In re Salander-O'Reilly Galleries, LLC

Lawrence Salander owned and managed Salander-O’Reilly Galleries, LLC (SOG) (debtor). SOG borrowed roughly $29 million from a bank pursuant to a loan agreement. Section 6.1 of the loan agreement stated that SOG granted the bank a continuing security interest in all of SOG’s personal property of every kind, “whether now owned or hereafter acquired or arising.” Section 6.2 of the agreement stated that SOG represented and warranted that SOG was the sole owner of the collateral subject to the bank’s security interest. Beginning in 2004, Kraken Investments Limited (Kraken) consigned a Sandro Botticelli painting (the Botticelli) to SOG. The consignment agreement required SOG to showcase and use its best efforts to sell the Botticelli, but Kraken remained the Botticelli’s owner unless the Botticelli was sold. The Botticelli was not sold, and the consignment expired in June 2007. Subsequently, authorities learned that Salander had been defrauding investors and consignors. SOG then entered bankruptcy proceedings in which many parties, including Kraken, asserted claims of ownership to art in SOG’s possession. The bankruptcy court assigned a working group to resolve the art-ownership disputes. In January 2010, the bankruptcy court confirmed a liquidation plan for SOG and established a liquidation trust. Pursuant to the liquidation plan, the bank transferred the security interest it had purportedly obtained in the Botticelli under the loan agreement to the liquidation trust. The working group subsequently found that the Botticelli was a bankruptcy-estate asset and could not be returned to Kraken. Kraken challenged that determination in the bankruptcy court. The liquidation trustee asserted that it had a superior right to the Botticelli because the trustee had been assigned the liens the bank obtained under the loan agreement. Kraken asserted that the loan agreement had not given the bank a lien on consigned goods. The bankruptcy court found that the loan agreement gave the bank a lien on the Botticelli, and Kraken appealed.