Editor’s Note
This is the first issue of Spencer’s Art Law Journal which will appear three times a year on Artnet. This issue contains four essays, which will become available, one essay each month, April through July 2010.

It’s been said that art market custom and practice remain much as they were in the 19th century. The legal structure we call art law (an amalgam of personal property law, contract, estate, tax and intellectual property law) supporting the acquisition, retention and disposition of fine art, often fits uneasily with archaic custom and practice. The result is that 21st century art market participants are frequently unsure of their legal rights and obligations.

This Journal proposes to promote discussion of art law legal issues for lawyers and nonlawyers alike, with the goal of providing greater transparency, stability and predictability.

The first four essays in our series deal with two core issues for the ownership of visual art -- authenticity and title -- who created it and who owns it? The first essay addresses a typical but often overlooked provision of an auction house consignment agreement allowing the auction house to rescind a sale over authenticity concerns. The second essay deals with ownership disputes with insurance companies over art stolen and recovered years later. A third essay raises the fraught question of changes in the attribution of visual art. The final essay of this issue of the Journal addresses the process of determining who owns art stolen between 1933 and 1945.

Three times a year future issues of the Journal will address legal issues of practical significance to collectors, dealers, scholars and the general art-minded public, such as (1) appropriate due diligence on the part of the buyer when provenance is incomplete or unclear, (2) the relevance of catalogues raisonné for due diligence, and (3) what to do if one suspects a piece in a collection of visual art is incorrectly attributed, or, indeed, an outright forgery.

Stolen Art: Who Owns it Often Depends on Whose Law Applies

Arabella Yip

It has been estimated that between 1933 and 1945 the Nazis looted more than 600,000 works of art from their European (mainly Jewish) owners. Despite great effort many stolen works have not been recovered. Since many looted works remain in public and private ownership, these owners remain at risk for claims against their art. When such a claim is made, how do courts decide ownership?

Under Anglo-American law and the law of some (but not all) European countries, a thief cannot pass good title (no matter how many subsequent owners buy in good faith). Relying on this well-settled principle of Anglo-American law, American courts have invariably ordered the return of Nazi-looted art to the heirs of former Jewish owners.

But what if the painting were never stolen, confiscated or looted by the Nazis? What if instead, the Jewish owner sold his painting to protect it from impending seizure by the Nazis or to generate income for his family because the Nazis stripped him of his livelihood? Is this a "forced sale" amounting to theft? The answer may well depend on which country’s law applies to the "sale" -- the country where it took place 75 years ago, the current residence of the heirs or the residence of the original owners.

ARABELLA YIP is Assistant General Counsel to Yale University, New Haven, Connecticut. She practices art and museum law, intellectual property and contract law, and has assisted dealers, artists, foundations and scholars in authenticity and title disputes in state and federal courts.

In February 2009, the Museum of Modern Art (MoMA) in New York settled a lawsuit involving one of its most valuable paintings, Boy Leading a Horse (1905-1906) by Pablo Picasso.(FN 1) Under the terms of the settlement, the museum was allowed to keep the painting in exchange for paying an undisclosed sum of money to a German art historian, whose Jewish ancestor allegedly sold the painting under Nazis duress. The settlement, announced in open court the morning the jury trial was set to begin, came as a surprise to many in the art world. Just a little more than a year earlier, the museum had taken preemptive measures against the claimant, asking a New York federal court to declare it the rightful owner of the painting. MoMA had sought a swift victory in partial reliance on an oft-applied principle of choice-of-law, which, if successful, would have cleared its title to Boy and saved it the expense of an unavoidably costly litigation.

Facts of Museum of Modern Art Claim to Picasso Painting
Here are the facts, in brief: Boy was owned by a prominent Jewish art collector, Paul von Mendelssohn-Bartholdy, who lived in Berlin during the Nazis’ ascendancy. In 1935, it was sold to a Jewish art dealer, Justin K. Thannhauser, and transported to the Swiss gallery of Siegfried Rosengart (partner of Thannhauser). A year later, while on a trip in Switzerland, William Paley, former MoMA chairman and CBS founder, purchased it. Paley donated Boy to MoMA in 1964 upon his death. At that time, Boy was estimated to be worth at least $100 million. More than four decades later, Julius Schoeps, great nephew of von Mendelssohn-
Bartholdy, demanded that MoMA return the painting. In his claims for ownership of Boy, Julius Schoeps alleged that Nazi coercion drove Mendelssohn-Bartholdy to sell the painting to Thannhauser, that Paley purchased Boy knowing that Thannhauser had acquired defective title to the painting, and that MoMA had accepted Paley’s gift of Boy with knowledge of his complicity.

Since the painting had passed through so many hands, and had traveled across many borders, the case was beset with choice-of-law issues. One such issue, in particular, became a focal point of the battle between Schoeps and MoMA -- the legal validity of the sale of Boy from Thannhauser to Paley in 1936. MoMA had argued that Swiss law governed the transaction since that is where the sale took place, while Schoeps had countered with New York law, asserting that New York had a greater interest than Switzerland in the outcome of the case. Since each jurisdiction has its own statute of limitations that determines the time in which an action for recovery of personal property must be brought, the substantive difference between the respective laws was paramount to the survival of Schoeps’ claims.

Swiss Law
Under Swiss law, a good faith purchaser of stolen property acquires title superior to that of the original owner. Moreover, all purchasers of property, stolen or not, are presumed to act in good faith, and a claimant seeking to reclaim such property bears the burden of establishing otherwise. The claimant must prove that suspicious circumstances surrounding the transaction should have caused the purchaser to doubt the seller’s authority to sell the property and to inquire about the property’s origins; more crucially, the claimant must institute action for return of the property from a good faith purchaser within five years. With respect to the sale from Thannhauser to Paley, if Swiss law had governed, the law’s presumption of Paley’s good faith would have, essentially, immunized the transaction from any taint after five years, "even if the transfer from [von Mendelssohn-Bartholdy] was infected with duress." This immunization would have extended to subsequent owners in the painting’s chain of title, such as MoMA, and would mean that Schoeps’ claims have been barred for more than sixty years.

New York Law
While Swiss law may perhaps be the most favorable law for good faith purchasers, New York law is on the opposite end of the spectrum. New York has a policy of fiercely protecting the right of original owners from whom property had been stolen to recover that property, even if it is in the possession of a good-faith purchaser. The rule in New York is that the original owner may seek to reclaim stolen property until three years after he makes a demand for its return and the good faith purchaser refuses. This rule relieves the original owner of the burden to track down the whereabouts of his stolen property and sue for its recovery within a limited window of time, but strips the good faith purchaser of any protection for having purchased and held the property innocent of any knowledge that the property had been stolen. Hence, in contrast to Swiss law, New York law would have afforded Schoeps wide latitude to pursue his claims against MoMA.

When initiating its declaratory judgment action, MoMA had pinned its hopes for an early defeat of Schoeps’ claims -- thereby averting an expensive trial -- on the expectation that the New York district court would declare Schoeps’ claims to Boy barred by Switzerland’s five-year statute of limitations for recovery of stolen property. But, at a series of hearings in early January, the judge presiding over the case, U.S. District Judge Jed Rakoff, denied MoMA a potentially swift victory, holding that New York law "governed the validity and legal effect of the sale of Boy to Paley in 1936." (FN 2)

Egon Schiele Painting in New York Court
And yet, less than a year earlier, another New York federal court, also in the Southern District, ruled that the application of Swiss law was appropriate to a Jewish owner’s 1956 sale of an Egon Schiele drawing known as Seated Woman with Bent Leg to an art dealer in Switzerland. The choice of Swiss law, ultimately, led to judgment for the current possessor of the drawing, philanthropist and art collector David Bakalar.

Like MoMA, Bakalar had initiated the lawsuit against the claimants by seeking a declaratory judgment to establish his rightful ownership of the drawing. In their counterclaims, the claimants asserted ownership of the drawing as the legal heirs of Fritz Grunbaum, the original Austrian owner who died in the Holocaust, by alleging that the Nazis had looted the painting from Grunbaum’s wife when they arrested her, or, alternatively, that she had been driven by Nazi persecution to transfer the drawing to her sister. Two decades later, in 1956, Grunbaum’s sister-in-law, who had escaped the Austrian Anschluss, sold the drawing to an art dealer in Bern, Switzerland. As with Schoeps and MoMA’s suit, the parties in Bakalar v. Vavra intensely disputed the law that governed the Swiss transaction because the Grunbaum heirs’ claims to the drawing "hinged on the propriety of [the Swiss dealer’s] initial acquisition of the drawing in Bern,"(FN 3) in other words, on the dealer’s good faith.

The choice of law was between Swiss and Austrian law (in Austria, a good faith purchaser of property cannot acquire title to stolen property), which, similar to the conflict between Swiss and New York law, would have dictated very different outcomes. The judge, relying on legal precedent from an earlier New York Southern District court decision, Greek Orthodox Patriarchate of Jerusalem v. Christie’s, applied the general principle of choice-of-law, called the lex loci delicti commissi rule. Under this rule, a forum court, when faced with a conflict of laws, applies the law of the jurisdiction where the property is located at the time of its sale. For instance, in Greek Orthodox Patriarchate of Jerusalem v. Christie’s, the
court had to determine the appropriate law governing a French woman’s receipt from her father of a 10th-century manuscript that had been stolen from a monastery of the Greek Orthodox Patriarchate of Jerusalem several decades earlier. Applying the lex loci rule, the court held that French law governed the transfer from father to daughter because France was the situs of the transfer.(FN 4)

Swiss Law Held Not to Govern Claim
Contrary to MoMA’s expectations, Judge Rakoff did not apply the "traditional" lex loci rule. Instead, he applied interest analysis, another choice-of-law principle and a modification of the lex loci rule. Under interest analysis, the law of the jurisdiction with materially greater interest in the outcome of the case is applied over the law of the jurisdiction in which the disputed transaction occurred. As Judge Rakoff points out: "In disputes over transfers of personal property, interest analysis will often lead to the conclusion that the law of the forum where the transfer took place applies, the same result that would have been reached under the traditional lex loci delicti rule. But such a result is not inevitable. . ."(FN 5) In other words, Judge Rakoff  seems to advocate a choice-of-law process whereby the lex loci rule is applied only if there is no other jurisdiction with interests greater than the place where the transaction occurred. Applying interest analysis, Judge Rakoff concluded that New York had more at stake in the issue of Boy’s ownership and applied New York law to Paley’s 1936 purchase of Boy in Switzerland.

New York Courts and Choice of Law Rules
But was the application of interest analysis inevitable? After all, the judge chose not to rely on precedent set by art restitution cases decided in his own federal district that had applied the lex loci rule, e.g., Bakalar v. Vavra and Greek Orthodox Patriarchate of Jerusalem v. Christie’s, and revealed his own sentiments on the potential significance of this case when he railed against the parties following their refusal to make the terms of the settlement public:

At the heart of this action are issues of considerable public import. . . . The Court finds the confidentiality provision of the settlement agreement and the plaintiffs' objection to disclosure to be against the public interest and a troubling reversal of the parties' previously stated positions on this issue. From the outset, the parties on both sides portrayed this lawsuit as of considerable public interest because of the importance of establishing the truth concerning the sensitive issues involved. The Museum[]. . . ha[s] characterized the plaintiffs' [a.k.a. Schoeps] claims as entirely baseless and, essentially, extortionate. The plaintiffs, for their part, have claimed loudly throughout that they were vindicating a historical injustice. . . .

Plaintiffs, however, for reasons wholly unexplained and seemingly no more compelling than concealing the amount of money going into their pockets, remain opposed [to disclosing the settlement]. . . . [T]he fact that the plaintiffs, who repeatedly sought to clothe themselves as effectively representatives of victims of one of the most criminal political regimes in history, should believe that there is any public interest in maintaining the secrecy of their settlement baffles the mind and troubles the conscience.(FN6)

With respect the judge’s choice-of-law determination, the choice of New York law was indeed correct because both the facts and public policy considerations command it. Boy was housed in a Swiss gallery for merely a year before being purchased by Paley, a resident of New York, and shipped to New York. Paley’s check to Thannhauser was made out to a New York bank. In addition, none of Boy’s owners, not even Thannhauser, was a Swiss resident or citizen at the time, nor is Schoeps, who resides in Germany. "And Boy has been in New York over 70 years and is now the property of a major New York cultural institution that is also a party to this action."(FN 7)

In contrast, if we look at the facts of Bakalar v. Vavra and Greek Orthodox Patriarchate of Jerusalem v. Christie’s, the result of applying either the lex loci rule or interest analysis would have been the same:

In Bakalar v. Vavra, where the choice was between Austrian law and Swiss law, there were no significant contacts to Austria concerning the 1956 sale of the Egon Schiele drawing in Switzerland. Neither party to the transaction resided in Austria at the time. Rather, Grunbaum’s sister-in-law, who had been a resident of Belgium for close to twenty years, had been selling artwork to a Swiss gallery for the five years preceding her sale of the Egon Schiele drawing to that same gallery in Switzerland, where the drawing was published and exhibited before being sold to a New York gallery. Moreover, none of the parties to the lawsuit were Austrian residents or citizens. The two Grunbaum heirs are, respectively, a citizen of the Czech Republic and a New York resident, while Bakalar is a Massachusetts resident.

In Greek Orthodox Patriarchate of Jerusalem v. Christie’s, the claimant had argued New York law governed instead of French law, but the case had no relationship to New York other than being where the suit was brought and where the medieval manuscript had been consigned for auction. On the other hand, the manuscript had been in France, in the possession of a French family, which was a defendant in the lawsuit, for close to 80 years.

Hence, if interest analysis had been applied to both these cases, instead of the lex loci rule, the analysis also would have lead to the application of Swiss (Bakalar) and French (Greek Orthodox) law.

There is no doubt that public policy considerations played a vital role in Judge Rakoff’s choice to apply interest analysis since the application of the lex loci rule would have extinguished Schoeps’ claims and thereby precluded an occasion to "vindicat[e] a historical injustice." More particularly, New York is unique with respect to its powerful protection of the rights of original owners of stolen artwork. As discussed earlier, New York has even established a rule whereby original owners can virtually never be barred from suing based on statute of limitations. In that seminal decision establishing New York’s demand-and-refusal rule, the New York Court of Appeals declared:

[O]ur decision today is in part influenced by our recognition that New York enjoys a worldwide reputation as a preeminent cultural center. To place the burden of locating stolen artwork on the true owner and to foreclose the rights of that owner to recover its property if the burden is not met would, we believe, encourage illicit trafficking in stolen art. . . In our opinion, the better rule gives the owner relatively greater protection and places the burden of investigating the provenance of a work of art on the potential purchaser.(FN 8)

At the time, the Governor of New York weighed in with his concern that New York would become "a haven for cultural property stolen abroad [if] objects [would] be immune from recovery under [] limited time periods. . . .",(FN 9) which, not coincidentally, is precisely the effect of Switzerland’s five-year statute of limitations on stolen property.

Due to the international character of Holocaust art restitution cases, questions of choice-of-law are, with some frequency, vigorously contested between the parties, since the application of one jurisdiction’s law over another may very well bring about different, and even antithetical, outcomes. In no other jurisdiction have we seen more of these disputes than in New York, which "enjoys a worldwide reputation as a preeminent cultural center." As a result, New York courts are time and again confronted with the Solomonic task of balancing the interests of original Jewish owners with those of good faith purchasers and called upon to decide between the laws of two jurisdictions, which, as we have seen in the fight over Pablo Picasso’s Boy Leading a Horse, means the vindication of one legitimate owner’s interests at the expense of the other.

New Haven, Connecticut
January 2010

Arabella Yip, Assistant General Counsel
Yale University email: Arabella.Yip@gmail.com

NOTES

(1) Schoeps v. Museum of Modern Art, 603 F. Supp. 2d 673, 674 (S.D.N.Y. 2009).

(2) Schoeps v. Museum of Modern Art, 594 F. Supp. 2d 461, 463 (S.D.N.Y. 2009).

(3) Bakalar v. Vavra, No. 05-Civ.-3037, 2008 U.S. Dist. LEXIS 66689, at *17 (S.D.N.Y. 2008).

(4) Greek Orthodox Patriarchate of Jerusalem v. Christie’s, Inc., No. 98-Civ.-7664, 1999 U.S. Dist. LEXIS 13257, at *14 (S.D.N.Y. 1999).

(5) Schoeps v. Museum of Modern Art, 594 F. Supp. 2d at 468.

(6) Schoeps v. Museum of Modern Art, 603 F. Supp. 2d at 674-77.

(7) Schoeps, 594 F. Supp. 2d at 468.

(8) Solomon R. Guggenheim Foundation v. Lubell, 77 N.Y.2d 311, 320 (N.Y. 1991).

(9) Id. at 319.

contact