Billionaire hedge fund manager John Paulson has bailed out the beleaguered Berry-Hill Galleries by assuming the security interest of its creditor, American Capital Financial Services, according to two sources with knowledge of the arrangement. He is now a creditor of the Upper East Side gallery, which specializes in 18th–20th-century American art, modern European paintings and old master works. The gallery filed for bankruptcy in 2005 and emerged from bankruptcy protection in 2007.

Once it assumed the debt from ACFS, Paulson Credit Opportunities agreed to dismiss the suit against Berry-Hill Galleries, according to court documents filed on Apr. 15, 2011. The agreement stipulates that each party cover its own legal expenses.

Paulson's attorney, David Parker of Kleinberg, Kaplan, Wolff & Cohen, told A.i.A  that he "only did the paperwork" and declined to comment further.

Reached by phone, Paul Niehaus, Berry-Hill's lawyer, said, "Berry-Hill is open, doing business and having shows." Clarifying rumors that have been circulating in American art circles, he asserted that "Paulson purchased the note; he did not acquire the gallery." Asked about the financial status of the gallery, Niehaus said, "no one is pursuing us for outstanding debt."

Last year, when the gallery's $9.5-million loan from American Capital Financial Services, a private equity and hedge fund, came due, it couldn't make the payment. On Mar. 30, 2010, after discovering that the gallery had secretly sold 223 works it had put up for collateral, ACFS was granted an order of seizure and removed numerous works from the gallery. Proceeds from that covert sale, court papers say, were not used to make good on the loan payments.

Berry-Hill Galleries, established in New York some seven decades ago, traces its lineage to the 17th-century Berry Gallery of London. Since 2003, Berry-Hill has been entangled in a web of legal and financial troubles, which led to a split between the two cousins who ran the business, Frederick Hill and James Berry Hill. Frederick Hill left the gallery and, in 2009, launched Collisart, a private art advisory service and dealership, with his daughter Daisy Hill Sanders. James Berry Hill remains at the helm of Berry-Hill Galleries, with his son, David Hill, as president.

What does all this mean? Niehaus declined to comment on the details of the agreement. Paulson is now a lender to the gallery, whose holdings, according to a 20-page inventory filed with the court, includes works by such major artists as Milton Avery, Frank Benson, George Bellows, Frederic Edwin Church, Laszlo Moholy-Nagy, Howard Hodgkin and Patrick Caulfield. Should the galley default again, Paulson could claim its inventory.