Kraken Invs. Ltd. v. Jacobs (In re Salander–O'Reilly Galleries, LLC)

• Decision Date: 10 July 2012
• Docket Number: No. 11–CV–6133 (CS).,11–CV–6133 (CS).
• Citation: 475 B.R. 9
• Parties: In re SALANDER–O'REILLY GALLERIES, LLC, Debtor. Kraken Investments Limited, Appellant, v. Alan M. Jacobs, in his capacity as the Liquidation Trustee of the SOG Liquidation Trust, Appellee.
• Court: U.S. District Court — Southern District of New York

475 B.R. 9

In re SALANDER–O'REILLY GALLERIES, LLC, Debtor.

Kraken Investments Limited, Appellant,

v.Alan M. Jacobs, in his capacity as the Liquidation Trustee of the SOG Liquidation Trust, Appellee.

No. 11–CV–6133 (CS).

United States District Court,

S.D. New York.

July 10, 2012.

David I. Faust, Esq., Petra v.Z. Davenport, Esq., Faust Oppenheim LLP, New York, NY, for Appellant.

Robert J. Feinstein, Esq., Ilan D. Scharf, Esq., Pachulski Stang Ziehl & Jones LLP, New York, NY, for Appellee.

OPINION AND ORDER

SEIBEL, District Judge.

Before the Court is the appeal of Kraken Investments Limited (“Kraken”), (Doc. 1), filed on September 1, 2011, from an Order of the United States Bankruptcy Court for the Southern District of New York, dated August 1, 2011 (the “Order”), (Bankr. Doc. 990),¹ denying Kraken's motion for relief from the automatic bankruptcy stay to pursue arbitration. For the reasons stated below, the Bankruptcy Court's Order is AFFIRMED.

I. Background

Kraken is a limited company incorporated in the British Virgin Islands with its principal place of business in Jersey, Channel Islands. (Bankr. Doc. 941 ¶ 4.) Kraken is owned by Dr. Ronald Fuhrer, a citizen and resident of Israel who owns and operates an art gallery there. ( Id. ¶¶ 1, 4.) Salander–O'Reilly Galleries, LLC (“SOG” or “Debtor”), owned by Lawrence Salander, operated an art gallery in New York City. (Trustee Br. 5.) ²

A. SOG's Loan Agreement and the Consignment of the Botticelli

On April 14, 2006, SOG entered into a loan agreement (the “Loan Agreement”) with First Republic Bank (along with all successors in interest, the “Bank”). (Scharf Decl. Ex. F; ³ Doc. 12 Ex. A.) Pursuant to the Loan Agreement, the Bank would make “advances (each a ‘Revolving Loan Advance’ or ‘Advance’ and collectively the ‘Revolving Loan’ ”) from time to time from April 14, 2006 up to, but not including, June 30, 2007. (Loan Agreement § 1.1, at 2.) At no time could the outstanding principal of the Revolving Loan exceed the lesser of the “Maximum Borrowing Base” or the “Maximum Revolving Loan Commitment.” ( Id.) The Loan Agreement set the Maximum Revolving Loan Commitment at $26 million initially and reduced the amount periodically. ( Id. § 1.2, at 2.) The Maximum Borrowing Base was tied to SOG's “Eligible Inventory”: “Maximum Borrowing Base shall mean at any time 55% of the lower of cost ... or market value of the Borrower's Eligible Inventory.” ( Id.) Eligible Inventory, in turn, was defined as

any works of art, including, without limitation, all paintings [and other types of art] (collectively “Artwork”) held by the Borrower for sale by the Borrower, which:

....

(b) Are not held by the Borrower on consignment;

....

(d) Are owned absolutely by the Borrower, free and clear of all liens and encumbrances other than those in favor of the Bank;

...

(i) Are not subject to any claims regarding ... ownership ...; and

(j) As to which, if requested by the Bank, the Bank has been provided with satisfactory verification and documentation that the Artwork has been cross referenced with the database by the Art Loss Register to confirm that it is not stolen or of questionable ownership.

( Id. § 1.4, at 2–3.) The Loan Agreement granted the Bank a security interest in the “Collateral,” which included all of SOG's “inventory”:

To secure the payment and performance of all Obligations of the Borrower to the Bank, the Borrower hereby grants to the Bank a continuing security interest in the following properties, assets and rights of the Borrower, wherever located, whether now owned or hereafter acquired or arising, and all proceeds and products thereof (all of the same being hereinafter called the “Collateral”): all personal and fixture property of every kind and nature including without limitation all goods (including inventory, equipment and any accessions thereto)....

( Id. § 6.1(a), at 15.) SOG, pursuant to the Loan Agreement, represented:

With respect to the Collateral at the time the Collateral becomes subject to the Bank's security interest, the Borrower represents, warrants and covenants that ... [t]he Borrower shall be the sole owner, free and clear of all liens, claims, security interests and encumbrances except for Permitted Liens and liens in favor of the Bank, of and fully authorized to sell, transfer, pledge and/or grant a security interest in each and every item of its Collateral.

( Id. § 6.2, at 15.) ⁴ After execution of the Loan Agreement, the Bank perfected its security interest in the Collateral by, among other things, filing a UCC–1 financing statement. (Sharf Decl. Ex. G; see Trustee Br. 10.)

On May 3, 2006, Kraken and SOG entered into an agreement (the “Consignment Agreement”), (Scharf Decl. Ex. A), whereby Kraken consigned a painting, “Madonna and Child” by Sandro Botticelli (the “Botticelli”), to SOG for one year after receipt of the painting. ( Id. ¶ 1.) Under the Agreement, SOG would feature the Botticelli at an exhibition and use its best efforts to sell the painting, the asking price for which would be $9.5 million. ( Id. ¶¶ 6, 8.) If the painting sold, Kraken would receive no less than $8.5 million, and SOG would receive the difference between the actual sale price and Kraken's share. ( Id. at ¶ 9.) The Agreement also referred all disputes between the parties to arbitration in Jersey and stated that Jersey law would control:

Any disputes between the parties, including any disputes regarding this agreement, will be referred to arbitration. The sole arbitrator to be appointed will be a former Judge of the Royal Court of Jersey, Channel Islands, with the only competent Court to be the Royal Court of Jersey, Channel Islands. Jersey, Channel Islands law will apply to this agreement, including the Arbitration (Jersey) Law 1998.

( Id. ¶ 11.) Kraken delivered the Botticelli to SOG on May 11, 2006. (Kraken Br. 4.) ⁵ Kraken did not file a UCC–1 financing statement registering its interest in the consigned property. ( Id.) When the consignment period expired on May 11, 2007, SOG requested a short extension, to which Kraken agreed. ( Id.) ⁶ Thereafter, Kraken requested that SOG return the Botticelli, but SOG did not return it. ( Id.;see Trustee Br. 7.)

B. State Court Proceedings and SOG's Bankruptcy

Months before the commencement of SOG's bankruptcy, artists and owners of artwork sued SOG and its owner in multiple actions asserting, among other things, rights to artwork consigned to or held by SOG, fraud, and unpaid debts. (Trustee Br. 7.) In one action, Lennox v. Salander O'Reilly Galleries, No. 602917/2007, the New York Supreme Court issued a preliminary injunction which enjoined the disposition of any artwork at SOG's gallery and prohibited SOG or its agents from accessing the premises except by order of the court. ( Id.) As a result of this injunction, SOG closed its gallery on or about October 19, 2007. ( Id.) On October 25, 2007, Kraken commenced an action by way of an order to show cause in New York State Supreme Court, seeking seizure of the Botticelli. ( Id. at 8.)

On November 1, 2007 (the “Petition Date”), three of SOG's creditors commenced an involuntary bankruptcy case against SOG under chapter 7 of the Bankruptcy Code, and Kraken's state court action to seize the Botticelli was automatically stayed pursuant to Section 362 of the Bankruptcy Code. ( Id. at 5, 8.) As of the Petition Date, SOG was in possession of more than four thousand works of art, including the Botticelli. ( Id. at 5, 8.) On November 9, 2007, SOG's involuntary case was converted to a voluntary case under chapter 11 of the Bankruptcy Code. ( Id. at 5, 8.) After conversion, Mr. Salander ceded control of SOG to a chief restructuring officer. ( Id. at 5.) On January 3, 2008, the Bankruptcy Court entered an order (the “Debtor–in–Possession (DIP) Financing Order”) that provided that the Bank's pre-petition loan to SOG was

secured by, among other things, a perfected security interest (the “Prepetition Lien”) in favor of the Bank in the following properties, assets and rights of the Debtor and its bankruptcy estate, or either of them, wherever located, whether now owned or hereinafter acquired or arising, and all proceeds and products thereof: all personal and fixture property of every kind and nature, including without limitation all goods (including inventory, equipment and any accessions thereto)....

(Scharf Decl. Ex. H, at 9.)

Due to the large number of potential claims to artwork in SOG's possession, the Bankruptcy Court entered an order dated March 11, 2008 (the “Protocol Order”), (Scharf Decl. Ex. D), approving the Protocol,⁷ the purpose of which was to “identify all claims against and interests in all of the Artwork in the Debtor's possession, custody or control, to determine which Artworks are not property of the Debtor's estate, and to resolve disputed claims to Artwork in a fair, orderly and efficient manner.” (Protocol 1.) Under the Protocol, a party (an “Art Claimant”) could “assert that certain Artwork is not property of the Debtor's estate under section 541 of the Bankruptcy Code” because the “Artwork is held by the Debtor ... on consignment.” ( Id.) The Art Claimant could do so by filing an Art Claims Form ⁸ by the Art Claims Bar Date of June 15, 2008. (Protocol Order 2.) After the Art Claims Bar Date, a Working Group ⁹ determined whether each piece of artwork subject to an Art Claim was property of the bankruptcy estate. (Protocol 6.) If a member of the Working Group asserted with a good faith basis that an artwork was part of the bankruptcy estate, the work was labeled as a “Claimed Estate Asset.” ( Id.) An artwork unanimously determined not to be property of the estate—including “Artworks that are subject to perfected consignment agreements in accordance with the UCC by the relevant consignor ... and Artworks subject to consignment agreements that expired or were terminated in accordance with their terms”—was labeled as a “Non–Estate Asset” and returned to the Art Claimant. (...