Hobby Panic in 2009

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Posted By: Jeff

For those of you not nauseated by the topic already, I'd be happy to give anyone a quick primer on bankruptcy law as it relates to auction houses (not very much unlike a "self-storage" facility that goes under, by analogy, a case I actually handled in Virginia). Simply put, no trustee or creditor can grab property of a bankrupt auction house in satisfaction of the debts of the bankrupt auction house. The Bankruptcy Courts only have jurisdiction over property in which the debtor (the bankrupt auction house) has a recognized legal interest in the asset in question. As a non-tile holder, and mere possessor of another's goods, the auction house has no legal title or interest in the consignor's goods, even if they are in the auction house's possession. (In other words, as was pointed out above, consignors' goods have to be affirmatively shown to be legally owned by the auction house in some fashion before the goods would be considered part of the bankruptcy "estate" and be subjected to Bankruptcy Court administration.)

No, no "bankruptcy clause" in a consignment contract would be valid, or enforced, but it wouldn't be necessary as long as it is clear that title, in whole or in part, fully or for collateral purposes only, does not pass to the auction house (most consignment contracts I have seen make this very clear, since, with ownership, comes liability).

And, no, it wouldn't be much of a slap fight (although there are bankruptcy lawyers I'd pay to see to have a slap fight). It would take a motion made on behalf of one or more consignors for "turnover" of "non-estate" property, and would likely take 30-60 days before a Bankruptcy Court would hear the motion and rule on it. Not knowing any more than this, I'd guess there is a 95+% chance of a consignor winning this motion without much of a fight.

Once the consigned goods are sold and paid for, though, its a little different. Now, the auction house holds the consignors' money in trust. However, that trust can be and usually is technically violated when the auction house commingles all of the consignors' proceeds with its own general operating money, making it impossible to identify a particular deposit into that account distinct from any other deposit. In such a case, the commingling will probably result in no "turnover" of "non-estate" property to the consignors, since you can no longer specifically identify the dollars in the general operating account attributable to the proceeds of the consignor's particular sale. Then, there might be a LIFO/FIFO sort of accounting, but that usually fails when it comes to money in a bankruptcy case, and the unpaid consignors are relegated to mere creditors, and unsecured creditors at that (the next to lowest on the food chain -- shareholders in the auction house are actually the lowest form of bankruptcy pond scum). If by some miracle the auction house segregates (physically segregates, like in a separate account, or bank, or state) the consignment proceeds from any and every other money it holds, then some accounting of how to divvy up what is in that account would protect the consignors. In other words, the best protection for consignors is to be sure that, after a sale, the auction house physically segregates the consignors' portion of the proceeds of sales, and accounts for it separately from all other money coursing through the auction house.

As for 2009 and 2010, the fact is that more crappy real estate is going to collapse -- the 60 Minutes story hit it on the head. Alt-A's and Option Arms are coming due in the next 12-24 months, and that almost guarantees further suppression of realty prices and liquidity, and thus the "ground up" theory of economic recovery is almost certainly stymied through that period. With businesses failing due to collapsing markets, and the failure of financial institutions to put the TARP money out on the street in new or refinanced loans, and the coming second swell of real estate setbacks, things will likely not improve much, if at all, through 2010, and will probably step back, perhaps not hugely, but most likely at least somewhat. I don't see any real change for the man on the street until late 2010 or 2011, and I have never seen it as bad as it is right now (in almost 30 years of bankruptcy practice). Unemployment is going to rise, realty prices soften, interest rates remain so low as to dissuade investment, etc., so 2011 may be the first real glimmer of recovery light.

Its not doom and gloom. I'm on the front lines here, and I see it everyday in the faces of the people I interview as prospective clients -- things are bad, going to get just as bad for many more people, and for others it will get far worse, and no one foresees any real change anytime in the next two years. Maybe we're all wrong, but I doubt it.