leasebacks and art financing looks irresistible from a distance. However, a recent New York appellate decision (Shagalov v. Edelman, 161 A.D.3d 455 (N.Y. App. Div. 2018) obtained by our firm not only highlights the danger of the merger, but also establishes a precedent that should caution financiers when using sale- leasebacks. Sale-leasebacks are a well-accepted method of corporate financing, particularly for real estate and machinery. In sale- leaseback financing, the asset owner sells it to a financing source, which in turn leases the asset back to the original owner. The original owner becomes the lessee while the financier becomes the lessor. While corporate debt involves loans that impact the balance sheet or the sale of equity, which lessens ownership, a sale-leaseback avoids both drawbacks. It has been noted: "This is much like the corporate version of a pawnshop transaction." sale-leaseback and a pawnshop loan. If one pawns an item, the pawnshop keeps the item as collateral. In the standard sale-leaseback, the original owner traditionally maintains possession of the asset that he sells. Since the sale-leaseback is a financing device, the lessor bears a risk. Should the lessee file for bankruptcy, the transaction could be recharacterized as a secured loan and the lessor's title to the property would be challenged. See In re Ajax Integrated, LLC, 554 B.R. 568, 577 (Bankr. N.D.N.Y. 2016). However, we are unaware of any case where the debtor himself ever challenged a transaction (until we did). or machinery, many major art purchases require financing. Potential buyers who seek to acquire pieces beyond their present means may use financing to purchase pieces for their collections or hoping to flip the piece after an increase in value. Art dealers use loans to finance their inventories. Other owners use art as collateral to establish a line of credit. Indeed, various businesses and wealthy individuals have begun using art financing as a means of funding investments in more traditional businesses. With private lenders (like our client Art Finance Partners), banks and the auction houses all taking active roles, art financing has become an incredibly important component in the art market. Like sale-leasebacks, art financing has been described as pawnshop transactions. In fact, the New York Times article about art financing was entitled "That Old Master? It's at the Pawnshop." to control the collateral. Art lenders are often lenders of last resort and defaults are not uncommon. If the lender can take possession of the art, it is available to be sold in the case of default. Further, if the lender takes possession of the art during the life of the loan, the risk that the art will be double pledged after the loan is made is minimized. not use the sale-leaseback structure to finance art purchases? The benefits for the entity providing financing are apparent. Where a sale-leaseback structure is used, the financier does not have to abide by the requirements of Article 9 of the Uniform Commercial Code which are applicable who has represented such diverse clients as the National Basketball Association, Art Finance Partners, the American Society of Travel Advisors, Sauder Furniture, La-Z-Boy and Underwriters Laboratories. Barton LLP. His practice spans all aspects of complex litigation in a vast array of industries, including art, financial services, manufacturing, media, medical device, pharmaceutical and safety products. assists his clients with complex financial and commercial litigation matters. He has successfully represented Fortune 100 companies, small businesses and individuals in breach of contract cases, trademark and patent disputes, and employment matters. 711 Third Avenue 14th Floor New York, New York 10017 jcohen@bartonesq.com mward@bartonesq.com bartonesq.com |