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An upcoming art auction, conducted by the famous auction house Sotheby’s, will put over two hundred pieces up for sale as part of an asset liquidation in the ongoing bankruptcy of Ralph Esmerian. Esmerian, the former owner of a luxury jewelry retailer, pleaded guilty to bankruptcy fraud and other charges in 2011, and is currently serving a six-year federal prison sentence. His extensive art collection is valued at up to $9.5 million, but reportedly still may not bring in enough to pay his creditors. Financial difficulties seem to follow the art collection, with the purchaser of one painting at an earlier auction getting into a dispute with Sotheby’s and filing for bankruptcy himself. Conflicting promises between an art museum, the auction house, and others have also complicated efforts to sell pieces from the collection. The ongoing case demonstrates some of the difficulties presented in bankruptcy by unconventional assets like art.

Esmerian was the owner of Fred Leighton, a high-end jewelry store based in New York. According to media reports, a 2005 robbery cost the store over $30 million in merchandise. In an effort to keep the company afloat, Esmerian reportedly took out loans that pledged specific pieces of jewelry as collateral that were already pledged elsewhere. Prosecutors accused him of misleading creditors, lying to a bankruptcy judge, and hiding millions of dollars overseas. He was arrested in November 2010, and he pleaded guilty to multiple fraud-related offenses. A judge sentenced him to six years in prison in July 2011, reducing the sentence from the maximum possible ten years based on his charitable works. He reportedly donated millions to the American Folk Art Museum (AFAM) and promised many of the pieces from his collection.

One of the works that became embroiled in Esmerian’s case was “The Peaceable Kingdom” by early-nineteenth-century painter Edward Hicks. Esmerian reportedly promised to donate it to AFAM in 2000, but then pledged it as collateral for a loan from Sotheby’s in 2005. He stated that this was not a conflict, but he was also dealing with loans that were coming due, including a $178 million from Merrill Lynch that it had declared to be in default. Esmerian put the painting up for auction with Sotheby’s.

The painting sold for $9.7 million in May 2008, the most ever paid for a Hicks painting, or for any work of American folk art. The buyer, California tech entrepreneur Halsey Minor, reportedly did not pay for “The Peaceable Kingdom” or two other paintings, resulting in Sotheby’s and Minor filing lawsuits against each other. Sotheby’s eventually obtained a judgment for $4.4 million, a lesser amount that reflected the recession-induced drop in the paintings’ value. Minor filed for bankruptcy in the summer of 2013.

Esmerian’s creditors, which include Sotheby’s, Merrill Lynch, and others, still claim to be owed over $140 million. The court-appointed trustee, who is in charge of liquidating Esmerian’s estate and paying the creditors, reached an agreement with AFAM in early 2013 to donate a portion of the art collection to the museum. The January 25 auction will likely dispose of much of the remainder of the collection, but is unlikely to satisfy a significant portion of the remaining debt.

Bankruptcy attorney Devin Sawdayi has over sixteen years’ experience guiding clients in the Los Angeles area through Chapter 7 and Chapter 13 bankruptcies, helping them restructure bill payments, liquidate assets to pay debts, and discharge certain debts entirely. Contact us today online or at (310) 475-9399 for a free and confidential consultation to see how we can assist you.

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