The Chelsea Museum -- a small New York museum -- faces the loss of its charter when it was discovered that the permanent collection had been pledged as collateral against a loan for the museum’s mortgage.
The ARTKABINETT social network for fine art collectors knows that it is generally a bad move to have to sell your art to settle your bills.
The Chelsea Art Museum was founded by Dorthea Keeser. The eight-year-old museum, which focuses on contemporary art, has faced ongoing financial difficulties, with Ms. Keeser struggling to pay the mortgage on its 30,000-square-foot home on West 22nd Street.
But the decision to collateralize its permanent collection—which has paintings and prints by abstract artists including Jean Arp, Sam Francis, Joan Mitchell and Robert Motherwell, and is worth $2.5 million, according to Ms. Keeser—has perhaps more serious repercussions for the museum.
The loss of its charter may cause referral to the state attorney general's office following disclosure that its entire permanent collection of artwork was pledged as collateral for a loan needed to pay its mortgage.
The possible penalties are the latest twist for the Chelsea Art Museum, whose founder and director, Dorothea Keeser, is trying to avoid foreclosure.
On Friday, a company controlled by Ms. Keeser that owns the museum's home filed for Chapter 11 bankruptcy protection in Manhattan—a step that would forestall any foreclosure proceedings.
The pledging as collateral of works from a museum's permanent collection is a contentious issue in cultural circles and beyond. It violates the regulations of the state Education Department's Board of Regents, which supervises and grants charters to museums. It could become illegal under a bill introduced last year in the state Legislature.
A spokesman for the department, Tom Dunn, said consequences for a museum whose collection is used as collateral include the removal of its board of trustees, revocation of its charter or referral to the attorney general's Charities Bureau. The loss of its charter jeopardizes a museum's nonprofit eligibility.
Mr. Dunn said the department will review the matter.Ms. Keeser said she was aware of the regulations and defended the move, emphasizing that she has avoided selling works from the collection.
"I know the laws about museum collections, but, at the same time, I have seen so many museums sell their collections, if they're in a bad situation," she said. "If worse comes to worse, that's something someone has to discuss—but…we seem to get out of our situation without that."
The collection was pledged as collateral, Ms. Keeser said, against a $350,000 loan completed in March to pay the interest on its mortgage.
Lenders of that loan are a group of individuals including a New York banker and a Hong Kong gallery owner, according Ms. Keeser. The collection is currently in storage, she said.
Ms. Keeser's company bought the building that houses the museum for $7 million. In February 2008, the New York-based real-estate fund Hudson Realty Capital refinanced the mortgage with an $11 million loan, after having the building appraised at $28.1 million, Hudson said.
The terms called for Ms. Keeser's company to pay only a portion of the interest—which totaled 14%—until January 2009, when the principal and balance of interest were due, according to a person familiar with the matter.
That deadline came and went without payment from the museum, the person said. In April 2009, Hudson Realty agreed to extend the loan for 18 months, making payment of the principal due in July 2010.
In March, and then again in June, Hudson Realty officials say they reminded Ms. Keeser that the loan matured in July. In June, Ms. Keeser indicated that she was planning to pay it off.
But during a meeting at Hudson Realty's office on June 28, three days before payment was due, Ms. Keeser said she couldn't repay the loan by the deadline, the person familiar with the matter said. The two sides discussed possible resolutions, including finding a buyer, a joint-venture partner or another lender to refinance the loan. At the meeting, she requested that the loan be extended a few more months.
Including interest, Ms. Keeser's company now owes Hudson Realty about $13 million. Ms. Keeser has been late on some of her interest payments, though Hudson Realty says it has not charged her late fees.
Prior to the bankruptcy filing, Hudson Realty said foreclosure was an option but one that it was hoping to avoid.
"Our intention is not to own the property," says Renee Lewis, a managing director at Hudson Realty. "Our intention is to get paid off on the loan." Hudson and Ms. Keeser had planned to meet again on Monday to discuss how to resolve the impasse.
But, reached in Switzerland by telephone on Monday, Ms. Keeser said her company had declared bankruptcy and is due in court in the middle of September.
She said she has agreed to pay rent on the building, allowing her to continue museum operations there, and has instituted half-time furloughs for her staff for the remainder of August. Ms. Keeser said she is hopeful that the museum can persevere, in part by developing its roof as a high-end restaurant.
"The museum and the people who work here have to survive also," she said. "It is a difficult thing."
courtesy, Erica Orden and Craig Karmin at WSJ