## Facts

- Lawrence Salander owned and managed Salander-O’Reilly Galleries, LLC (SOG), an art gallery.
- SOG borrowed roughly $29 million from a bank under a loan agreement.
- Section 6.1 of the loan agreement 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 loan agreement stated that SOG represented and warranted that it 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 for exhibition and sale.
- Under the consignment agreement, SOG was to use best efforts to sell the painting, but Kraken remained the owner unless and until a sale occurred.
- The Botticelli was never sold, and the consignment expired in June 2007.
- Authorities later discovered Salander had defrauded investors and consignors, and SOG entered bankruptcy proceedings in the Southern District of New York.
- In the bankruptcy case, numerous parties asserted ownership claims to artworks in SOG’s possession; the bankruptcy court used a working group process to address art-ownership disputes.
- In January 2010, the bankruptcy court confirmed a liquidation plan that created a liquidation trust, and the bank transferred to the trust the security interest it claimed under the loan agreement.
- The liquidation trustee (Jacobs) asserted that the assigned lien gave the trust rights superior to Kraken’s claim to recover the Botticelli.
- Kraken disputed that the loan agreement granted any lien in consigned artwork that SOG did not own.
- The bankruptcy court ruled in substance that the bank’s lien reached the Botticelli (and denied Kraken the relief it sought), and Kraken appealed to the district court.

## Issues

1. Whether the bank’s security interest in SOG’s personal property “whether now owned or hereafter acquired or arising” attached to a painting held on consignment where the consignor retained ownership and no sale occurred.
2. Whether SOG’s representation that it was the “sole owner” of the collateral expanded the collateral grant to include third-party consigned property in SOG’s possession.
3. Whether the liquidation trustee, as assignee of the bank’s lien rights, could assert an interest in the consigned painting superior to the consignor’s ownership claim.

## Decision

- The district court reversed the bankruptcy court’s order.
- The court held that, on the undisputed contract terms, the loan agreement did not give the bank a security interest in the Botticelli because SOG did not own the painting and did not acquire ownership while it remained on consignment.
- The court rejected the argument that the “sole owner” representation converted consigned property into collateral; it functioned as a warranty about collateral within the grant, not an expansion of the grant itself.
- Because the bank’s security interest did not attach to the Botticelli, the liquidation trust (standing in the bank’s shoes) had no enforceable lien that could defeat Kraken’s title.
- The case was remanded with instructions to enter summary judgment in favor of Kraken and for further proceedings consistent with the district court’s decision.

## Legal Principles

- A security interest attaches only to collateral covered by the security agreement and only to the extent the debtor has rights in the collateral sufficient for attachment.
- Broad collateral language such as “now owned or hereafter acquired” is read in context as tied to debtor ownership or later acquisition of ownership, not mere possession.
- A borrower’s representation or warranty of ownership does not, by itself, enlarge the collateral description to capture property the borrower does not own.
- An assignee of a secured lender’s interest takes no greater rights than the lender had; if the lender’s security interest never attached, the assignee cannot enforce it against the true owner.
- Under a consignment agreement that leaves title in the consignor unless a sale occurs, the consignee’s limited rights to possess and attempt to sell do not automatically become lienable as if the consignee owned the goods.

## Conclusion

In this bankruptcy appeal, the district court held that a lender’s blanket lien on a gallery’s personal property did not attach to a Botticelli painting held on consignment where the consignor retained ownership and the painting was never sold; therefore, the liquidation trustee, as assignee of the lender’s purported lien, could not defeat the consignor’s title, and summary judgment was ordered for the consignor on remand.


In re Salander-O'Reilly Galleries, LLC, 2014 WL 7389901 (2014)