LLC, an art financier, the advantages to the
art owner include lower interest rates than
would ordinarily be charged on art loans, a
higher loan-to-value ratio than was available
on standard art loans and critically, that
under a sale-leaseback (unlike an art loan),
the original owner maintained possession of
the art.
Anatole Shagalov was a well-known
art dealer and collector. Shagalov and his
entity Nature Morte (together "Shagalov")
and Artemus, LLC, entered into a series
of transactions resulting in the financing
of artworks that had been purchased by
Shagalov worth millions of dollars. As is
typical in sale-leasebacks, there were two
agreements: a Purchase and Sale Agreement
("PSA") and a lease. The PSA referred to
Shagalov as the "Seller" and Artemus as
the "Buyer." Those terms, and not Borrower
and Lender, were used over 100 times.
Shagalov transferred all of his rights in
the art to Artemus for a purchase price of
several million dollars. Under the Lease and
Possession Agreement, Shagalov agreed to
pay Artemus monthly and had the right to
repurchase the art. Superficially at least, the
transaction looked as if it were a standard
sale-leaseback with at least one critical
distinction. Until Shagalov repurchased the
art, the art adorned the walls of Artemus'
principal's home office.
In 2017, Artemus alleged that Shagalov
defaulted and they began selling the art.
Artemus did not give Shagalov notices of
disposition and right to redeem the collateral
under UCC Section 9-611, 9-613 and 9-623
that were required only if the transaction
was a loan. These Sections were designed to
do exactly what Shagalov wanted give him
any sales to third parties to ensure they were
reasonable.
Shagalov sought a temporary restraining
order (TRO) to stop Artemus from selling
any more art. The TRO was denied, at
which point our firm was retained. We
were successful in obtaining a preliminary
injunction to halt further art sales. The trial
court found that, notwithstanding the fact
that the parties referred to the transaction
as a sale and leaseback, "It sounds like
very much, much more so than it's a
collateralized loan because who is enjoying
the art? Certainly not the plaintiff but rather
it is the defendant." NYSCEF No. 48 at 15.
Artemus appealed to the Appellate
Division, which affirmed the injunction
holding: "Plaintiffs demonstrated that
the parties' arrangement may constitute
a collateralized loan and that, therefore,
they were entitled to notice concerning the
disposition of the collateral under UCC
article 9."
The Court did not explain the basis
for its view that we had established the
transaction was a loan. There are two
possible grounds for the Court's holding.
First, we argued the transaction was a loan
under the "Bright Line Test" contained in
UCC 1-203(b) "which requires the Court
to determine whether the contractual
terms of the Agreement ... bear certain
characteristics the statute defines as
conclusive evidence that a security interest
was created." In re World Com, Inc., 339
B.R. 56, 64-65 (Bankr. S.D.N.Y. 2006).
Alternatively, "[o]nce the court finds that
the leases are not security interests per se,
it is necessary to examine all the facts to
determine whether the economic realities of
a particular transaction nevertheless create
319 B.R. 698, 714 (Bankr. M.D. Fla. (2005);
N.Y. U.C.C. § 1-203; In re WorldCom,
supra). We simply do not know whether
the Court agreed with us on one or both
standards.
Where then does that leave the parties
to a sale-leaseback? The financier needs to
understand that the transaction needs to be
a true lease. The language and intent of the
parties are irrelevant. In re ECCO Drilling
Ltd., 390 B.R. 221, 226 (Bankr. E.D. Texas
2008); In re Triplex Marine, 258 B.R. 659,
666 (Bankr. E.D. Texas 2000).
If the "lessor" holds the "leased"
property, if the value paid for the
"purchased" property is much lower than
the actual value of the property, if the option
price to buy the property back is much lower
than the value of the property, or if, at the
end of the "lease," the only economically
sensible thing for the lessee to do is buy
the property, the lessor risks the transaction
being successfully challenged as a loan and
Article 9 of the UCC will apply.
There is a simple solution to all this,
however. Temper aggressiveness and provide
the notices required under Article 9 of the
UCC and act in accordance with Article
9 standards, whether or not they apply.
Even if this is beyond your obligations, the
requirements are by no means draconian
and simply encourage fairness.
our client's borrowers was prosecuted for pledging works
that he did not own, and another two borrowers asserted
the protection of the Fifth Amendment when asked
about collateral.