Kraken Investments consigned the classic “Madonna and Child” painting by Botticelli to crooked NY gallery owner Lawrence Salander in 2006. The painting is valued at $9.5 million. Kraken, an Israeli company, probably thought it had dotted its “i’s” and crossed its “t’s” when it had Salander sign a consignment agreement agreeing that any disputes would be resolved by arbitration in the Channel Islands, where Kraken does business.
Consignment is a form of commercial transaction where the consignor places goods in the hands of a dealer for sale. Once the goods are sold, the consignor takes back an agreed price and the dealer keeps the rest. If the sale doesn’t happen, the consignor receives back his goods and the dealer walks away.
The problem is that the outside world may not understand that the goods are part of a consignment transaction. To an uninformed viewer, it may just look as if the consignor is a seller and the dealer is a buyer, required to repay the sale price on normal credit terms. In unraveling modern commercial transactions, courts look more to the substance of a transaction than the description used by the parties. That’s why complex transactions like financing leases and consignments may be recast as sales with the goods earmarked to secure the unpaid purchase price.
To protect themselves from this reinterpretation of their transactions, lenders, sellers and consignors put on a belt and suspenders and file a financing statement with an office established for that purpose. This is a one page document that must identify the debtor and reasonably describe the goods. Financing statements enable lenders and consignors to perfect their rights by giving notice of their interest to the world. In modern commerce, the financing statement doesn’t even have to be signed.
Kraken made two enormous mistakes in this deal: (1) it allowed the consignment agreement to lapse and (2) it never filed a financing statement. Add a third: it got into bed with Salander, who stole $120 million from investors and is now serving an 18 year prison term. Because of these mistakes, Kraken’s Botticelli was trapped in NY when Salander was forced into bankruptcy by his creditors. Last year the Bankruptcy Court ruled that due to the failure to file a financing statement Kraken needed to prove this transaction is a true consignment. This is a daunting task, because Kraken will have to prove that a substantial portion of Salander’s creditors knew that the transaction was a consignment, a burden that appears to be nearly impossible.
To make matters worse, because the consignment agreement lapsed the arbitration clause is no longer valid, so Kraken needs to litigate in New York City and cannot flee to the Channel Islands. Last week the US District Court for the Southern District of NY agreed. So it turns out that the headline was somewhat misleading because there’s really only one reason why the Botticelli has to stay in New York: Kraken didn’t file a financing statement. As a result Salander’s creditors will likely split the $9.5 million and Kraken will leave the city empty handed.