Consignments are typical in the art world. The owner of a painting who wishes to sell it will often consign it to an art gallery for exhibit to the public. The gallery will be empowered to sell the painting on behalf of the owner, usually at a predetermined minimum price. Upon sale of the painting to a customer, the gallery will remit the sale proceeds to the owner, retaining an agreed upon percentage of the sale price as its commission. Ordinarily, the consignment agreement will specify that the owner retains title to the painting until it is sold to a third party. These types of transactions have existed for years and are well understood in the art world. What could possibly go wrong? Apparently, quite a bit. In a recent bankruptcy case, the consignor/owner found itself in a precarious position vis-à-vis both the bankruptcy trustee and the consignee's secured party with respect to a painting that the owner had consigned to the debtor gallery. Jacobs v. Kraken Inv. Ltd. (In re Salander-O'Reilly Galleries, LLC), 2014 Bankr. LEXIS 1101 (Bankr. S.D.N.Y. Mar. 21, 2014) (hereinafter Jacobs) [an enhanced version of this opinion is available to lexis.com subscribers].
In Jacobs, the party Kraken had consigned a valuable painting by Botticelli to the debtor gallery. 2014 Bankr. LEXIS 1101, at *3. The parties entered into two successive one-year consignments. In the second consignment agreement, the debtor agreed to list the painting for sale for $9.5 million. The second consignment ended in May or June 2007, but the painting remained in the gallery. 2014 Bankr. LEXIS 1101, at *4. An involuntary Chapter 7 bankruptcy petition was filed against the gallery on November 1, 2007, and was converted to a voluntary Chapter 11 proceeding on November 9, 2007. 2014 Bankr. LEXIS 1101, at *5. The consignor Kraken's state court action to recover the painting was stayed, and the bankruptcy court assumed jurisdiction over the dispute regarding the painting. The consignor Kraken argued that, as the holder of title to the painting, it was the true owner whose rights were superior to those of all other claimants. The debtor's secured party, First Republic Bank, claimed a superior perfected security interest in the painting as part of the debtor's inventory. The Bank eventually assigned its claim to the trustee, who thereafter asserted the secured party's interest. 2014 Bankr. LEXIS 1101, at *8. Kraken and the trustee brought cross-motions for summary judgment with respect to the painting. The bankruptcy court in Jacobs ended up denying both motions, finding that disputed issues of material fact precluded summary judgment for either party. 2014 Bankr. LEXIS 1101, at *32. On the way to its ruling, the court in Jacobs explored the impact of Uniform Commercial Code Article 9 on consignments such as Kraken's. The U.C.C. specifically states that consignments as defined in Article 9 are within the scope of that article. U.C.C. § 9-109 (a)(4) (Official Text 2014). An Article 9 consignment is a "transaction, regardless of its form, in which a person delivers goods to a merchant for the purpose of sale and
(A) the merchant (i) deals in goods of that kind under a name other than the name of the person making the delivery; (ii) is not an auctioneer; and (iii) is not generally known by its creditors to be substantially engaged in selling the goods of others; (B) with respect to each delivery, the aggregate value of the goods is $1,000 or more at the time of delivery; (C) the goods are not consumer goods immediately before delivery; and (D) the transaction does not create a security interest that secures an obligation."
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