By Philip Boroff

April 18 (Bloomberg) -- Embattled art dealer Lawrence Salander suffered a defeat in a Poughkeepsie, New York, courtroom yesterday, when he and his wife, Julie, were ordered to cede control of their finances to an independent trustee.

U.S. Bankruptcy Judge Cecelia Morris approved a motion to convert the Salanders' case from a Chapter 11 reorganization to Chapter 7 liquidation, in which a trustee sells all except ``exempt assets.''

The U.S. Justice Department introduced the motion last month, and it was opposed by the Salanders. Justice Department lawyer Eric Small said yesterday that since the Salanders filed for bankruptcy protection in November, they've been slow to sell assets and quick to accumulate new debt.

``This proceeding has been an exercise in delay,'' he said.

Yesterday's rebuke wasn't Salander's first by Morris. In February, she denied his request that he be rehired by his bankrupt Salander-O'Reilly Galleries LLC, calling it a ``fatally flawed motion.''

The Manhattan district attorney has seized records from the Salanders' Manhattan home and the Upper East Side mansion he rented that housed the gallery. Salander, who has seven children from two marriages, hasn't been charged with a crime.

Excluding fees for bankruptcy-related professionals, such as lawyers, Small said yesterday that the Salanders incurred about $800,000 in new debt since their bankruptcy filing, through February. He pointed out that the couple hasn't sold their Manhattan townhouse or their home in Millbrook, New York, though they have hired a Manhattan broker and have sought court approval to enlist one for Millbrook.

`No Confidence'

``The debtor does not have the confidence of the creditors,'' said Lewis Wrobel, a lawyer representing Renaissance Art Investors, which supported the conversion to liquidation and claims to own 600 works of art held by Salander- O'Reilly. ``This cries out for an independent fiduciary.''

The Salanders were in court and left before the judge's order. Salander lawyer Douglas E. Spelfogel argued that a trustee would be less effective in selling the Salanders' art collection than Salander himself. One reason the couple didn't rush to sell their real estate was to realize the best price, Spelfogel said.

Salander-O'Reilly Galleries also filed for Chapter 11 bankruptcy in November, as it and Salander personally faced dozens of lawsuits alleging that art and funds were misappropriated and debts were ignored. Salander has denied wrongdoing.