Is Art Worth More if a UCC-1 is Never Filed

Is Art Worth More if a UCC-1 is Never Filed?

Is art worth more if the UCC-1 was never filed? Yes, I’m asking the hard hitting questions of our time. OK, maybe not our time, but definitely a tough question that was answered in Salander-O’Reilly Galleries 475 B.R. 9 (S.D.N.Y.  2012) (Salander).

Kraken Investments Ltd. (“Kraken”) entered into a consignment agreement with Salander for the sale of Sandro Botticelli’s “Madonna and Child” with a price tag of no less than $8.5 million.

As you know, with consignment agreements, the consignor (Kraken) retains title to the goods (the painting) until the consignee (Salander) sells the goods and/or the goods are returned to the consignor.

In 2007, Salander, filed for bankruptcy protection. Kraken requested Salander return the painting, which was Kraken’s right based on the consignment agreement. Unfortunately, Salander did not comply with Kraken’s request, so Kraken wanted to pursue arbitration in order to retain ownership of the painting.

According to the terms of the consignment agreement, arbitration was to be handled in New Jersey, the bankruptcy proceeding was being handled in New York (and the piece of art & debtor were also in New York), so as you may have guessed: bankruptcy trumps arbitration. It was up to the bankruptcy judge to determine whether the rights to the art belonged to the bankrupt estate or Kraken.

There was a lot of money at stake and someone was bound to lose big.

As it turns out, the judge ruled that Kraken did not have rights to the art because the consignment agreement itself was not “binding.” To add insult to injury, the judge pointed out that rights could have been maintained had Kraken filed a UCC-1 with its consignment filing.

“The Court well understands why Kraken is perturbed, even outraged, by the idea that SOG’s [Salander] creditors may enjoy the proceeds from the sale of a valuable painting concededly owned by Kraken. The law of the state in which Kraken consigned the painting, however, allows for such an outcome where the consignor does not protect itself by filing a financing statement giving notice of the consignment to the consignee’s creditors.”

The takeaway is that a consignment agreement itself is not enough to secure rights – it is best to file a UCC with the consignment agreement to create a security interest in the goods.

So, is art worth more if it becomes an asset to the bankruptcy estate?

I’m not sure I’d be willing to find out – file the UCC!

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