Three documents were filed with the clerk of the U.S. Bankruptcy Court, Southern District of New York, at just before 4 p.m. on February 19,beating a filing deadline of 5 p.m. by a little more than an hour. With those filings, the fate of the Ralph Esmerian folk art collection has become much more fluid. (See M.A.D., February 2013, p. 11-A, for a look at the event that triggered the deadline.)
First, some general background information for those not acquainted with the story. Ralph Esmerian, jeweler extraordinaire, was also a prominent folk art collector, whose collection was the subject of a highly acclaimed 2001 book, American Radiance: The Ralph Esmerian Gift to the American Folk Art Museum. He was the former president of the American Folk Art Museum (AFAM). He needed funds to continue his various businesses and went to the New York City auction giants Christie’s and Sotheby’s for loans during the 2005-08 period. For collateral, Esmerian gave first security interests in and liens on objects from his folk art collection, many pieces of which already resided at the American Folk Art Museum as promised gifts (various bankruptcy filings cite between 265 and 327 objects).
(A security interest is established when an owner files a form with a state’s Secretary of State, declaring that he has used that item or object as collateral for a loan or otherwise entailed it in some fashion. Once filed, a security interest signals to others that a claim or lien exists, and that claim must be settled before the title can be transferred to another party. For more information, see Uniform Commercial Code.)
When his businesses failed, Esmerian was discovered to have doubly pledged most of his treasures. He also tried to conceal assets from the bankruptcy proceedings. A final accounting revealed that Esmerian owed up to $140 million. He pled guilty to a number of frauds and is now in a federal prison.
Bankruptcy liquidation trustee Jay Teitelbaum waded through the welter of claims and came up with a plan that he believed would protect the cream of the objects for the museum and still provide assets that could be sold to satisfy creditors. He filed a motion on December 26, 2012, with Judge Robert Drain to authorize a settlement agreement, which he hoped could be accomplished at the next scheduled court session, tentatively scheduled for March 22.
Teitelbaum managed to get AFAM to settle on a core list of 53 pieces that were crucial to its collection. AFAM would give up 212 “promised gifts,” which Teitelbaum would add to other assets in the newly created RE Liquidation Trust. AFAM would get the 53 items free and clear of claims and liens and would have no claim to the material transferred to the RE Liquidation Trust. The other claimants to various pieces at AFAM would have their liens or security interests wiped out and replaced by liens on pieces removed to the liquidation trust.
Bankruptcy Court Judge Robert Drain set 5 p.m. of February 19 as the last hour and day that filings could be received by the court to approve or oppose Teitelbaum’s motion. Three documents came in that afternoon: one was from Michael Salzman, attorney for Christie’s; one was from Howard Comet, attorney for Sotheby’s; and the third was a Declaration of Opposition from Jan Prasens, managing director of Sotheby’s Financial Services, Inc.
Michael Salzman said that Christie’s was reserving its rights to object later to the settlement order, explaining that “Christie’s has a security interest in twenty pieces of the Disputed Art, as identified in an April 30, 2008, financing statement.” That security interest came from a 1998 loan agreement signed by Esmerian. By 2010, Esmerian had defaulted on that financing arrangement, so Christie’s went to court and on May 21, 2010, got a $5,100,265 judgment.
Fifteen of the 20 pieces on which Christie’s had a security interest were in the proposed Trustee Art group (material that Teitelbaum could sell to satisfy creditors). The remaining five were on the list of objects that would be retained by AFAM, with Christie’s claim wiped out. Christie’s lien on those five pieces valued them at between $330,000 and $490,000.
Teitelbaum’s plan would give Christie’s a “first priority replacement lien on the thirteen pieces of Trustee Art in which neither Christie’s nor Sotheby’s heretofore has asserted an interest” (another document sets the value on those 13 pieces at approximately $381,000 to $571,000). Christie’s also would get a first-priority replacement lien on another four pieces worth an estimated $550,000.
With security interests on 17 replacement items of higher value than the original group, why was Christie’s reserving its right to object to the plan at this point? Attorney Salzman explained that Christie’s was concerned that others might object to the fairly complex plan—or that other events might occur that would alter it. He did state, however, “Christie’s does not currently object to the proposed Settlement, as set forth in the [Teitelbaum] Motion.”
Christie’s might not object, but Sotheby’s certainly did. Sotheby’s opposition filings, which are quoted below, left no doubt whatsoever about how it viewed the plan proposed by the liquidation trustee. Sotheby’s based its opposition on several facts.
On August 18, 2005, Ralph Esmerian borrowed $11,574,650 from Sotheby’s. The collateral for the loan was “more than 300 items of folk art.” For that loan, “Esmerian agreed to grant Sotheby’s a first priority security interest and first lien upon specified collateral.” That collateral “had an aggregate ‘low estimate’ at that time of $22,149,300 and an aggregate ‘high estimate’ of $33,425,000.”
The auction firm, no novice in the lending of money against antiques and art, knew that “the market for high value folk art is a niche market, with a relatively limited number of collectors.” Accordingly, Sotheby’s sought collateral worth far in excess of estimated sale amounts. The collateral for the 2005 loan had an estimated high value of nearly triple the loan amount. Sotheby’s factored in the cost of attorneys’ fees in the event of a default and also bore in mind the fact that many of the pieces listed as collateral were named on already existing security interest filings as “promised gifts” to AFAM.
Sotheby’s lawyers huddled with museum representatives and Esmerian’s attorneys and came up with something called a Subordination Agreement—a legally binding contract noting that, while the AFAM had security interests in the material, those interests were always secondary to Sotheby’s. Museum representatives were required to defend the listed material from any action that would endanger Sotheby’s priority interest. Sotheby’s could release its interests on some material when and if it believed it had enough Esmerian treasure to oversecure its position, but the Subordination Agreement made it quite clear that if any such action were to occur, it would be Sotheby’s choice to make that decision, not the museum’s.
In January 2008, an event that some had said couldn’t happen did happen. Esmerian defaulted. AFAM was notified, and in February 2008 both Esmerian and AFAM agreed that the museum would release one item to Sotheby’s to sell to cover the default. Sotheby’s would sell at auction the folk art icon by Edward Hicks, the painting known as Peaceable Kingdom—the most valuable single item in the collection. It carried a $5 million reserve and was estimated at $6/8 million. If it were sold in a privately negotiated sale, the minimum bid had to be $10 million.
In his “Declaration in Opposition” of February 2013, Jan Prasens, managing director of Sotheby’s financial services, detailed the problems that followed when Sotheby’s included Peaceable Kingdom in its May 2008 American paintings auction:
Halsey Minor, a cofounder of the Internet media company CNET, which was eventually acquired by CBS, was the winning bidder for the painting at $9.86 million (including buyer’s premium). But Minor failed to settle his account with Sotheby’s. The firm sued Minor and then spent nearly two years trying to find a buyer for the painting. As Jan Prasens noted, “[A] worldwide recession had begun, and prices for art works—including in particular prices for folk art—had declined significantly.” Finally, in January 2010, Peaceable Kingdom sold for $7 million, a loss of 30% from the 2008 auction price.
In January 2009, the first list of other salable material had been agreed upon, but AFAM decided to make some changes, Sotheby’s states, so different items were added, and the second list was made in March 2009.
Sotheby’s and AFAM renegotiated the list of folk art pieces that might be sold to satisfy Esmerian’s debt, which had grown because of the legal costs incurred in collecting it, a factor that Esmerian had agreed to when he received the loan. Sotheby’s has entered a secured claim on Esmerian assets of “not less than $3,475,215.” The legal expenses are currently over $1.3 million.
The value of the entire Esmerian collection is a big question. According to one of the documents filed on February 19, AFAM claims the collection has “a total value of at least $47 million.” Bankruptcy trustee Jay Teitelbaum’s Motion for a Settlement Agreement, presented on December 26, 2012, estimates “the total value is between $14.1 million and $20.5 million.”
Four of the pieces on the March 2009 list are among the 53 pieces AFAM wants to keep. Sotheby’s strongly takes issue with Jay Teitelbaum’s plan to award those pieces free and clear to AFAM. Furthermore, if there is to be any sale of the Esmerian collection, Sotheby’s wants to be the seller, not some unnamed party that has made a $7 million offer (as mentioned in the December 26, 2012, settlement document) and definitely not another auction house.
Jan Prasens contends that if Sotheby’s isn’t awarded the auction of the Esmerian art claimed by AFAM, “[I]t will incur damages in the form of lost commissions and premiums totaling between $1.6 million and $2.2 million.” And if it doesn’t get to sell the Trustee Art either (the remainder of the 265 to 300 pieces on which it holds security interests), “[I]t will incur additional damages totaling between $1.2 million and $1.9 million.” “Sotheby’s secured claim could thus total from $6 million to over $7.3 million,” attorney Comet declares in his opposition statement.
In Sotheby’s view, it has bent over backwards to accommodate Teitelbaum and AFAM, but it draws the line at taking an over $7 million loss. There is a sense of barely restrained anger in the timbre of Sotheby’s objection to Teitelbaum’s order.
For instance, at the request of the Unsecured Creditors Committee, Sotheby’s prepared a valuation of the entire Esmerian folk art collection, which was to be kept confidential. It wasn’t, Sotheby’s claims. Sotheby’s also notes that “Sotheby’s valuation was also based on certain assumptions, including that the Collateral would be sold by Sotheby’s, taking advantage of its enormous experience and success in marketing and selling art.” That valuation was also an appraisal of the entire collection, Sotheby’s notes. “Under the AFAM Settlement, however, many of the most valuable items would be removed from the collection. Removing those items would significantly reduce the prospects for selling the remaining items….”
Sotheby’s also points out that it did not examine the condition of almost all the artwork and states a fact obvious to those in the arts and antiques market, “The condition of art items can have a major impact on the actual auction prices for those items.”
Sotheby’s opposition to the Teitelbaum Motion includes these charges: “The Motion seeks to strip a senior secured creditor [Sotheby’s] of more than half of its collateral…The Liquidation Trustee has acceded to AFAM’s demand to terminate Sotheby’s lien even though (i) the confirmed plan provides that Sotheby’s secured claim will remain unimpaired, and (ii) AFAM and Sotheby’s are parties to a subordination agreement, in which AFAM agreed to subordinate its security interest and take no action to dispute or remove Sotheby’s senior lien.”
Sotheby’s views the December 26 motion as nothing more than a belated Christmas gift to the American Folk Art Museum. “AFAM is not paying anything for the AFAM Art,” attorney Howard Comet argues. “Under settled law, this transaction is not a sale.”
And yet, despite some contentious language, Sotheby’s does reach out to offer protection to the key items AFAM wishes to keep. “Contrary to the Motion, if Sotheby’s retains its lien on the AFAM Art, it will sequence the sale of collateral so as to avoid, if possible, any sales of art that AFAM wants to keep. Sotheby’s has followed that same course since Esmerian defaulted in 2008.”
It will be interesting to see how Judge Robert D. Drain views Jay Teitelbaum’s proposal in light of Sotheby’s objection.
Originally published in the April 2013 issue of Maine Antique Digest. © 2013 Maine Antique Digest