PILLAR, Patricia Gericka A.

MODADV1

Vulnerabilities of Consigment: A Case of Fraud

I. INTRODUCTION

Consignment is prevalent in today’s corporate environment. It is a marketing strategy

wherein the consigner, the owner of the goods, transfers the physical goods to the consignee. It

is essentially an agreement between the two parties wherein the consigner allows the consignee

to sell the goods, and ultimately remit the cash sales which is net of the consignor’s commission

and reimbursable expenses. This arrangement is beneficial for both parties because the

consignor’s selling activities is shouldered by the consignee, and in return the consignee earns a

percentage based on sales.

II. SYNTHESIS AND INTEGRATION

The journal article entitled “Consignment Catastrophes: Lessons From New York’s Art

Gallery Fraud” highlights the benefits and vulnerabilities of the consignment arrangement. The

article tells a tale of Lawrence Salander owner of Salander O’Reilly Gallery in New York City. In

2010, he was sentence to prison after being found guilty of fraud and theft. This led to the ordered

shutdown of the gallery. Plaintiffs claimed that Salander fraudulently sold the consigned works of

art and failed to remit it to the artists, the consignors. The damage is estimated to be 120 million

dollars. This scandal caught the attention of the public because although the benefits of the

consignment arrangement are promising to both parties, it also sheds light to the vulnerabilities,

especially to the consignor. Despite the downsides of the arrangement, why do companies still

consign? According to the case of the Salander O’Reilly Gallery, consignment is a good
arrangement because purchasing pieces of arts is crazy expensive. This is why they resort to

consignment, because galleries can sell a piece of art with barely little to no expense at all.

On the other hand, from the perspective of the consignor, artists have the freedom of time

to pursue their passions which is to create pieces of art instead of marketing their works and

running a business. An important vulnerability of consignment takes place at the initial stages of

the agreement. Since consignment is a contract, mere consent would perfect the contract.

Therefore, a verbal consent instead of a written contract put both parties to an agreement at risk.

As in the case of the journal article, the artists especially those without experience selling their

own works, can be taken advantage of in this context. Inexperienced artists are not always aware

of what their rights are in a contract negotiation. A sweet talker gallery owner or dealer who is

more familiar with consignment practices and transactions could easily take advantage of a

consignor in the absence of a written document. Another complication in a consignment

arrangement is that it assumes that the property is held in trust. There is little assurance that the

consignee would really respect the agreement.

As mentioned earlier, the role of the consignee is critical. It is the channel for both the

sales and cash remittance of the consignor. Another complication of the consignment

arrangement is that consigners would often mix their own funds with the proceeds received from

the sale of the consigned goods. This could mean that the consignee’s creditors could reach the

funds that are actually due to the consignors. The mix up of the accounts would cause confusion

not only between the consignor and the consignee but as well as other parties involved such as

suppliers and creditors. As in the case of the Salander O’Reilly Gallery, Lawrence Salander sold

the consigned goods and applied the proceeds to his debts leaving the consignor with nothing. If

the consignee will act on bad faith, then it will be detrimental to the operation of the consignor.

Assuming that the consignee did go against what was agreed upon, the consignor will eventually
file a case on the court which would cost him/her litigation fees that would not have been incurred

in the first place if the consignee acted in good faith.

As stated in the journal article, many artists who chose to consign their works are not

highly paid. They create art as a hobby or side project. So when faced with the choice between

paying costly legal fees or simply dropping the matter, many artists may think twice about using

the courts to settle their disputes. In totality, the journal article revealed the weaknesses of

consignment that leaves the consignor at risk. Almost everything is at odds to the consignor when

all the scenarios above are probable and actually happens in real life. the case of the Salander

O’Reilly Gallery is a testament to how the consignment can be used as a means to fraud and

theft. It also shows that this cannot be shrugged off easily because it can cause great damage

which is sampled by the 120 million dollars worth of damages.

III. CONCLUSION AND RECOMMENDATION

In the journal article, the author has enumerated the actions of authorities in New York

against people who take advantage of the consignment arrangement. The new statute in New

York requires the parties to have the agreement in legal writing. The legal document should

expressly include the rights and obligations of the parties. This would ensure that the parties are

aware and fully understand the terms of the agreement. Another amendment by the authorities in

New York now specifies that the consignor– consignee relationship requires trust to give effect to

the contract. This means that whenever the consignor no longer feels that the consignee is trust-

worthy, then it could terminate the contract with the favor of the court.

This makes the interest of the consignor a priority, and makes the consignee strive to keep

the relationship in good condition. It is a good deterrent from the consignee acting in bad faith.

Other than that, the new amendment explicitly states that the comingle of the consignor and
consignee’s property is unallowable. And violations of this can lead to misdemeanor charges. As

for the legal fees, the amendment states that “any person who has been injured by reason of a

violation of this article may bring an action in his or her own name to enjoin such unlawful act, to

recover his or her actual damages, or both. The court may award reasonable attorneys’ fees,

costs and expenses to a prevailing plaintiff in any such action.”. With this, the consignor will no

longer need to fear the high cost of litigation when seeking to protect their rights.

IV. REFLECTION

Consignment indeed is a good marketing strategy for the consignor because the selling

activities are passed to the consignee. It is also promising to the consignee because he/she will

earn a commission based on the sales as well as be reimbursed for expenses that should be

shouldered by the consignor. Although the benefits seem a perfect arrangement, it actually has

several vulnerabilities especially to the consignor. In the journal article, Lawrence Salander owner

of Salander O’Reilly Gallery in New York City took advantage of the consignment arrangement to

sell the consigned goods and apply the proceeds to his debts. This fraudulence and theft led to a

120 million dollars worth of damages to the consignors. One important vulnerability is that here is

little assurance that the consignee would really respect the agreement. This is critical because

the consignee is the channel for both the sales and cash remittance to the consignor.

Another important vulnerability worth highlighting is the litigation expenses assuming that

the consignee did go against what was agreed upon. The consignor will shoulder litigation

expenses that should not be incurred in the first place. The consignor will shoulder the burden

even though the consignee is at fault. These vulnerabilities should not be set aside, because as

accountants the possible damages and losses caused by the weaknesses of the consignment

arrangement can greatly affect the operations of the business. Ultimately, the consignment
arrangement is beneficial for both parties when both parties act with good faith. However, both

parties, especially the consignor should still set precautions because failure to account for

consignment vulnerabilities could make or break a company’s operation and possibly its life-span.

BIBLIOGRAPHY

Haslach, M. (2014). Consignment Catastrophes: Lessons From New York’s Art Gallery Fraud.

Retrieved from http://digital.law.washington.edu/dspacelaw/bitstream/handle/1773.1

/1407/10wjlta125.pdf?sequence=3