In re Galleries

• Decision Date: 18 July 2011
• Docket Number: No. 07–30005.,07–30005.
• Citation: 453 B.R. 106,55 Bankr.Ct.Dec. 50
• Parties: In re SALANDER O'REILLY GALLERIES, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

453 B.R. 106

55 Bankr.Ct.Dec. 50

In re SALANDER O'REILLY GALLERIES, Debtor.

No. 07–30005.

United States Bankruptcy Court,S.D. New York,Poughkeepsie Division.

July 18, 2011.

Ilan Scharf, Pachulski Stang Ziehl & Jones, LLP, New York, NY, for Alan M. Jacobs, Liquidation Trustee, SOG Liquidation Trust.Petra von Ziegesar and David Faust, Faust Oppenheim, LLP, New York, NY, for Kraken Investment, Ltd.

OPINION DENYING MOTION FOR RELIEF FROM STAY

CECELIA G. MORRIS, Bankruptcy Judge.

Kraken Investment, Ltd. (“Kraken”) moves for relief from the automatic stay, and for an order of this Court stating that Jersey (Channel Islands) law controls the determination of whether a work of art, “Madonna and Child, by Sandro Botticelli” (the “Botticelli”) is part of the Debtor's estate, and that such determination shall be made in arbitration in Jersey (Channel Islands).¹ Kraken seeks to enforce an arbitration clause in a pre-petition consignment contract entered with Debtor's former principal, which states that all disputes between the parties shall be determined by arbitration in Jersey under the law of Jersey, and that the agreement shall be governed by Jersey law. Kraken's motion is denied. The Trust's rights were created through chapter 5 of the Bankruptcy Code, which governs creditors, the debtor and the estate, and were assigned to the Trust by Debtor's prepetition secured lender. The Court does not find that cause exists to lift the stay, where a party seeks to enforce an arbitration clause against an entity that asserts rights derived from the Bankruptcy Code and as assignee of a third-party creditor. The presumption of enforceability of arbitration clauses must yield to the policies of the Bankruptcy Code, where the matter to be arbitrated is substantively core. Kraken has not made a persuasive argument that the arbitration and choice of law clause is valid in light of N.Y. U.C.C. § 1–105(2), which states that N.Y. U.C.C. §§ 9–301 through 9–307 specify the law governing perfection, the effect of non-perfection, and the priority of security interests, which are at the heart of determining whether the Trust may liquidate the work of art for the benefit of creditors.

BACKGROUND

Before the bankruptcy case was commenced, the Debtor was an art gallery in Manhattan. It obtained financing from the predecessor-in-interest of Bank of America, N.A. (the “Bank”), which allegedly was secured by a blanket lien on all the Debtor's assets.² At the time the bankruptcy case was commenced, the aggregate outstanding principal balance owed to the Bank was $25.317 million. See Final Order Pursuant to 11 U.S.C. §§ 361, 362, 363, 364 and 105 and Fed. R. Bankr.P. 4001 and 6004 Granting Final Approval of Debtor in Possession Financing and Use of Cash Collateral, entered Jan. 3, 2008 (“Final DIP Order”); Disclosure Statement with respect to Third Amended Plan of Liquidation for Salander O'Reilly Galleries, LLC, p. 12. ³ A blanket lien on the artwork in favor of the Bank was referenced in the Final DIP Order, in which the Court approved debtor-in-possession financing.

On May 3, 2006, about a year and a half before the bankruptcy case was commenced, Kraken and the Debtor entered into an agreement characterized as a consignment agreement, which provided for the consignment of a painting called “Madonna and Child,” by Botticelli. The sale price was set at $9.5 million. The agreement contained a clause that states:

11. 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, or another suitably qualified person. Arbitration will take place in 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.

(the “Jersey Law Clause”). According to the Trust, the consignment agreement expired in June 2007.

Before the bankruptcy was commenced, a creditor, Lennox, obtained a state-court injunction barring the transfer of any artwork. Six days before the bankruptcy was filed, Kraken commenced its own lawsuit in the New York Supreme Court to recover the Botticelli; the lawsuit was stayed by the bankruptcy filing.

Procedural history of the bankruptcy case

On November 1, 2007 (the “Petition Date”), three creditors of the Debtor commenced an involuntary case against the Debtor under chapter 7 the Bankruptcy Code. On November 9, 2007, the Debtor's involuntary case was converted to a voluntary case under chapter 11 of the Bankruptcy Code. After conversion of the case, the Debtor's business was managed by a chief restructuring officer appointed by the Court.

On November 20, 2007, the United States Trustee appointed the Official Committee of Unsecured Creditors (the “Committee”). By stipulation entered February 4, 2008, the Debtor and the Committee agreed that the Debtor would assign certain responsibilities with respect to the investigation and prosecution of certain estate claims to the Committee (the “Stipulation”). Pursuant to the Stipulation, the Committee was authorized to prosecute certain claims on behalf of the Debtor's estate, including any claims pursuant to sections 544 through 552 of the Bankruptcy Code, and section 541 of the Bankruptcy Code.

By order entered March 11, 2008, the Court approved the Art Claims Protocol, a procedure designed to streamline the resolution of competing claims to the artwork (the “Protocol”). Pursuant to the Protocol, art claimants would file claims of ownership with respect to the artwork, and engage in mediation regarding disputed claims. Disclosure Statement, pp. 21–22.

Kraken filed an art claim pursuant to the Art Protocol on or about May 28, 2008, asserting claims to the Botticelli, among other artwork, and engaged in an unsuccessful mediation regarding the Botticelli pursuant to the Art Protocol. Kraken filed a proof of claim on July 17, 2008, for $9.5 million for “consigned artwork,” and annexed a copy of the art claim, apparently as supporting documents.

On January 20, 2010, the Court entered its Order (A) confirming the third amended joint plan of liquidation proposed by Debtor, the Committee and the Bank (the “Plan”) and (B) approving a settlement between Debtor, the Committee, and four other entities (the “Settlement”) (together, the “Confirmation Order”). Pursuant to the confirmed plan, a liquidation trust was established (the “Trust”), and the rights and powers under sections 544 through 552 of the Bankruptcy Code passed from the Committee to the Trust. Disclosure Statement, p. 47. The Bank assigned its interest in the Botticelli to the Trust. Objection of the Liquidation Trustee to Motion of Kraken Investments Limited for Relief from the Automatic Stay, Exhibit D, Docket No. 951.

The lift-stay motion

On January 19, 2011, Kraken filed a motion for relief from stay, with supporting affidavits and memorandum of law. Case No. 07–30005, Docket Nos. 937–943. The Trust filed an objection to the motion on February 22, 2011. Docket Nos. 951–952. A hearing was held to consider the motion on March 1, 2011. The Court held a subsequent hearing in May 9, 2011, and assigned additional briefing. Kraken and the Trust filed the supplemental briefs and corresponding replies.

Kraken seeks relief from the stay, to enforce the Jersey Law Clause and pursue arbitration against the Liquidation Trustee of the Trust in Jersey. Kraken's request in pursuing arbitration is to determine whether the Botticelli was property of the Debtor prior to the commencement of the bankruptcy proceeding and whether, the Botticelli is now part of the bankruptcy estate. Kraken asks that Jersey law control that determination.

Kraken argues that the question is whether the Botticelli is part of the bankruptcy estate, and such question turns on state law—the Uniform Commercial Code. The Uniform Commercial Code controls two important questions: whether the arbitration clause should be enforced, and the effect of Kraken's failure to file a financing statement. At oral argument, counsel to Kraken framed the issues as: 1. whether the Botticelli was property of the Debtor before the bankruptcy case was commenced; and 2. where the first question should be decided. According to Kraken, N.Y. U.C.C. 1–105(1) provides that choice of law provisions must be respected where the choice is of a jurisdiction that bears a “reasonable relation” to the transaction. Kraken argues that the Court should enforce the provision in the consignment agreement that sets Jersey law as the law that should control whether the Botticelli is part of the estate. Kraken does not address the effect of N.Y. U.C.C. § 1–105(2), other than as an exception allegedly not relevant to the matter at bar. As discussed herein, N.Y. U.C.C. § 1–105(2) appears on its face to suggest that the Uniform Commercial Code pre-empts the Jersey Law Clause with respect to the effect of non-perfection of a security interest, and is highly relevant to deciding whether Kraken may be granted relief from the stay.

The Trust opposes the lift-stay motion, pointing out that a U.C.C. financing statement was not filed with respect to the artwork and arguing that Kraken must prove that the consignment was a “true consignment.” The Trust alleges the consignment agreement expired before the chapter 11 bankruptcy was commenced, and Kraken consented to a continued consignment. As proof that the Debtor continued in possession of the Botticelli after the consignment agreement expired, counsel to the Trust proffers an excerpt of a catalogue featuring the Botticelli in an exhibition scheduled to run from October 17, 2007, to February 1, 2008. The Trust alleges that the Bank's lien survived Kraken's attempt to terminate the consignment agreement before the commencement of the bankruptcy, resulting in a valid...