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The Beaverbrook U.K. Foundation may have to sell some assets to pay off its loans. The debts were incurred in the seven-year legal battle over 133 paintings at the Beaverbrook Art Gallery in Fredericton. ((CBC))

The Beaverbrook U.K. Foundation may have to sell some of its assets to pay mounting legal bills stemming from its seven-year dispute with Fredericton's art gallery, an audit has revealed.

The August 2009 report, which was filed with the U.K. Charities Commission last summer but was made public this week, is part of the Beaverbrook Foundation's most recent annual report.

The report said the foundation spent more than $3 million Cdn in 2007-08 but brought in only $450,000.

The foundation has been in a legal battle for seven years with Fredericton's Beaverbrook Art Gallery over ownership of 133 works of art.

Auditors say they have doubts about the British foundation's ability to continue its operations.

The foundation borrowed more money in 2009, bringing its total loans to $10 million Cdn to pay the huge legal bills in the dispute with the Fredericton-based art gallery.

The auditors say those debts create "significant doubt" about the charity's ability to continue operating.

The auditors also say the foundation may have to sell assets to repay the loans.

There's only one asset that could cover that amount: Cherkley Court, the former home in Surrey, U.K., of the original Lord Beaverbrook, which is valued between $21 million and $28 million Canadian.

Beaverbrook was a Canadian-born, British politician and businessman who died in 1964. Beaverbrook founded the Fredericton gallery in 1959.

More legal bills

Former Supreme Court of Canada justice Peter Cory's 2007 ruling awarded 85 of the 133 paintings to Fredericton's Beaverbrook Art Gallery.

An appeal panel, comprised of retired judges Edward Bayda, Coulter Osborne and Thomas Braidwood, said in September 2009 that Cory's original decision was reasonable and did not make any mistakes in his original judgment.

The U.K. foundation is challenging the appeal panel's ruling in the Court of Queen's Bench meaning even more legal bills to come.

Among the paintings that will be staying at the Fredericton art gallery are J.M.W. Turner's Fountain of Indolence, valued at $25 million, and Lucian Freud's Hotel Bedroom, valued at $5 million.

The 45 paintings awarded by Cory to the foundation are worth $6 million Cdn and not enough to cover its debts.

The U.K. foundation, which is controlled by Beaverbrook's descendants, said the paintings were only on loan to the gallery and wanted to take some of them back.

The art gallery argued Lord Beaverbrook had given the works as gifts in the 1950s.

The foundation also announced late last year it was discontinuing public tours of Cherkley Court because they were losing money.