Oct. 31 (Bloomberg) -- First Republic Bank, which Merrill Lynch & Co. bought in September for $1.8 billion, has been snared in the biggest U.S. art market mess since the price- fixing scandal at auction houses in the 1990s.

San Francisco-based First Republic is one of the largest creditors of embattled New York dealer Lawrence Salander and his Salander-O'Reilly Galleries, accused in about two dozen lawsuits of defrauding customers and failing to repay tens of millions of dollars of debt. The bank has not been accused of wrongdoing.

First Republic has lent a total of $59 million to Salander and his wife, Julie, his Upper East Side gallery and to an investment fund that said it arranged to buy all of Salander- O'Reilly's Renaissance art, according to property records and comments First Republic lawyer J. Christopher Shore made in court.

Shore said in court that $40 million worth of loans to Salander-O'Reilly and Renaissance Art Investors, the investment entity, are in default.

``First Republic's credit position is strong and adequately collateralized,'' bank spokesman Greg Berardi said in a statement. ``We are working with all parties to achieve an orderly resolution.''

In 2001, Sotheby's and Christie's International agreed to pay $512 million to clients who said they were overcharged on commissions and premiums at U.S. auctions from 1993 to 2000.

Merrill's Troubles

Tennis star John McEnroe, former New York Observer Publisher Arthur Carter, hedge-fund manager Roy Lennox, Earl Davis, the son of artist Stuart Davis, American Express Co., Bank of America Corp. and Sotheby's have filed lawsuits against Salander.

The plaintiffs accuse the dealer of selling art on consignment and pocketing all the proceeds; soliciting investments on deals in which he guaranteed profits but paid back little or nothing; and reneging on loans, bills and credit card charges.

Merrill spokesman Bill Halldin declined to comment.

Yesterday, Merrill Chairman and Chief Executive Stan O'Neal was ousted by Merrill's board following an unrelated $2.24 billion quarterly loss and an $8.4 billion writedown for losses on mortgages, asset-backed bonds and loans.

Of the $40 million allegedly in default, the Salander- O'Reilly gallery owes First Republic about $26 million, according to two people familiar with the situation. Renaissance Art Investors owes First Republic about $14 million, the people said.

Renaissance sued Salander on Friday, seeking at least $42 million. Renaissance said in its complaint that it was ``scammed'' in connection with art that it bought from Salander that he later sold to third parties. Stuart Slotnick, a lawyer for Renaissance, declined to comment about First Republic. Renaissance is associated with New York businessman Donald Schupak, Slotnick said.

`Grateful' to Bank

First Republic, a private bank and investment manager founded in 1985 that focuses on wealthy entrepreneurs and their businesses, once featured the 58-year-old Salander and his grown daughter, Ivana, on a First Republic billboard displayed over its Upper East Side branch and in its 2005 annual report.

In the ad and annual report, the Salanders were pictured on a marble staircase in their ornate five-story gallery on East 71st Street.

``Our business is unique in every way,'' Ivana Salander states in both. ``First Republic was the first bank to understand that. We're grateful to bank with them.''

This month, the two-page spread about the gallery was excised from the 2005 annual report posted on the bank's Web site. The spread was restored after a query from a reporter.

`Embarrassing'

Alan Bromberg, a securities law professor at Southern Methodist University in Dallas, said First Republic's association with Salander is embarrassing.

``Once an institution endorses a business to the public, it takes on some responsibility,'' he said. ``Not necessarily legal, but in terms of public relations.''

Merrill announced the First Republic acquisition in January. ``First Republic will enable Merrill Lynch to accelerate its strategic objective of growing its high net worth business,'' Robert McCann, president of Merrill's global private client business, said in a statement at the time.

Andy Augenblick, president of Fine Art Capital, which lends money to individuals and art dealers to buy art, said the legal fray highlights ``how important it is for the financial institution to understand the art market'' before lending.

Promise to Repay

In an interview last month, Salander declined to discuss in detail any allegations but said that he would repay all debts. The gallery has been closed to the public since early October. Barbara Thompson, a spokeswoman for Manhattan District Attorney Robert Morgenthau, said the office has received complaints against the dealer and is reviewing them.

Salander, his wife and the gallery owe First Republic about $45 million. Lawrence and Julie Salander have about $19 million of personal loans from the bank, secured by an East 82nd Street townhouse that they bought in 2004 for $4.75 million, according to New York Department of Finance records on its Web site.

Last year, the Salanders consolidated previous loans on the house into a $14 million mortgage from First Republic and received an immediate cash payout of $9 million.

This year, the Salanders took an additional $5.35 million home equity line of credit from First Republic.

The $19 million mortgage obligated the couple to make initial monthly interest payments of $81,083. For the gallery space, Salander's monthly rent and real estate taxes total about $183,000. His landlord, RFR Realty, is seeking to evict him, citing late rent payments.

To contact the writer of this story: Philip Boroff in New York at pboroff@bloomberg.net.

Last Updated: October 31, 2007 00:04 EDT