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Salander Bankruptcy Bogged Down By Colliding Claims and Disputes

As the office of New York District Attorney Robert Morgenthau continues its investigation of art dealer Lawrence Salander and the now-shuttered Salander-O’Reilly Galleries on Manhattan’s Upper East Side, the Chapter 11 bankruptcy proceedings initiated by Salander and his wife, Julie, in November are proving to be extraordinarily complicated and contentious.

NEW YORK—As the office of New York District Attorney Robert Morgenthau continues its investigation of art dealer Lawrence Salander and the now-shuttered Salander-O’Reilly Galleries on Manhattan’s Upper East Side, the Chapter 11 bankruptcy proceedings initiated by Salander and his wife, Julie, in November are proving to be extraordinarily complicated and contentious. Creditors, clients and investors—many with competing claims alleging breach of contract, misappropriation of artworks, fraud and other misconduct by Salander—are seeking the return of more than $80 million worth of artworks and funds they claim are owed to them (ANL, 10/2/07, pp. 6-8).

However, even the bankruptcy court’s early efforts to take charge of the proceedings have been bogged down in procedural disputes, right down to who should be given authority to survey the artworks and other assets in the estate.

Joseph Sarachek, of Triax Capital Advisers, New York, the chief restructuring officer (CRO) in the case, was selected by Salander himself and has been conducting an inventory of the estate’s assets.

Sarachek had asked the court for permission to relocate certain artworks from Salander’s private residences to the gallery premises or a bonded warehouse, arguing that such a move was necessary to preserve the artwork as well as to ensure continued insurance coverage. At a Jan. 3 hearing on the motion, marked, says one attorney, by a lot of “procedural wrangling,” in Poughkeepsie at the U.S. Bankruptcy Court, the Southern District of New York, Salander, who is representing himself in his personal bankruptcy filing, opposed the motion and the matter has been adjourned for a hearing on Jan. 17.

Robert Feinstein, of Pachulski, Stang, Ziehl & Jones, who is representing the unsecured creditors’ committee in the bankruptcy case, told ARTnewsletter that the storage of numerous works in Salander’s private residence has raised concerns, such as whether Salander “has the financial wherewithal to insure” and properly care for the artworks, and whether Salander should be “entrusted” to retain the works.

There was language in the motion specifying that moving the works was not a determination of ownership, he points out. The creditors’ committee supported the motion, he says. “We just want [the artwork] safe and sound.”

Feinstein says that another issue of concern to the creditors is that while the gallery bankruptcy filing has an overseer in the form of the CRO, in Salander’s personal bankruptcy filing the art dealer himself is overseeing the assets in question.

Initially, Sarachek’s appointment was a source of heated debate among the claimants in the case when it was approved last November. Amid a storm of protest, Judge Cecelia G. Morris approved Salander’s request to appoint Sarachek as CRO at a monthly salary of $50,000. The approval of Sarachek was granted in mid-November, on an interim basis, and continues through Feb. 14, 2008.

The committee of unsecured creditors, comprising many of those who had brought legal action against Salander in some two dozen lawsuits last fall, was appointed days later, on Nov. 20. The committee was vehemently opposed to a Salander-appointed officer, noting that Sarachek “lacks the confidence and support of the creditor body because he was handpicked by Lawrence Salander, the principal debtor who is alleged to have engaged in massive prepetition fraud and other misconduct,” a November filing states.

According to the committee’s filing, “This case cries out for the appointment of an independent estate fiduciary to marshal the Debtor’s assets, investigate and prosecute estate causes of action against a wide variety of potential targets, [and] sort out competing claims.” However, at a hearing on Dec. 13, Judge Morris expressed doubt about the prospect of appointing a trustee—noting it might interfere with Sarachek’s progress to date.

Morris also expressed concern that creditor First Republic Bank, which has secured priority as a Salander lender, and which also opposed the appointment of a Chapter 11 trustee, might pull the financing it has extended to Salander under the auspices of the bankruptcy law—a crucial element in allowing the reorganization to proceed. The Chapter 11 filing in November revealed that the bank is Salander’s largest secured creditor.

Judge Morris further questioned attorneys about how and by whom, the expense of a Chapter 11 trustee, apart from Sarachek, would be handled. She said Sarachek was “undoubtedly in the best position to take inventory right now,” though she conceded he was “not in a position to investigate potential estate claims to commence litigation.”

The creditors’ committee has since withdrawn its support for appointment of a trustee, having seemingly been reassured by Sarachek’s work to date, as well as having hammered out an agreement under which it will itself oversee investigation and litigation of any estate claims.

Immediately after Sarachek’s appointment, court filings reveal, he commenced taking an inventory of artworks at various locations—the Salander-O’Reilly Galleries and the Lawrence and Julie Salander Upper East Side townhouse, along with their 60-acre estate in Millbrook, N.Y. By mid-December Sarachek had identified, catalogued and photographed about 3,000 pieces of art at those locations but said he anticipated needing additional time to complete a survey of the 25,000-square-foot, five-floor gallery.

Sarachek identified 231 pieces of art—including works by Willem de Kooning, Richard Diebenkorn, Robert de Niro Sr. (father of actor Robert) and Amedeo Modigliani, among others—which he believes to be the property of Salander’s estate; he recommended that these artworks be returned to him.

According to statements made by a Salander attorney, Robert Raicht, Sarachek immediately gained access to the gallery to ensure that matters such as adequate heating and oil were taken care of so that the contents of the gallery would remain “protected and preserved.” Raicht also told the judge that his people have “interfaced with the criminal court of New York” and the Manhattan District Attorney’s office concerning information that had been “confiscated and impounded” as the result of a search warrant executed at Salander’s Manhattan residence last fall. Raicht did not respond to ARTnewsletter’s request for comment.

The Benucci Gallery, Rome, is currently among several creditors pursuing the right to reclaim artworks they say are being improperly held in the Salander estate. It is requesting the return of more than ten works, valued at about $2.5 million, as well as the costs of shipping them back to Italy. A hearing on the Benucci motion is presently scheduled for Jan. 17.

On a positive note, Feinstein says that in recent weeks he and the other attorneys involved, including those for the debtor, the bank and various artists, have been working to develop a protocol whereby reclaiming work that rightfully belongs to artists and consigners can be done without extensive litigation. “A lot of artwork was captured, or caught, in the bankruptcy,” he reports, “including an unknown number of pieces that truly belong to artists or consigners” who took appropriate measures beforehand to secure their interest or title.

This was further complicated by the unavailability of Salander’s records after the gallery was shuttered on Oct. 17 and the D.A. seized documents and computer files. “The goal,” Feinstein affirms, is to develop “a mediation process, the intention of which is to identify those people who are clearly entitled to [have] their art back.”

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