UCC Lien Filed Against 16th Century Portrait of de` Medici by del Sarto:

This was originally posted on the SGR Blog.

Would Court Direct Immediate Filing of Termination Statement?

The Uniform Commercial Code authorizes the filing of a lien  to perfect a security interest in personal property. But, as a recent case illustrates, the Court may be called upon to adjudicate the validity of the filing/lien.

A 16th century painting, entitled Portrait of Ottaviano de` Medici by the artist Andrea del Sarto, was scheduled for a UCC auction sale at Sotheby’s. Virginia Bonito challenged the validity of a UCC-1 lien filed by Ian Peck, Empire Chesapeake Holdings, LLC and Chelsea Fine Arts Holding, LLC against the painting in May 2021. Arguing that they had no security interest. Bonito moved for injunctive relief and Peck, Chesapeake and Chelsea cross-moved to dismiss Bonito’s complaint.

Bonito, an art historian with a Ph.D. in Art History, acquired a 51% interest in the painting in 1997 for approximately $200,000 from its owner, non-party Giorgio Gibelli, who apparently retained his interest. According to Bonito, she thereafter embarked on a mission to restore the painting so as to have it take its proper place in the world of Old Masters. Her investment in the restoration process over the years resulted in a personal debt of approximately $850,000.

In 2020,  Peck offered to purchase the painting for $1,250,000. Peck, an “art lender”, bought and sold fine art and was the principal of Empire and Chelsea. Bonito and Chelsea entered into a protracted negotiation. Chelsea Arts was to purchase the piece for $1,250,000 and Bonito would also receive a percentage of the sale price upon a resale by Chelsea pursuant to a residual contingency profit-sharing arrangement. The written agreement was never signed. And Chelsea Arts did not pay the $1,250,000. However, at Bonito’s request, Peck advanced certain monies to her in 2020 when she was in a poor financial position. Bonito claimed that she was “desperate.” Specifically, Peck advanced approximately $35,000 over three payments and paid an insurance premium of $8,800 to insure the painting. Peck, Chesapeake and Chelsea claimed that those advances created a security interest in the painting.

Peck sent a letter to Bonito on December 7, 2020, to memorialize their agreement. The letter stated in part:

“As discussed, this letter is to confirm our interest pursuant to the purchase and sale agreement that the purchaser has advanced certain sums listed below. These payments have been made in good faith and at the seller’s request with the understanding and agreement that they constitute a pro-rated direct ownership interest in the subject painting by Andera del Sarto and that they will be applied as a credit against the purchase price. The seller grants the purchaser a perfected security interest in the subject painting to secure purchaser’s rights regarding amounts owed, totaling $43,000 as identified below. Lastly, it is agreed and understood that the seller grants the purchaser the right of first exclusivity and a right of first refusal as it relates to the purchase closing by December 31, 2020, as noted, on the acquisition on previously agreed terms.”

In closing, the letter stated, “Please confirm your acceptance and agreement with the above terms by return e-mail.”

Bonito responded by e-mail on December 8, 2020 suggesting revisions to the proposal regarding the crediting of the advances.

Five months later, in May 2021, Peck filed a UCC-1 against the painting on behalf of Chelsea Arts, claiming a 13% interest. Bonito and her counsel were made aware of the filing sometime between May and November 2021 (the exact date was disputed).

In the meantime, Peck, Chesapeake and Chelsea were also negotiating with an unnamed “business partner” to consign the painting to an auction house, once they obtained possession. The details of that deal were not made clear except that Peck claimed that, for that deal to go through, he needed access to the painting for expert evaluation and access was refused by Bonito–who denied that assertion. They further claimed that there was a prior $80,000 lien against the painting filed by creditor Ansible Ventures, Inc. that had to be removed before they could purchase the painting. The lien was satisfied in December 2021.

Bonito, in turn, was engaged in negotiations to sell the painting to yet another entity, non-party Bottom Line Exchange Company, Inc., whose principal was a private collector. The painting was sold by Bonito and Gibelli to Bottom Line in December 2021 for $1,200,000. Bottom Line arranged a consignment to Sotheby’s and the painting was included in the Old Masters Auction scheduled for January 27, 2022. Peck and his entities claimed that Bottom Line also knew that they had filed a UCC-1 claiming a security interest. Also, there were unsuccessful attempts by Bonito to reimburse Peck and his LLCs for the advances made.

Bonito filed suit on December 13, 2021, alleging that the UCC-1 was invalid because Peck, Chesapeake and Chelsea had no security interest in the painting and sought (1) an order directing them to file a UCC-3 to terminate the UCC-1 or, in the alternative, an order of the Court terminating the UCC-1 and (2) money damages for the filing of an invalid UCC-1 pursuant to UCC 9-625.

Bonito maintained that the parties never reached a final agreement and Peck and his companies never paid the $1,250,000 purchase price. She argued that the UCC-1 lien was invalid within the meaning of Article 9 of the UCC. She also argued that the lien impaired the painting’s value at auction and that withdrawing the painting from the auction would also serve to diminish its value in the estimation of potential purchasers.

On December 27, 2021, Bonito moved by Order to Show Cause for an order immediately directing the filing of UCC-3 termination statements relating to the artwork or an order immediately discharging and terminating the UCC-1.

Peck, Chesapeake and Chelsea opposed the motion and cross-moved, pre-answer, to dismiss the complaint on the grounds of lack of subject matter jurisdiction, no legal capacity to sue and failure to state a cause of action, respectively, and for the imposition of sanctions against Bonito.

The motion for a preliminary injunction was denied. Bonito failed to establish entitlement to the relief sought on the papers submitted. Bonito did not established by clear and convincing evidence all that was necessary for a preliminary injunction: (1) a likelihood of success on the merits, (2) irreparable injury if a preliminary injunction was not granted, and (3) a balance of equities in her favor.

Article 9 of the Uniform Commercial Code governs the enforcement of a creditor’s security interest. UCC 9-625 addresses the remedies available to a debtor when a secured party fails to comply with Article 9. That section provides for injunctive relief “if it is established that a secured party is not proceeding in accordance with this article” and permits a court to “order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions.”  And money damages are available “in the amount of any loss causes by a failure to comply with” Article 9.

The Court noted that in her proposed Order to Show Cause, Bonito sought an order directing the defendants to file a UCC-3 or an order granting a discharge of the UCC-1. But in her supporting papers Bonito presented her application as one for a preliminary injunction, and opined that she has satisfied the three requirements for that relief . In the supporting papers, Bonito also requested other relief and relief against a non-party, asking the Court to “enjoin [Peck, Chesapeake and Chelsea] from interfering in the sale of the artwork on January 27, 2022, and to direct Sotheby’s to conduct the sale.”

An order granting interim relief, such as halting the sale or otherwise restraining a disposition of the painting, could be granted since the Court had the authority to order or restrain collection, enforcement, or disposition of collateral on appropriate terms and conditions. However, the  relief sought here could not  be granted as it constituted ultimate relief in the action.  Bonito essentially sought a finding or declaration that Peck and his LLCs had no security interest in the painting and the subject UCC-1 lien was invalid and a directive that the UCC-1 be canceled or terminated in order to facilitate the sale of the painting.

A preliminary injunction which gives the ultimate equitable relief sought in the action is generally improper and may only be granted under extraordinary circumstances or circumstances which are imperative, urgent or of grave necessity so as to warrant such relief. Bonito did not establish those extraordinary circumstances or grave necessity. To grant the relief sought in the motion would be tantamount to an award of summary judgment to Bonito. But no answer had been filed and no discovery had taken place–and the parties’ submissions on the motions made clear that discovery was necessary to determine the issues presented.

The complaint also sought money damages in addition to injunctive or declaratory relief–but any money damages arose directly from and were dependent upon a finding or declaration that the UCC-1 lien was invalid. The request for money damages was not an independent form of relief that would bar application of the rule that a preliminary injunction which gives a plaintiff the ultimate equitable relief sought in the action cannot be granted.

Money damages are expressly authorized by statute, so was no showing of irreparable harm should the motion for equitable relief be denied. Where the plaintiff can be fully compensated by a monetary award, an injunction will not issue because no irreparable harm will be sustained in the absence of such relief. Any diminution in value at auction or other sale resulting from the defendants’ UCC-1, as averred by Bonito, was compensable by a monetary award, pursuant to UCC 9-625, albeit by employing art valuation experts.

Nor would the granting of the injunctive relief sought serve to maintain the status quo pendente lite. Rather, it would change it and, indeed, grant the ultimate relief.  The status quo was maintained by having the  UCC-1 lien remain until a determination could be made as to its validity. In that regard, Bonito did not dispute that she had been aware of the UCC-1 filing for some time before filing the application as an emergency. Moreover, the alleged emergency, an imminent auction, was one created largely by Bonito and Bottom Line, who arranged for the painting to be placed in a January 27, 2022 auction, notwithstanding the lien. By her own admission, Bonito had held the painting for two decades and, save for stating that her financial situation was still tenuous, did not explain why the painting could not be sold at a later date.

Finally, a balancing of the equities did not favor Bonito. A termination of the UCC-1 would indisputably harm Peck, Chesapeake and Chelsea while leaving the lien in place pendente lite would result in only speculative damage to Bonito. And notwithstanding her accusations of bad faith on the part of Peck and his companies, Bonito’s own conduct in the transactions was equally questionable, even if she acted out of desperation or even naivete.

In addition to opposing the motion, Peck, Chesapeake and Chelsea cross-moved to dismiss the complaint on the grounds of lack of subject matter jurisdiction, lack of legal capacity to sue and failure to state a cause of action upon which relief can be granted. And for the imposition of sanctions against Bonito for bringing the action and motion.

The Court had authority to grant equitable relief.

Peck and his LLCs maintained that Bonito had no legal capacity or standing to sue since she alleged that she sold her interest in the painting to Bottom Line retaining only a speculative interest dependent on a future sale price. They argued, her complaint failed to state a cause of action upon which relief could be granted. Although Bonito submitted the affidavit of its principal, she did not explain the absence of Bottom Line or Gibelli in the action and appeared to argue that her retained interest as per her agreement with Bottom Line was sufficient. But if the Court credited the counter-argument that Bonito had no legally recognizable interest in the painting as a result of the sale of the painting to Bottom Line, then Peck and his companies undercut their own claim of interest—but they failed to establish that their purported interest was superior to that of Bottom Line, Botino or anyone else.

Instead, the Court found that the papers submitted by all parties raised issues that were more appropriately addressed on a summary judgement motion or trial. The cross-motion to dismiss the complaint was denied.

Finally, Peck, Chesapeake and Chelsea sought sanctions against Bonito arguing that the action was frivolous.  Frivolous conduct is defined by statute as that which “is completely without merit in law and cannot be supported by a reasonable argument for an extension, modification or reversal of existing law,” is undertaken to delay or prolong the litigation, or asserts material factual statements that are false.  Under the disputed facts and circumstances presented, no sanctions were warranted.

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