What happens to the Barnes if deal falls apart? Bankruptcy is possible, but not inevitable, legal experts said. And piecemeal sale of its art is not considered to be likely.

Posted: September 04, 2003

If the three charities backing the proposed move of the Barnes Foundation's priceless art to Center City were to withdraw their support, what is the worst-case scenario for the art and the public's ability to see it?

"Given our financial situation, given the unlikely situation where we're going to get the kind of support that we need, we're going into bankruptcy, and it's that simple," Barnes board chairman Bernard Watson said yesterday. "We go into bankruptcy, at which point the attorney general of the Commonwealth of Pennsylvania takes over, and it's up to him what happens to the Barnes after that."

But it is not really that simple, legal experts said yesterday. It is unlikely that Attorney General Mike Fisher would in any way take control of the Barnes, they added.

And it is almost certain that the Barnes' collection of Cezannes, Matisses and other masterpieces hanging on the walls of its gallery in Lower Merion would never be sold off piecemeal.

Although Fisher could elect to play a role in a bankruptcy case as a representative of the state's citizens, bankruptcies are filed in federal court and go before federal bankruptcy judges. Because of the Barnes' nonprofit status and the unique restrictions within its bylaws, there is little precedent to indicate how things might be resolved from there.

"There's no book on this," said John Gough, a lawyer specializing in bankruptcy at Montgomery, McCracken, Walker & Rhoads in Philadelphia. "I'm anxious to see how it reads."

The Barnes, backed by the Pew Charitable Trusts and two other foundations, proposed last September moving its art to a more accessible location in Center City to help it avert possible bankruptcy. A Barnes attorney said this week that the proposal was in danger because the charitable foundations have been unable to work out differences with Lincoln University over governance issues.

Not many nonprofit organizations file for bankruptcy, an option used in the corporate world when companies have debts they cannot repay. The Barnes Foundation does not have creditors banging on its doors, but because of its bylaws - left by Albert C. Barnes, who died in 1951 - it cannot sell assets. It also is restricted in how much money it can make from admissions, and it faces a cash crunch.

It has operated at a deficit for several years - it was $1.1 million in the red in 2002 - and some expenses are just going uncovered.

Watson said a public-relations firm was working for the Barnes pro bono. "We certainly aren't paying them; we have no money," he said.

There are two main types of bankruptcy filings.

Chapter 7 of the bankruptcy code involves the liquidation of holdings. In Seattle this March, the nonprofit Kalakala Foundation filed under Chapter 7 after it racked up debt while failing to raise money it sought to convert a historic ferryboat into a museum. The result: a sell-off. On Sept. 13, any bidder can buy the 67-year-old Kalakala ferryboat at a public auction.

That scenario is not likely here, Gough said.

Chapter 11 - a more likely bankruptcy scenario here - is filed by an organization that wants to restructure its finances and remain viable.

"In order to ask for relief under the bankruptcy code, it is not necessary that the debtor be insolvent," Gough said. "It is not even necessary that the debtor be in a cash-flow bind. There are situations where the debtor seeks something else that the Bankruptcy Court can give to it - relief from certain contractual obligations, for example."

If the Barnes were to file under Chapter 11, it would have to present a restructuring plan to the bankruptcy judge, Gough said. But it would be strictly about restructuring finances and cutting expenses, and might involve reducing visiting hours at the gallery or other cutbacks.

If the plan asked for permission to sell paintings, to alter the composition of Barnes' board of trustees, or to make other changes that would oppose the Barnes' existing bylaws, legal experts say that issue could be referred back to the state Orphans' Court, where the Barnes' embattled request to move and make other changes is already filed.

The attorney general would automatically be a party to a state court case, but there is no guarantee he would be granted permission to participate at the federal level, Gough said. In the Allegheny health system bankruptcy case in Pittsburgh, for example, a federal judge denied Fisher's request to be a full participant.

"The response that the Bankruptcy Court gave in that case - while I won't say it's necessarily a predictor - was that the court saw no need to have the attorney general participate fully at all levels of that proceeding," Gough said.

Instead, the court allowed Fisher's office to intervene in parts of the case.

Still, Gough added that there was a lot of gray area in the law when nonprofit groups and bankruptcy mix.

"There are two realms involved here," he said. "The attorney general's realm is oversight over charities, and the other is the realm of bankruptcy courts. It's an unresolved - I won't say collision - but an unresolved concordance of the two spheres of influence."

A bankruptcy filing is not a foregone conclusion. The Barnes' next option would be to explore whether it could arrange alternative funding, according to a person familiar with the Barnes and its options, who spoke on condition of anonymity.

Failing that, it could then go back to Orphans' Court and request the right to sell some holdings - perhaps not any of the art on display in the Lower Merion gallery, but artifacts in storage, or perhaps real estate.

But if the Barnes does choose to go to Bankruptcy Court, the case could establish legal precedents.

"They may make a lot of new law," said Don Kramer, an attorney specializing in nonprofit law at Montgomery McCracken. He said that, while art lovers would hold their breaths, for lawyers and legal scholars, it "will be a lot of fun."

Contact staff writer Don Steinberg at 215-854-4981 or dsteinberg@phillynews.com.

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