Ross has relied upon Subsection 2 of N.Y.U.C.C. § 2-403(2), which provides that: "Any entrusting of possession of goods to a merchant who deals in goods of that kind gives him power to transfer all rights of the entrustor to a buyer in the ordinary course of business." Cantor v. Anderson, 639 F. Supp. 364, 368 (S.D.N.Y. 1986). The Uniform Commercial Code ("U.C.C.") is applicable to art as to other chattels.

However, “where there are warning signs about problems in a sale,” merchants purchasing art have “an added duty of inquiry.” Brown v. Mitchell–Innes, No. 06 Civ. 7871, 2009 WL 1108526, at *7, 2009 U.S. Dist. LEXIS 35081, at *19 (S.D.N.Y. April 24, 2009); see also Interested Lloyd's Underwriters v. Ross, No. 04 Civ. 4381, 2005 WL 2840330, at *5, 2005 U.S. Dist. LEXIS 25471, at *13–14 (S.D.N.Y. October 31, 2005); Cantor v. Anderson, 639 F.Supp. 364, 367–68 (S.D.N.Y.1986); Morgold, Inc. v. Keeler, 891 F.Supp. 1361, 1368–69 (N.D.Cal.1995); Porter v. Wertz, 68 A.D.2d 141, 146, 416 N.Y.S.2d 254 (2d Dep't 1979).

(4) And art is subject to any applicable provisions of the Uniform Commercial Code and the various state analogues. See Cantor v. Anderson, 639 F. Supp. 364 (S.D.N.Y. 1986); Porter v. Wertz, 68 A.D.2d 141, 416 N.Y.S.2d 254 (1979), aff'd, 53 N.Y.2d 696, 439 N.Y.S.2d 105, 421 N.E.2d 500 (1981). In this dispute there do not appear to be any relevant differences in the versions of the Uniform Commercial Code among New York, Arizona, and California.

The text of each section should be read in the light of the purpose and policy of the rule or principle in question, as also of the Act as a whole, and the application of the language should be construed narrowly or broadly, as the case may be, in conformity with the purposes and policies involved. The purpose of § 42a-2-326(3) is to prevent creditors from being misled by a hidden lien. Walter E. Heller Co. Southeast v. Riviana Foods, Inc., 648 F.2d 1059, 1062 (5th Cir. 1981); Cantor v. Anderson, 639 F. Supp. 364, 369 (S.D.N.Y. 1986); GBS Meat Indus. Pty. Ltd. v. Kress-Dabkin Co., Inc., 474 F. Supp. 1357, 27 U.C.C.Rep.Serv. 388, 393 (W.D.Pa. 1979); Matter of Gross Mfg. Importing Co., Inc., 328 F. Supp. 905, 909 (D.N.J. 1971). The exceptions found in subsection (3) are intended to limit that subsection to instances where creditors of a consignee may have been misled by a secret lien. Walter E. Heller Co., supra, 648 F.2d at 1062; Conn.Gen.Stat. § 42a-2-326, comment 2.

The Government's interest in the property thus vested when Defendant committed the acts that led to his possession of those proceeds, meaning that, while Defendant might have possessed the forfeited assets, he did not enjoy any legal interest in them that was substantial enough to serve as the basis of a security interest. See 21 U.S.C. § 853(c); see also Logan, 868 F. Supp. at 66-67 (holding that, where an intermediary was a mere "agent" holding assets for distribution on behalf of another party with an ownership interest, a "rational jury" might find that the intermediary lacked a "substantial interest" in the assets, and thus that a security interest did not attach); In re Nash, 70 B.R. 40, 42 (Bankr. E.D.N.Y. 1987) (finding that right to obtain stock that had not yet been issued was not sufficient to support security interest in that stock); Cantor v. Anderson, 639 F. Supp. 364, 368 (S.D.N.Y. 1986) (concluding, based on record at trial, that art dealer did not have sufficient rights in painting for a security interest to attach, despite his possession of that painting), aff'd, 833 F.2d 1002 (2d Cir. 1986); Lincoln First Com. Corp. v. New York State Tax Comm'n., 136 Misc.2d 478, 518 N.Y.S.2d 904, 906 (N.Y. Sup. Ct. 1987) (finding that "agent" in possession of collateral owned by state and municipal governments "did not possess the type of rights in the collateral which could be pledged to a third party without permission of the owner of the collateral"); cf. Possessory Interest, Black's Law Dictionary (11th ed. 2019) (defining a "possessory interest" as a right to control property, as opposed to mere actual possession).

As per the language of the section and the official comment, the “purpose of U.C.C. § 2–326 is to protect creditors of a consignee of goods from hidden liens.” Cantor v. Anderson, 639 F.Supp. 364, 369 n. 8 (S.D.N.Y.1986). A similar term to “consignment” found in U.C.C. Art. 2 is the term “entrusting.”

This heightened duty of due diligence is triggered “where there are warning signs about problems in a sale.” Joseph P. Carroll Ltd. v. Baker, 889 F.Supp.2d 593, 604 (S.D.N.Y.2012) (quotation marks omitted) (citing Brown, 2009 WL 1108526, at *7;Interested Lloyd's Underwriters, 2005 WL 2840330, at *5;Cantor v. Anderson, 639 F.Supp. 364, 367–68 (S.D.N.Y.1986); Morgold, 891 F.Supp. at 1368–69;Porter, 416 N.Y.S.2d at 254). The seminal case of Porter v. Wertz is instructive.

Defendants argue that they are not merchants because they do not sell artwork, only collect it, and that even if they are deemed merchants they only have an added duty of inquiry where there are warning signs about problems in a sale. See Cantor v. Anderson, 639 F. Supp. 364, 367-68 (S.D.N.Y. 1986) (sophisticated art purchaser had reason to doubt seller's ownership of painting and had duty of further inquiry); Morgold, Inc. v. Keeler, 891 F. Supp. 1361, 1368-69 (N.D. Cal. 1995) (finding after trial that buyers who were also art dealers had no heightened duty of inquiry because they "responded to the available information reasonably. There were no warnings which required them to do further investigation"); Porter v. Wertz, 416 N.Y.S.2d 254, 257 (App.Div. 1st Dept. 1979), aff'd, 53 N.Y.2d 696 (1981) (merchants purchasing art cannot be "indifferen[t] as to the 'provenance', i.e., history of ownership or the right to possess or sell an object d'art"); Lindholm v. Brant, 925 A.2d 1048, 1058 (Conn. 2007) (reviewing case law and finding that "[w]e agree with these courts that a merchant buyer has a heightened duty of inquiry when a reasonable merchant would have doubts or questions regarding the seller's authority to sell").

The question presented by plaintiffs claim is whether CTC had rights in the ATIC invoice to which the Bank's security interest could attach. See, e.g., Cantor v. Anderson, 639 F. Supp. 364, 368 (S.D.N.Y.) (art dealer entrusted with painting did not have "rights in the collateral" and could not pledge the painting to a third party), aff'd., 833 F.2d 1002 (2nd Cir. 1986). Plaintiff argues that CTC had no rights in the ATIC invoice because CTC was only plaintiffs "agent and broker," whose role was to arrange the sale of coal from CTC to ATIC in return for a one percent commission.

In any event, Frito-Lay cannot show legal ownership or a superior right to possession of specifically identifiable property which is required for a conversion claim. See, e.g., Aetna Casualty Sur. Co. v. Glass, 75 A.D.2d 786, 428 N.Y.S.2d 246, 247 (1st Dep't 1980); Rodgers v. Roulette Records, Inc., 677 F. Supp. 731, 736-37 (S.D.N.Y. 1988); Cantor v. Anderson, 639 F. Supp. 364, 369 (S.D.N.Y.), aff'd, 833 F.2d 1002 (2d Cir. 1986). Indeed, the TBT Agreements specifically state that the debtors retained all ownership rights in the properties.