Last month, Sotheby’s sold the art collection of former jeweler to the stars, art collector and former chairman of the Folk Art Museum in New York City, Ralph O. Esmerian. Fetching $13M USD, the sale has been reported to be the highest for any American folk art collection. As reported in a previous blog post, Esmerian is currently serving a six-year prison term for wire fraud, bankruptcy fraud and other charges relating to the bankruptcy filing of the Manhattan based luxury jewelry retailer, Fred Leighton Holding Inc. In connection with the bankruptcy proceeding, the auction net proceeds (approximately $10.5M USD) will be used to pay Esmerian’s many creditors.
This case demonstrates the need to conduct due diligence in every transaction!
When contemplating an extension of credit, lenders must determine whether the potential borrower has clear title to the work by first researching provenance and checking the Art Loss Register. The lender must also conduct a search under the Uniform Commercial Code (UCC) in the state in which the potential borrower resides (or if the borrower is an entity in the state of organization/incorporation) to determine whether another party has a prior perfected lien on the work.
Further, lenders cannot rely on the potential borrower to provide accurate information regarding their financial state. The lender must consider the potential borrowers financial wherewithal as a whole – i.e., the borrower’s cash flow or ability to pay back the loan because the goal is not to liquidate the asset but rather use it as collateral for the loan. Once credit is extended, lenders should take immediate steps to file a UCC Financing Statement (UCC-1), which identifies the specific work(s) of art. The UCC-1 puts all on notice that the lender possesses a secured interest in the work. As we have seen in previous cases such as the Renoir’s “Paysage bords de Seine” (On the Shore of the Seine) that was recently returned to the Baltimore Museum of Art, buyers of art should conduct the same due diligence as a lender when contemplating a purchaser of art.