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POUGHKEEPSIE, N.Y.—On November 5, disgraced New York art dealer Larry Salander, of Salander-O’Reilly Galleries, filed for personal bankruptcy under Chapter 11 along with his wife, Julie Salander, in Poughkeepsie, New York, near one of their homes. The move was hardly unexpected: Salander faces a shuttered gallery, a criminal investigation, dozens of lawsuits and debts of more than $50 million.

The Chapter 11 filing came on the heels of another legal action, brought in New York City on November 1. In this suit, a small group of creditors is seeking to put Salander-O’Reilly into Chapter 7 bankruptcy, which would force the once world-renowned gallery, specializing in modern art and Old Masters, to liquidate whatever assets it still owns. In a flurry of courtroom maneuvers, Salander’s attorneys on November 9 merged the two bankruptcy actions and moved both to Poughkeepsie. The sleepy upstate town has thus become the setting for one of the hottest art world cases of recent times.

“The Salander bankruptcy was an end run that so far is successful,” says New York attorney John Koegel, who represents two living artists and the estates of two deceased ones, all of whom showed with Salander-O’Reilly and are parties to the Chapter 7 suit, with combined claims of $3 million against the dealer. According to Koegel, the action in federal court essentially freezes all other litigation and gives precedence to the Chapter 11 type of bankruptcy, which allows a business to reorganize and emerge in a new form, while the owners keep their property.

In fact, Salander’s bankruptcy petition states that “the debtor plans to use the breathing space afforded to it by the bankruptcy filing to accomplish a number of goals that will ultimately inure to the benefit of its estate and all of its creditors.” To this end, the dealer has already hired a turnaround specialist, Triax Capital Advisers, and appointed the firm’s managing director, Joseph Sarachek, as the gallery’s court sanctioned chief restructuring officer. “Mr. Sarachek,” the petition says, “has assumed complete control of all aspects of the debtor’s business and financial affairs, including unfettered authority to make all managerial and operational decisions on behalf of the debtor.”

For its forensic accounting services, Triax gets $50,000 a month plus 1.5 percent of all monies recouped and returned to the laundry list of both secured and unsecured creditors. The gallery’s biggest creditor by far is First Republic Bank, a wholly owned subsidiary of Merrill Lynch, which has outstanding loans to Salander in excess of $40 million. First Republic has already agreed to advance the gallery a further $630,00 to pay for at least part of the reorganization in a deal known in the bankruptcy trade as “debtor-in-possession financing.”

One of the first items on Triax’s agenda is to embark on a complete inventory of the art work in the “debtor’s possession or control.” That is a sticky task, since the New York district attorney’s office has already commandeered and removed for a criminal investigation virtually all the gallery’s records from its 71st Street mansion.

Despite this and any other obstacles that may arise, Salander’s lead attorney, eminent white-collar criminal law specialist John Moscow, of the New York firm Baker & Hostetler, asserts that his client “wants to make sure that everyone gets repaid, and that’s why he filed for personal bankruptcy.”