U.S Lawyer Warns That COVID-19 Might Cause a Bankruptcy Wave in the Art World

The COVID-19 pandemic has almost put everything to a halt, including events in the art industry. Museums and exhibitions around the globe are closed while most auctions are postponed. A lawyer from the U.S. who specialises in cases related to art dealing has issued a piece, warning the art world about a wave of bankruptcies in the upcoming months to years. His piece mentions Paddle8’s recent bankruptcy, using it as an example to provide legal advice for artists, galleries and auction houses. 

Nicholas M. O’Donnell

The piece was issued by Nicholas M. O’Donnell, an art law partner at Sullivan & Worcester in Boston. According to the law firm’s website, O’Donnell’s practice focuses primarily on complex civil litigation, including many cases related to Nazi-looted art. He has also authored and contributed to several books on art law. 

O’Donnell is the editor of the ‘Art Law Report’, a blog that provides updates and commentary on legal issues in the museum and visual arts communities. The blog is often put under the spotlight as O’Donnell’s commentary is frequently used by the media. Even the New York Times quoted O’Donnell when reporting a forgery case related to an art gallery in New York. His recent piece on the art world’s potential bankruptcy wave was released on this blog. 

In O’Donnell’s blog, he writes, ‘The art world, from museums, to large auction houses and mega galleries, to small businesses and service providers, is reeling from the sudden inability to gather together with other people. We all know this and feel its absence already. Even before the fallout from the larger economic situation is felt in terms of whatever effect is yet to come on buyers’ willingness to spend money on art, all the events, fairs, and gatherings to which we are accustomed (particularly in New York) are suspended indefinitely.’ 

The MET is forced to close due to the spread of COVID-19

The current situation suggests an unfavourable future for many museums in the U.S as they have already suffered a great loss in a short period of time. For instance, the MET is looking at a minimal loss of US$100m, having to close and reopen in July at the earliest. Demands to support non-profit cultural organisations by including them into the U.S. relief package and funding them through the Federal Emergency Relief Administration (FERA) have been heard. 

The MOCA LA has also closed its museum in an effort to contain the spread of the coronavirus. To cut costs, it has also laid off all 97 of their part-time staff. Prior to this, their total number of employees was around 185 which means that they have discharged over half of their staff. 

Frieze New York 2020 has been cancelled

O’Donnell also comments on Paddle8’s bankruptcy in his blog post. He writes, “While the Paddle 8 bankruptcy seems to have been driven by business conditions long before the complete upheaval of the art and business world due to COVID19, it is all but certain now that the cascading closures of businesses large and small for the foreseeable future will bring a wave of bankruptcies in the months and year to come...Most businesses are going to need to think very soon about their roles as creditors who are owed some good or service, in the hopes of avoiding becoming debtors who need the help of bankruptcy laws to reorganize or stave off liquidation.’ 

Details of Paddle8’s bankruptcy can be found in our previous article- ‘Online Auction House Paddle8 Filed for Bankruptcy, Owing Justin Bieber and Jay-Z Over US$130,000 In Total’. 

Paddle8 organised a charity sale last year for the nonprofit New American Cinema Group (NACG). However, NACG failed to receive payments from Paddle8 and their clients did not receive the works that they bid for. Therefore, NAGC finally filed a lawsuit against Paddle8. A week later, Paddle8 filed for Chapter 11 bankruptcy protection in New York. 

Paddle8’s filing for bankruptcy might save their business 

Paddle8 has filed for bankruptcy Chapter 11 reorganization, not Chapter 7 liquidation. It protects debtors from creditors demanding to settle loans prior to the filing of bankruptcy. According to O’Donnell, it will get more complicated as ‘there are very severe penalties for continuing to pursue a lawsuit without leave of court where the automatic stay of 11 U.S.C. § 362(a) is in effect’. What drove Paddle8 to bankruptcy is unknown but from the perspective of the law it might be the best way to save their business. 

The case has also ignited discussions on how art sellers and dealers can protect their rights. O’Donnell writes in his blog, ‘typically when an owner conveys property to a gallery or auction house in the business of such sales, if the gallery becomes insolvent, the consignor cannot simply exercise its right to retrieve its painting. Rather, the paintings and all other property held by the gallery or auction house become part of the debtor’s estate when the petition is filed to be distributed to allowed claimants in the bankruptcy in accordance with priorities established by the Bankruptcy Code.’  

He continues to say that if the consignor has not taken other action to protect itself, the typical consignor is regarded as a general unsecured creditor. The owner will not be entitled to the return of his artwork and may stand to receive little to none of the proceeds in the event that the artwork is ultimately sold by the debtor.

O’Donnell also gives suggestions to those who will potentially be affected by the bankruptcy wave. He tells those who have consigned art to a dealer or gallery to first account for any works of art that are not in their possession by getting U.C.C.-1 statements on file so that they can retrieve their works when bankruptcy happens. 

For galleries and auction houses, they should get their records in order to avoid having to explain why funds or consigned works (particularly in New York) were not maintained separately. At the end of his piece, O’Donnell expresses his fear of a Paper Chase situation that will happen in the art world.