AO Summary: What’s the Significance of the Salander-O’Reilly Gallery Bankruptcy Claims?

February 12th, 2008

Repossessing artwork via New York Times

Why would a respected Manhattan gallery have to file for bankruptcy and break the trust of loyal customers? The Manhattan District Attorney, Robert M. Morgenthau, is investigating Salander – O’Reilly Galleries LLC for breach of fiduciary responsibilities. The gallery did so by using consignment fees, to pay off his debt, instead of using revenue generated by the business. Galleries do not own all of the proceeds of the artworks that they sell. Instead, they act as holding companies and are obligated to set aside the consignor’s cut of the sale, until they receive it. The Upper East Side, gallery allegedly swindled consignors, artists and buyers out of approximately $40 million dollars in artworks.

Congoleum, Northwest Air, Adelphia, Dana: Bankruptcy (Update1) [Bloomberg]
Salander, Magnus, Movie Gallery, Plastech: Bankruptcy (Update1) [Bloomberg]
Art Dealer Files for Bankruptcy, Delaying Suits Against Him [New York Times]
Lawyers Suggest Process to Retrieve Art From Salander-O’Reilly [Bloomberg]
First Republic Says $40 Million in Default in Salander Art Fray [Bloomberg]
Big Dreams, Big Expenses: In a Lavish Town House, an Art Gallery in Trouble [New York Times]
First Republic Bank 2005 Annual Report [First Republic Bank]
The Salander Chronologies [ARTINFO]

Documenting artwork via Bloomberg

Salander – O’Reilly has filed bankruptcy with First Republic Bank, a subsidiary of Merrill Lynch. This leaves owners who sold and consigned of artworks to the gallery, vulnerable to repossession without compensation. The gallery owner claims he can not compensate purchasers or consignors because he does not have the money and that is why he filed bankruptcy. His excuse is that he can’t afford legal representation to defend himself in court. In order to avoid litigation, the gallery is alleging they own the artwork out right. First Republic Bank lent Salander $59 million dollars dating back to 2005. The bank has put liens on all his property. The bank has seized temporary ownership of the artwork as equity because there is a lien on all of Salander – O’Reilly LLC’ property. Therefore; the gallery is telling claimants to file complaints with the bank.

Over 4,000 artworks are being withheld from their original owners, or recent purchaser. The consignors, artists and buyers may have to participate in mediation to determine legitimacy of their claim and its value; in front of a creditors’ committee. Judge Cecelia Morris has been assigned to the hearing, at the Southern District Bankruptcy Court in Poughkeepsie, New York. If Judge Morris rules in favor of the petitioners, then they will have 3 months to file a claim for their artwork. Mediation would then begin some time in November. First Republic Bank has been determined to have done no wrong doing. However, their rights to the consigned belongings in the gallery are unjustified and have no basis of law.

Philip Boroff of, in his October 31 article, declared the fray to be “the biggest U.S. art mess since the price fixing scandal at auction houses [Christie's and Sotheby's] in the 1990’s.” The auction house price fixing investigation altered the art-business world completely. It stained the reputations of the two largest auction houses in the world and created laws protecting art collectors and their investments. Ironically, Salander-O’Rielly Galleries LLC was a victim of the scandal. Now the shoe is on the other foot. The February 14th hearing does not relate to works of art that had already been purchased from Salander. 24 lawsuits have been filed for fraud by high profile clients such as Sotheby’s, American Express Co., and hedge fund millionaire Roy Lennox. A separate suit has been filed by Renaissance Art Investors, an investment group, has developed debt recovery problems with First Republic Bank due to Salander’s Ponzi Scheme.

“The Annunciation, 1440c.50″ donated to the Met. Salander in 2005

Once Lawrence Salander had possession of his consignors’ artworks, he had a legal responsibility to protect their property and rights of ownership. In regards to his clients’, by selling them work that he rightfully knew was no longer his to sell, the buyer was unknowingly purchasing the work illegally. This is known as breaking the chain of title and render the sale null and void.
There are no solid laws concerning art title insurance right now. The issue of chain of title is important. Traditionally Title Insurance has been recognized as essential when purchasing land. For example, First Republic Bank’s lien on Salander-O’Rielly Galleries LLC’ property now gives it the right its title. Normally, when a company defaults to a bank, the bank repossesses all of it’s property. The question in the case of the artwork is; can a bank repossess artwork that the gallery only partially owns?  There are, however solidified laws regarding real-estate title insurance. Courts are only just addressing these questions and establishing laws. In fact, the concept is basically 1 -2 years old. The concepts was brought on by WWII claims concerning art seized by the Nazi’ and gallery owner schemes similar to Salander’s. ARIS – Corporation was the first art title insurance company founded and does the largest percentage of business today. Judith Pearson, CEO of ARIS Corporation stated in an interview for, “Nobody knows what creates a clear title. No one can know where this goes.” Due to the liens First Republic Bank has on Salander’s property, it may complicate litigation for claimants of artworks. If clients are forced to participate in non-biding mediation or lawsuits in bankruptcy court, the Salander-O’Rielly art scandal may become messier than any legal issue the art world has ever seen.