The Liquidation Trustee of The SOG Liquidation Tru v. Kraken Investments Limited and Golconda Fine Art L

FOR PUBLICATION
UNITED STATES BANKRUPTCY COURT
SOUTHERN DISTRICT OF NEW YORK
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In re:
SALANDER–O’REILLY GALLERIES,
LLC,
Debtor
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Chapter 11
Case No. 07-30005 (CGM)
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ALAN M. JACOBS, as Liquidation Trustee
of the SOG Liquidation Trust,
Plaintiff
v.
KRAKEN INVESTMENTS LIMITED,
Defendant
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Adversary No. 13-09004
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MEMORANDUM DECISION DENYING
CROSS-MOTIONS FOR SUMMARY JUDGMENT
A P P E A R A N C E S :
PACHULSKI STANG ZIEHL & JONES
Attorneys for Alan M. Jacobs, as Liquidation
Trustee of the SOG Liquidation Trust
780 Third Avenue
36th Floor
New York, NY 10017
By: 	Robert J. Feinstein, Esq.
John A. Morris, Esq.
Ilan D. Scharf, Esq.
FAUST OPPENHEIM LLP
Attorneys for Kraken Investments Limited
488 Madison Avenue
17th Floor
New York, NY 10022
By: 	David I. Faust, Esq.
Petra v.Z. Davenport, Esq.
CECELIA G. MORRIS
CHIEF U.S. BANKRUPTCY JUDGE
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Before the Court are cross-motions for summary judgment in this proceeding to
determine the validity, extent and priority of interests asserted in the painting Madonna and
Child by Sandro Botticelli (the “Botticelli”). At this juncture, the sole issues before the Court are
(i) whether a perfected blanket lien in debtor’s inventory attached to the Botticelli while it was
on consignment to the debtor’s art gallery, and (ii) if so, whether that lien has priority over the
consignor’s interest in the return of the painting. For the reasons set forth below, the Court
concludes that material issues of fact preclude summary judgment for the either party at this
time. Both motions are therefore denied.
JURISDICTION
The Court has subject-matter jurisdiction over this adversary proceeding pursuant to 28
U.S.C. § 1334 and the Amended Standing Order of Reference signed by Chief District Judge
Loretta A. Preska on January 31, 2012. This is a “core” proceeding pursuant to 28 U.S.C. §
157(b)(2)(B) (allowance or disallowance of claims against the estate) and (K) (determinations as
to the validity, extent, or priority of liens).
BACKGROUND 1
This case was commenced by the filing of an involuntary petition against Salander–
O’Reilly Galleries (the “Debtor”) on November 1, 2007 (the “Petition Date”). Pl.’s Statement of
Facts ¶ 1, No. 13-09004, ECF No. 55. Prior to the Petition Date, the Debtor operated an art
gallery in New York City. Id. ¶ 2. As of the Petition Date, the Debtor was in possession of in
excess of 4,000 works of art, many of which were subject to the claims or interests of various
parties. Id. The Botticelli was one of these works of art.
1 Except where otherwise noted, the following facts are taken from the statements of fact and responses thereto that
were submitted in support of the cross-motions for summary judgment. Exhibits were submitted in the form of
attachments to the declarations of Ilan Scharf (the “Scharf Declaration”) (Pl.’s Exs. A through I) and David I.
Faust (the “Faust Declaration”) (Def.’s Exs. 1 through 24). See Scharf Decl., No. 13-09004, ECF No. 56; Faust
Decl., No. 13-09004, ECF No. 64. Except where noted, the facts are not in dispute.
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The Botticelli is owned by Kraken Investments Limited (“Kraken” or the “Defendant”).
Def.’s Statement of Facts ¶ 1, No. 13-09004, ECF No. 63. Kraken originally consigned the
Botticelli to the Debtor’s gallery for a one-year period in 2004. Id. ¶ 3. On May 3, 2006, Kraken
and the Debtor entered into a second agreement (the “Second Consignment”) to consign the
Botticelli to the Debtor’s gallery for another one-year period. Id. ¶ 7. A copy of the Second
Consignment is attached to the Scharf Declaration as Exhibit A. See Scharf Decl. Ex. A, No. 13-
09004, ECF No. 56. Among other things, the terms of the Second Consignment provided that the
Debtor would list the Botticelli for sale for $9.5 million, with a sale to result in a commission of
$1 million being payable to the Debtor and no less than $8.5 million being payable to Kraken.
Pl.’s Statement of Facts ¶ 3, No. 13-09004, ECF No. 55. Kraken did not file a UCC-1 financing
statement with respect to either consignment of the Botticelli to the Debtor. Def.’s Statement of
Facts ¶ 6, No. 13-09004, ECF No. 63.
By its terms, the Second Consignment ended in May or June 2007. Id. ¶ 12; Pl.’s
Statement of Facts ¶ 4, No. 13-09004, ECF No. 55. According to Kraken, after the Second
Consignment ended, one of its agents removed the Botticelli from the Debtor’s gallery and
stored it in her apartment until September 2007. Def.’s Statement of Facts ¶ 13, No. 13-09004,
ECF No. 63. At that time, Kraken contends that it returned the Botticelli to the Debtor’s gallery
as a loan for an exhibition that was to be held in October 2007. Id. ¶¶ 13–15. The liquidation
trustee under the Debtor’s confirmed chapter 11 plan (the “Trustee” or the “Plaintiff”) disputes
this claim, alleging that it is “self-serving” and “wholly contradicted by [the agent]’s testimony
and Kraken’s own pleadings to this Court.” Pl.’s Resp. to Def.’s Statement of Facts ¶¶ 13; 15.
According to the Trustee, there is no evidence that the Botticelli was ever removed from the
gallery after the Second Consignment ended. Id. ¶ 13.
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On October 15 and 17, 2007, Kraken demanded the return of the Botticelli. Def.’s
Statement of Facts ¶ 18, No. 13-09004, ECF No. 63. On October 25, 2007, Kraken filed suit in
New York state court seeking seizure of the Botticelli. Pl.’s Statement of Facts ¶ 5, No. 13-
09004, ECF No. 55. As set forth above, this case was commenced as an involuntary chapter 7
case on November 1, 2007 and converted to a voluntary chapter 11 case on November 9, 2007,
staying Kraken’s state court action. Id. ¶ 1. The Trustee is currently in possession of the
Botticelli. Def.’s Statement of Facts ¶ 8, No. 13-09004, ECF No. 63.
On March 11, 2008, this Court entered an order approving a protocol (the “Art Claims
Protocol”) for assertion and resolution of claims of ownership against artwork in the possession,
custody or control of the Debtor. Pl.’s Statement of Facts ¶ 6, No. 13-09004, ECF No. 55.
Among other things, the Art Claims Protocol required parties asserting claims of ownership in
artwork to file a claim (an “Art Claim”) with supporting documentation on the Court’s claims
register for the Debtor’s bankruptcy case. Id. The Art Claims Protocol further provided that a
working group (the “Working Group”) would convene to review the Art Claims to determine,
among other things, whether the works subject to those claims were “Claimed Estate Assets” or
“Non-Estate Assets.” See Art Claims Protocol § VI, No. 07-30005, ECF No. 308. The Art
Claims protocol provided:
If any member of the Working Group asserts a good faith basis that [a work
subject to an Art Claim] is property of the Debtor’s estate, such Artwork shall be
labeled a “Claimed Estate Asset.” Each item of Artwork that the Working Group
unanimously believes is not property of the Debtor’s estate, including, without
limitation . . . Artworks subject to consignment agreements that expired or were
terminated in accordance with their terms, shall be labeled as a “Non-Estate
Asset.”
Id. Approximately 276 Art Claims were filed asserting claims against approximately 2,000
works of art. Pl.’s Statement of Facts ¶ 6, No. 13-09004, ECF No. 55.
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On May 28, 2008, Kraken filed an Art Claim (the “Kraken Art Claim”) asserting its
ownership interest in the Botticelli. Id. ¶ 7. A copy of the Kraken Art Claim is attached to the
Scharf Declaration as Exhibit B. See Scharf Decl. Ex. B, No. 13-09004, ECF No. 56. On July 17,
2008, Kraken also filed a proof of claim (the “Kraken Proof of Claim”) for $9.5 million based on
“consigned artwork.” Pl.’s Statement of Facts ¶ 8, No. 13-09004, ECF No. 55. The Kraken Proof
of Claim was assigned Claim No. 289 in the Debtor’s bankruptcy case. Id. A copy of the Kraken
Proof of Claim is attached to the Scharf Declaration as Exhibit C. See Scharf Decl. Ex. C, No.
13-09004, ECF No. 56.
After reviewing the Kraken Art Claim, the Working Group determined that the term of
the Second Consignment expired prior to the Petition Date. Def.’s Statement of Facts ¶ 30, No.
13-09004, ECF No. 63. However, notwithstanding the pre-petition termination of the Second
Consignment, the Working Group did not label the Botticelli a “Non-Estate Asset.” Id. ¶ 31.
Instead, on June 24, 2009, counsel for the Debtor sent a letter (the “June 24 Letter”) to Kraken’s
attorneys scheduling the Kraken Art Claim for mediation pursuant to the Art Claims Protocol. A
copy of the June 24 Letter is attached to the Faust Declaration as Exhibit 22. See Faust Decl. Ex.
22, No. 13-09004, ECF No. 64. According to the June 24 Letter, the purpose of the mediation
would be to address the issue of “[w]hether [Kraken] can establish [its] asserted ownership
interests in the [Botticelli] or whether such interests represent unperfected security interests
under UCC Article 9.” Id.
On December 15, 2010, after an unsuccessful mediation, the Trustee and Bank of
America, as successor-in-interest to Merrill Lynch Bank & Trust Co. and First Republic Bank
(collectively, the “Bank”) entered into an assignment of lien (the “Lien Assignment”) with
respect to the Botticelli. A copy of the Lien Assignment is attached to the Scharf Declaration as
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Exhibit G. See Scharf Decl. Ex. G, No. 13-09004, ECF No. 56. Pursuant to the Lien Assignment,
the Bank:
assign[ed], transfer[red] and convey[ed] outright and unconditionally to the
[Trustee] . . . all of the Bank’s right, title and interest in or to the [Botticelli],
including without limitation the Bank’s lien against or in the [Botticelli] and all of
the rights, powers, privileges, remedies, and other benefits of the Bank with
respect to the [Botticelli].
Id. ¶ 2.
The Bank’s purported lien in the Botticelli arises out of a pre-petition loan agreement
between the Bank and the Debtor (the “Loan Agreement”). See Pl.’s Statement of Facts ¶ 9, No.
13-09004, ECF No. 55. A copy of the Loan Agreement is attached to the Scharf Declaration as
Exhibit D. See Scharf Decl. Ex. D, No. 13-09004, ECF No. 56. By virtue of the Loan
Agreement, the Debtor granted the Bank a continuing security interest in all of the Debtor’s
“personal and fixture property of every kind and nature including without limitation all goods
(including inventory, equipment, and any accessions thereto) . . . and all products and proceeds
of the foregoing.” Id. § 6.1. The Bank perfected its blanket lien in substantially all of the
Debtor’s assets by, among other things, filing a UCC-1 financing statement (the “UCC-1”) on
March 1, 2005. A copy of the UCC-1 is attached to the Scharf Declaration as Exhibit E. See
Scharf Decl. Ex. E, No. 13-09004, ECF No. 56. Pursuant to the UCC-1, the collateral securing
the Bank’s claim against the Debtor included “all works of art.” Id.
On January 19, 2011, after the unsuccessful mediation and the Bank’s assignment of its
purported lien in the Botticelli to the Trustee, Kraken filed a motion for relief from the automatic
stay to enforce the arbitration provisions of the Second Consignment and arbitrate the dispute
between Kraken and the Trustee over whether the Botticelli was property of the Debtor’s
bankruptcy estate. See Mot. ¶¶ 19–22, No. 07-30005, ECF No. 938. After a hearing and briefing
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by Kraken and the Trustee, this Court entered a memorandum decision denying the motion for
stay relief. See In re Salander–O’Reilly Galleries, 453 B.R. 106 (Bankr. S.D.N.Y. 2011), aff’d
sub nom., Kraken Inv. Ltd. v. Jacobs (In re Salander–O’Reilly Galleries), 475 B.R. 9 (S.D.N.Y.
2012).
On September 5, 2012, the Trustee filed an objection to the Kraken Art Claim and the
Kraken Proof of Claim (collectively, the “Claim Objection”). See Claim Obj., No. 07-30005,
ECF No. 1112. In sum, the Trustee alleged that Kraken failed to perfect its interest in the
Botticelli and that the Trustee had a superior right to the Botticelli either: (i) pursuant to § 544(a)
of the Bankruptcy Code, which allows the Trustee to avoid certain unperfected interests in the
Debtor’s property; or, alternatively, (ii) as assignee of the Bank’s perfected lien in the Botticelli.
See id. ¶ 1. On November 30, 2012, Kraken filed a response to the Claim Objection. See Resp. to
Claim Obj., No. 07-30005, ECF No. 1133. In its response, Kraken contended: (i) the Trustee
could not exercise any rights under § 554(a) with respect to the Botticelli, since the Debtor had
no interest in the Botticelli as of the Petition Date; and (ii) the Bank’s lien did not extend to
goods that the Debtor held consignment such as the Botticelli. See id. ¶¶ 97–111. Kraken also
requested that the Court convert the Claim Objection into an adversary proceeding under Federal
Rule of Bankruptcy Procedure 7001. Id. ¶ 112.
On January 24, 2013, the Court so-ordered a stipulation between Kraken and the Trustee
providing that the Claim Objection would proceed as an adversary proceeding. See Order, No.
07-30005, ECF No. 1149. Pursuant to the stipulation, the Claim Objection was deemed to be the
Trustee’s complaint. Id. ¶¶ 4. Kraken’s response to the Claim Objection was deemed to be its
answer. Id. ¶ 5.
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On November 26, 2013, the Trustee filed a motion for summary judgment (the “Trustee’s
Motion”) supported by a statement of facts, the Scharf Declaration, and a memorandum of law.
See Mot., No. 13-09004, ECF No. 54; Pl.’s Statement of Facts, No. 13-09004, ECF No. 55;
Scharf Decl., No. 13-09004, ECF No. 56; Pl.’s Mem. of Law, No. 13-09004, ECF No. 57. On
January 6, 2014, Kraken filed opposition to the Trustee’s Motion and a response to the Trustee’s
statement of facts. See Def.’s Opp., No. 13-09004, ECF No. 68; Def.’s Resp. to Pl.’s Statement
of Facts, No. 13-09004, ECF No. 69. On January 27, 2014, the Trustee filed a reply to Kraken’s
opposition. See Pl.’s Reply, No. 13-09004, ECF No. 76.
On December 3, 2013, Kraken filed a cross-motion for summary judgment (“Kraken’s
Motion,” together with the Trustee’s Motion, the “Motions”) supported by a statement of facts,
the Faust Declaration, and a memorandum of law. See Mot., No. 13-09004, ECF No. 61; Def.’s
Statement of Facts, No. 13-09004, ECF No. 63; Faust Decl., No. 13-09004, ECF No. 64; Def.’s
Mem. of Law, No. 13-09004, ECF No. 62. On January 6, 2014, the Trustee filed opposition to
Kraken’s Motion and a response to Kraken’s statement of facts. See Pl.’s Opp., No. 13-09004,
ECF No. 72; Pl.’s Resp. to Def.’s Statement of Facts, No. 13-09004, ECF No. 71. On January
27, 2014, Kraken filed a reply. See Def.’s Reply, No. 13-09004, ECF No. 74.
A hearing on the Motions was held on February 19, 2014. The Court reserved decision
and now issues this memorandum decision resolving the Motions.
DISCUSSION
A. 	Summary Judgment Standard
Federal Rule of Civil Procedure 56(a), applicable in this adversary proceeding pursuant
to Federal Rule of Bankruptcy Procedure 7056, provides that a court “shall grant summary
judgment if the movant shows that there is no genuine dispute as to any material fact and the
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movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). “A fact is material if it
‘might affect the outcome of the suit under the governing law.’” Roe v. City of Waterbury, 542
F.3d 31, 35 (2d Cir. 2008) (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986)).
“A factual dispute is genuine ‘if the evidence is such that a reasonable jury could return a verdict
for the nonmoving party.’” McElwee v. County of Orange, 700 F.3d 635, 640 (2d Cir. 2012)
(quoting Anderson, 477 U.S. at 248).
“The burden rests on the movant to demonstrate the absence of a genuine issue of
material fact.” Jacobowitz v. Cadle Co. (In re Jacobowitz), 309 B.R. 429, 435 (S.D.N.Y. 2004)
(citing Celotex Corp. v. Catrett, 477 U.S. 317, 330 (1986)). “In determining whether that burden
has been met, the court is required to resolve all ambiguities and credit all factual inferences that
could be drawn in favor of the party against whom summary judgment is sought.” Vivenzio v.
City of Syracuse, 611 F.3d 98, 106 (2d Cir. 2010); see Gallo v. Prudential Residential Servs.,
L.P., 22 F.3d 1219, 1224 (2d Cir. 1994). “When ruling upon cross-motions for summary
judgment, the court must evaluate each motion separately and must draw all reasonable
inferences against the party whose motion is under consideration.” Coach, Inc. v. Peters, 386
F.Supp.2d 495, 497 (S.D.N.Y. 2005).
In considering a motion for summary judgment, “[t]he trial court should not weigh the
evidence or determine the truth of any matter.” Virgin Atlantic Airways Ltd. v. British Airways
PLC, 257 F.3d 256, 262 (2d Cir. 2001) (citing Anderson, 477 U.S. at 248). As a result, “if there
is any evidence in the record from any source from which a reasonable inference could be drawn
in favor of the non-moving party, summary judgment is improper.” Howley v. Town of Stratford,
217 F.3d 141, 151 (2d Cir. 2000).
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B. 	Disposition of the Motions
i. 	The Trustee’s Motion
For purposes of the Trustee’s Motion, the Trustee is seeking summary judgment solely on
the basis that he has a superior right to the Botticelli as the assignee of the Bank’s perfected lien.
See Pl.’s Reply ¶ 6, No. 13-09004, ECF No. 76 (“[T]he Trustee is not relying on his judicial lien,
which would have arisen as of the Petition Date and apparently after the [Second Consignment]
ended.”). For the reasons discussed below, the Court concludes that there are material issues of
fact that preclude judgment for the Trustee at this time.
As set forth above, the parties do not dispute that Kraken owns the Botticelli. See Def.’s
Statement of Facts ¶ 1, No. 13-09004, ECF No. 63 (“Kraken owns the painting Madonna and
Child by Sandro Botticelli . . . .”); Pl.’s Resp. to Def.’s Statement of Fact, ¶ 1, No. 13-09004,
ECF No. 71 (“[The Trustee] does not dispute this assertion.”). As between the Debtor and
Kraken, the Court agrees that Kraken owns the Botticelli. See In re Valley Media, Inc., 279 B.R.
105, 123 (Bankr. D. Del. 2002) (stating that nothing in the Uniform Commercial Code “affects
the ownership rights of the consignor in relation to the consignee”). However, the claims made
by the Trustee in this adversary proceeding are based on provisions of the Uniform Commercial
Code that allow the creditors of a consignee such as the Debtor to obtain rights in consigned
goods that are superior to those of the actual owner of the goods if the owner fails to take steps to
perfect its interest.
Under the Uniform Commercial Code, where a transaction is a “consignment,” the
consignee—in this case, the Debtor—will be deemed to hold rights and title to the goods equal to
those of the consignor:
[F]or purposes of determining the rights of creditors of . . . a consignee, while the
goods are in the possession of the consignee, the consignee is deemed to have
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rights and title to the goods identical to those the consignor had or had power to
transfer.
N.Y. U.C.C. Law § 9–319(a). In contrast, the consignor—in this case Kraken, the “owner” of the
Botticelli—is deemed to hold only a purchase-money security interest in the consigned goods as
against creditors of the consignee. See N.Y. U.C.C. Law §§ 1–201(37) (stating that a “‘[s]ecurity
interest’ . . . includes any interest of a consignor . . . in a transaction that is subject to Article 9”);
9–103(d) (stating that “[t]he security interest of a consignor in goods that are the subject of a
consignment is a purchase-money security interest in inventory”). Although a consignor may
perfect its purchase-money security interest in the consigned goods to prevent creditors of the
consignee from obtaining rights superior to the consignor, Kraken admits that it failed to file a
UCC-1 financing statement to protect its interest in the Botticelli. See Def.’s Statement of Facts ¶
6, No. 13-09004, ECF No. 63.
In light of these provisions, creditors of the Debtor such as the Bank may have obtained
rights in the Botticelli superior to those of Kraken, provided that the provisions of Article 9 apply
to the consignment of the Botticelli. By its terms, Article 9 applies to a “consignment.” See N.Y.
U.C.C. Law § 9–109(a)(4). Article 9 defines a “consignment” as:
[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 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;
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(C) 	the goods are not consumer goods immediately before delivery; and
(D) 	the 	transaction 	does 	not 	create 	a 	security 	interest 	that 	secures 	an
obligation.
Id. § 9–102(a)(20).
In support of the Trustee’s Motion, the Trustee alleges:
[T]he transactions between Kraken and the Debtor fall squarely within the
definition of a consignment because Kraken delivered the [Botticelli] to the
Debtor and (a) the Debtor dealt in artwork under its own name and not in
Kraken’s name, (b) the Debtor was not an auctioneer, (c) the Debtor was not
generally known by its creditors to be substantially engaged in selling the goods
of others, (d) the value of the [Botticelli] was more than $1,000 at the time of
delivery, (e) the [Botticelli] is not a consumer good, and (f) the transaction did not
create a security interest as in favor of Kraken.
Pl.’s Mem. of Law 11, No. 13-09004, ECF No. 57. The Trustee does not provide any evidentiary
support for these allegations, instead contending that Kraken bears the burden of bringing forth
evidence to disprove the application of § 9–102(a)(20). See id. at 12 n.9 (stating that “[Kraken]
must prove” that the Debtor was not generally known by its creditors to be substantially engaged
in selling the goods of others (citing Valley Media, 279 B.R. at 123)).
Contrary to the Trustee’s contention, in the Second Circuit, the burden of proof falls on
the party claiming applicability of § 9–102(a)(20) to show that each element of the definition is
satisfied. In re G.S. Distrib., Inc., 331 B.R. 552, 561 (Bankr. S.D.N.Y. 2005) (“[T]he burden of
proof falls on the party claiming applicability of [§ 9–102(a)(20)].”); In re Mortgansen’s Ltd.,
302 B.R. 784, 787 (Bankr. E.D.N.Y. 2003) (“[T]he burden of proof with respect to each attribute
falls on the party claiming to be protected by [§ 9–102(a)(20)].”). 2 The Trustee has failed to
2 In Salander–O’Reilly, the District Court noted that this Court “in subsequent proceedings will have to determine
which party bears the burden of proof on th[is] issue . . . .” Salander–O’Reilly, 475 B.R. at 24 n.18 (citing French
Design Jewelry, Inc. v. Downey Creations, LLC (In re Downey Creations, LLC), 414 B.R. 463, 467–72 (Bankr.
S.D. Ind. 2009)). In light of the unequivocal statements regarding the allocation of the burden of proof in G.S.
Distribution and Mortgansen’s, and the lack of any contrary authority presented by the parties from other courts
in this Circuit, this Court agrees that the burden of proof falls on the party claiming applicability of § 9–
102(a)(20). In this case, that party is the Trustee.
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produce any evidence in support of this issue on which the Trustee will bear the burden of proof
at trial. This failure by the Trustee warrants denial of the Trustee’s Motion. See Feurtado v. City
of New York, 337 F.Supp.2d 593, 599 (S.D.N.Y. 2004) (stating that, at the summary judgment
stage, “where the movant does bear the burden of proof on an issue, it must furnish evidence in
support of its contentions . . .” (citing Giannullo v. City of New York, 322 F.3d 139 (2d Cir.
2003))).
To be clear, the Court does not hold one way or the other that the transaction by which
the Botticelli came into the Debtor’s possession was or was not governed by Article 9 of the
Uniform Commercial Code. Rather, the Court finds that, at the summary judgment stage, the
Trustee has failed to offer any evidence from which the Court can conclude that the requirements
of § 9–102(a)(20) have been met with respect to the transaction. The Court is therefore unable to
award summary judgment to the Trustee.
ii. 	Kraken’s Motion
In Kraken’s Motion, Kraken sets forth essentially two reasons why this Court should
award it summary judgment on the Claim Objection: (i) under the terms of the Loan Agreement
and based on the testimony of representatives of the Bank, the Bank did not obtain a lien on
consigned goods such as the Botticelli; and (ii) the Second Consignment expired pre-petition,
which entitles Kraken to the return of the Botticelli under Valley Media and the terms of the Art
Claims Protocol. As discussed below, the Court concludes that Kraken has not established its
entitlement to summary judgment on these bases.
a. 	The Terms of the Loan Agreement Unambiguously Grant the Bank a
Lien on Consigned Inventory
According to Kraken, “the inescapable conclusion is that the Bank (a) would not and did
not lend against the Botticelli and (b) neither sought nor received a security interest therein.”
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Def.’s Mem. of Law 17, No. 13-09004, ECF No. 62. In support of this contention, Kraken cites
to: (i) the definition of “Eligible Inventory” in § 1.4 of the Loan Agreement, which specifically
excludes works of art on consignment; and (ii) the deposition testimony of various executives of
the Bank, who did not take possession of the Botticelli pre-petition at the time they took
possession of other collateral and who allegedly testified that they did not consider consigned
artwork to be collateral. See id. at 14–17. In response, the Trustee contends: (i) the definition of
“Eligible Inventory” relates to the calculation of advances under the Loan Agreement and does
not limit the scope of the Bank’s security interest; and (ii) the parol evidence rule bars the
admission of extrinsic evidence to contradict the terms of the Loan Agreement. See Pl.’s Opp.
17–20, No. 13-09004, ECF No. 72. The Court agrees with the Trustee.
In New York, 3 “the question of whether a written contract is ambiguous is a question of
law for the court.” JA Apparel Corp. v. Abboud, 568 F.3d 390, 396 (2d Cir. 2009) (citing Seiden
Assocs., Inc. v. ANC Holdings, Inc., 959 F.2d 425, 429 (2d Cir. 1992)). “Ambiguity is
determined by looking within the four corners of the document, not to outside sources.” Kass v.
Kass, 696 N.E.2d 174, 180 (N.Y. 1998). Language is unambiguous when it has “a definite and
precise meaning, unattended by danger of misconception . . . and concerning which there is no
reasonable basis for a difference of opinion.” Breed v. Ins. Co. of N. Am., 385 N.E.2d 1280, 1282
(N.Y. 1978). By contrast, ambiguous language is “capable of more than one meaning when
viewed objectively by a reasonably intelligent person who has examined the context of the entire
integrated agreement and who is cognizant of the customs, practices, usages and terminology as
generally understood in the particular trade or business.” Revson v. Cinque & Cinque, P.C., 221
F.3d 59, 66 (2d Cir. 2000) (quoting Seiden, 959 F.2d at 428).
3 New York law governs the Loan Agreement. See Scharf Decl. Ex. E (Loan Agreement) § 11.10, No. 13-09004,
ECF No. 56.
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“Language whose meaning is otherwise plain does not become ambiguous merely
because the parties urge different interpretations in the litigation.” Hunt Ltd. v. Lifschultz Fast
Freight, Inc., 889 F.2d 1274, 1277 (2d Cir. 1989). “If the contract is unambiguous, its meaning
is . . . a question of law for the court to decide.” JA Apparel, 568 F.3d at 397. In interpreting an
unambiguous contract, the court “is to consider particular words not in isolation but in the light
of the obligation as a whole and the intention of the parties as manifested thereby, but the court is
not to consider any extrinsic evidence as to the parties’ intentions.” Id. (citations omitted); see
also Marine Midland Bank-Southern v. Thurlow, 425 N.E.2d 805, 807–08 (N.Y. 1981) (applying
parol evidence rule).
Upon review of the Loan Agreement, the Court concludes that it unambiguously grants
the Bank a lien in all of the Debtor’s inventory, including consigned goods. Section 6.1 grants
the Bank a lien in “all personal property . . . of every kind and nature . . . .” See Scharf Decl. Ex.
E (Loan Agreement) § 6.1, No. 13-09004, ECF No. 56. Although § 1.4 excludes consigned
goods from being used to determine the amount that the Bank would loan to the Debtor, there is
no corresponding provision in § 6.1 excluding consigned goods from the scope of the Bank’s
lien. Compare id. § 1.4(b) (“‘Eligible Inventory’ shall mean any works of art . . . which . . . [a]re
not held by the Borrower on consignment . . . .”) with id. § 6.4 (stating that collateral includes
“all personal and fixture property of every kind and nature . . .”).
In support of its view that the Loan Agreement does not include goods that the Debtor
held on consignment, Kraken points to § 6.2, in which the Debtor “represents, warrants and
covenants that . . . [the Debtor] shall be the sole owner . . . of . . . each and every item of its
Collateral.” Id. § 6.2(a). According to Kraken, § 6.2 is evidence that “Collateral is . . . defined to
include only Artwork owned[ ] free and clear.” Def.’s Mem. of Law 14, No. 13-09004, ECF No.
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62. Kraken misreads the Loan Agreement. Section 6.2 does not define “collateral” to include
only works of art that are not held on consignment. Rather, it imposes a requirement on the
Debtor to make certain representations and warranties to the Bank without limiting whether or
not the Bank’s lien attaches to the collateral. See Scharf Decl. Ex. E (Loan Agreement) § 6.2(a),
No. 13-09004, ECF No. 56. The hanging paragraph at the end of § 6.2 illustrates this point. It
states:
The failure of any Collateral to fully comply with the provisions of this Section
6.2 shall not affect, terminate, modify or otherwise limit the Bank’s lien or
security interest in the Collateral.
Id. (emphasis added).
From the hanging paragraph and the balance of §§ 6.1 and 6.2, the Court concludes that
the Loan Agreement unambiguously grants the Bank a lien in all of the Debtor’s property
without regard to whether the property was held on consignment. For that reason, the Court also
concludes that Kraken may not introduce extrinsic evidence—including the testimony of any of
the Bank’s representatives—to contradict the unambiguous terms of the Loan Agreement. See JA
Apparel, 568 F.3d at 397; Seiden, 959 F.2d at 428 (“If the language unambiguously conveys the
parties’ intent, extrinsic evidence may not be properly received . . ., since th[is] extraneous
factor[ ] would vary the effect of the contract’s terms. ”); Metropolitan Life Ins. Co. v. RJR
Nabisco, Inc., 906 F.2d 884, 889 (2d Cir. 1990) (“The parties’ rights under an unambiguous
contract should be fathomed from the terms expressed in the instrument itself rather than from
extrinsic evidence as to terms that were not expressed . . . .”).
In view of the foregoing, the Court concludes that Kraken has not established that it is
entitled to summary judgment on the basis that the Bank’s lien did not extend to consigned goods
such as the Botticelli.
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b. 	The Pre-Petition Termination of the Second Consignment Does Not
Necessarily Entitle Kraken to the Botticelli
Kraken also contends that the termination of the Second Consignment mandates that the
Botticelli be returned to Kraken. Specifically, Kraken contends that the return of the Botticelli is
warranted: (i) under the precedent of Valley Media, in which consignors whose consignment
agreements were terminated pre-petition were entitled to the return of their consigned goods; (ii)
pursuant to the terms of the Art Claims Protocol, which Kraken contends requires the return of
consigned goods where the relevant consignment agreement terminated pre-petition; and (iii)
because the Botticelli was removed from the Debtor’s gallery in May 2007 and returned solely
on loan for an exhibition, not on consignment. Def.’s Mem. of Law 18–22, No. 13-09004, ECF
No. 62. The Court finds each of Kraken’s arguments unpersuasive.
Kraken cites Valley Media for the proposition that the pre-petition termination of a
consignment agreement requires the return of the consigned goods. Id. at 20–21. Specifically,
Kraken contends:
[The consignors in Valley Media] recovered their inventory notwithstanding that
they 	had 	not 	filed 	UCC-1 	financing 	statements 	because 	their 	“distribution
agreements” were terminated pre-petition . . . . The principle of the Valley Media
decision is clear—where the consignment terminated prior to the bankruptcy, the
bankruptcy estate did not include consigned inventory still in the possession of the
debtor.
Id. at 21 (citing Valley Media, 279 B.R. at 142–44). Although Kraken is correct that Valley
Media allowed certain consignors under terminated consignment agreements to recover their
consigned goods, it did so where the debtor-in-possession was seeking to exercise its powers as a
hypothetical lien creditor under § 544(a) of the Bankruptcy Code, not as assignee of a prior
perfected lienholder in the goods. See Valley Media, 279 B.R. at 132. With respect to the
creditors whose consignment agreements had terminated pre-petition, the Valley Media court
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held that the debtor-in-possession never came into any rights in the consigned goods in order to
exercise any powers under § 544(a). Id. at 142–43. Here, the Trustee has expressly disclaimed
that he is seeking to exercise any rights under § 544(a). See Pl.’s Reply ¶ 6, No. 13-09004, ECF
No. 76 (“[T]he Trustee is not relying on his judicial lien, which would have arisen as of the
Petition Date and apparently after the [Second Consignment] ended.”). Instead, the Trustee is
relying on his status as the assignee of the Bank, which the Trustee contends has a perfected lien
in the Botticelli pursuant to the Loan Agreement. As Valley Media did not involve the rights of a
competing lienholder in the consigned goods, nothing in that case is controlling of the issues
before the Court in the Motions.
Kraken also contends that the terms of the Art Claims Protocol require the return of the
Botticelli to Kraken since the Second Consignment terminated pre-petition. Def.’s Mem. of Law
18–20, No. 13-09004, ECF No. 62. As set forth above, the Art Claims Protocol provides in
relevant part:
If any member of the Working Group asserts a good faith basis that [a work
subject to an Art Claim] is property of the Debtor’s estate, such Artwork shall be
labeled a “Claimed Estate Asset.” Each item of Artwork that the Working Group
unanimously believes is not property of the Debtor’s estate, including, without
limitation, Artwork indisputably protected under the ACAL, 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, shall be labeled as a “Non-
Estate Asset.”
Art Claims Protocol § VI, No. 07-30005, ECF No. 308. By Kraken’s interpretation of the Art
Claims Protocol, any of the listed classes of artwork—works indisputably protected under the
ACAL, works subject to perfected consignment agreements, and works subject to expired
consignment agreements—must be labeled as “Non-Estate Assets” and returned. See Def.’s
Mem. of Law 18, No. 13-09004, ECF No. 62 (“[T]he use of ‘shall’ did not give the Working
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Group discretion to determine that the Botticelli—which was subject to an expired consignment
agreement—was anything other than a Non-Estate Asset.”).
By contrast, the Trustee argues that the Art Claims Protocol “does not direct the Working
Group to determine that artwork subject to a terminated consignment agreement is a Non-Estate
Asset.” Pl.’s Opp. ¶ 39, No. 13-09004, ECF No. 72. Instead, the Art Claims Protocol “provides
that artwork that the Working Group unanimously believed was not property of the Debtor’s
estate would be labeled a ‘Non-Estate Asset.’” Id. ¶ 40. The Court agrees with the Trustee. The
relevant understanding of the terms of the Art Claims Protocol is that “[e]ach item of Artwork
that the Working Group unanimously believes is not property of the Debtor’s estate . . . shall be
labeled as a ‘Non-Estate Asset.’” Art Claims Protocol § VI, No. 07-30005, ECF No. 308. The list
of types of artwork is illustrative of the types of artwork that the Working Group might
unanimously believe is not property of the Debtor’s estate. See id. However, nothing in the Art
Claims Protocol requires the Working Group to conclude that any type of artwork is or is not
property of the Debtor’s estate. Kraken concedes that the Working Group did not “unanimously
believe” that the Botticelli was a “Non-Estate Asset.” See Def.’s Mem. of Law 18–19, No. 13-
09004, ECF No. 62. As a result, nothing in the Art Claims Protocol mandated that the Botticelli
be labeled a “Non-Estate Asset” and returned to Kraken.
Kraken’s final argument involves Kraken’s contention that the Botticelli was removed
from the Debtor’s gallery in May 2007 and returned in September 2007 solely as a loan for an
exhibition. Id. at 21–22. Kraken contends that the removal terminated the “consignment” of the
Botticelli in favor of a “loan” to the Debtor. Id. at 21. However, Kraken’s argument that the
consignment ended as a result of the removal from the Debtor’s gallery is premised on a disputed
issue of fact; specifically, whether the Botticelli was actually removed from the gallery by one of
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Kraken’s agents. As set forth above, the Trustee disputes that the Botticelli was actually removed
from the gallery at any time after the expiration of the Second Consignment. See Pl.’s Resp. to
Def.’s Statement of Facts ¶¶ 13; 15. At the summary judgment stage, the Court cannot resolve
this disputed issue of fact. See Anderson, 477 U.S. at 248. Accordingly, the Court cannot award
Kraken summary judgment on this basis.
CONCLUSION
For the reasons set forth above, the Motions are denied. The Court will issue a separate
order consistent with this memorandum decision.
Dated: Poughkeepsie, New York
March 21, 2014
/s/ Cecelia G. Morris
CECELIA G. MORRIS
CHIEF U.S. BANKRUPTCY JUDGE
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