states’ statutory requirements. For example, Section 5-701(a)(6) of New York’s General Obligations Law requires auctioneers to include “the name of the purchaser, and name of the person on whose account the sale was made” on the memorandum used to confirm the sale of goods at a public auction.

Recently, the Appellate Division of the New York Supreme Court held in William J. Jenack Estate Appraisers & Auctioneers, Inc. v. Rabizadeh that New York auctioneers must include the names of both sellers and buyers, not merely their identification numbers, on sales contracts for the contracts to be valid. The decision stems from the court’s strict construction of the above-cited New York commercial law that requires “the name” of a seller to be written on each sales contract. The court held that use of identification numbers in lieu of actual names, albeit general industry practice, conflicts with a narrow interpretation of the statute, and when such a conflict exists, the statute prevails. If not overturned on appeal, this ruling will likely have far-reaching implications for art buyers and sellers.

This September, 2012 case is the first example of a court taking a hard stance on upholding statutory requirements that conflict with auctioneer practice. Plaintiff William J. Jenack Estate Appraisers & Auctioneers is an auction house located in Chester, New York. During Jenack’s 2008 public auction, defendant Albert Rabizadeh, a Long Island dealer, bought a 19th century Russian decorative box for $400,000 ($460,000 including buyer’s premium). When Rabizadeh refused to pay, Jenack sued. Rabizadeh argued that General Obligations Law § 5-701(a)(6)’s requirement that a vendor’s name be written on a contract insulated him from having to pay the price of the auction contract because the contract only indicated the seller’s identification number (#428) and not his name. The court agreed with Rabizadeh that the law required contracts to note both the names of buyers and sellers, not merely a number assigned to the parties. In so holding, the court recognized that, “[w]hile it may be true that auction houses commonly withhold the names of consignors…, this Court is governed not by the practice in the trade, but by the relevant statute.”

The Jenack decision, if left uncontested, could have far-reaching implications for the New York auction business. Buyers may seek to be relieved of their obligation to pay for auction items if invoices do not include the name of the consignor. Sellers may take their business out of state to maintain anonymity in the transaction. Auction houses could name themselves as the seller’s agent to avoid having to disclose sellers’ names. Sellers may stop using auction houses altogether, instead opting to sell through dealers where the norms of confidentiality do not conflict with the language of the statute.

The decision may also galvanize a political lobbying movement among consignors and auction houses to change the New York law. As the court acknowledged, the decision “may be burdensome to consignors or auction houses or both, [and therefore] a change in the law to eliminate that requirement may be warranted.” Consignors and auction houses may begin to lobby New York legislators to amend the law to accommodate, rather than restrict, auction business.

The increased transparency will undoubtedly have jarring immediate effects on the auction industry. It may be that the long-term benefits of buyers and sellers knowing the identity of the other will outweigh the short-term shock of complying with the well-established but long-forgotten law. Or it may be that New York’s highest court, the New York Court of Appeals, will reverse the Jenack decision.

The prospect of reversal has just increased. Last week the Court of Appeals agreed to review the Jenack decision. The court will hear two issues: first, whether the lower court erred in holding that a contract that listed a bidder’s identification number was insufficient under the New York law, even when considered along with additional identifying documents; and second, whether the lower court erred in applying an explicit and literal reading of the law.

This development in the Jenack case is significant. Not only does it mean the highest court of New York could resolve the requirements of auction practice, it also means that the large auction houses, Christie’s and Sotheby’s, having previously expressed interest in joining the appeal as amici, will now have the opportunity to do so.

We will continue to follow this matter.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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