On 11 October 2012, the Second Circuit Court of Appeals (New York) made a ruling in a case that has been litigated for over seven years and involves the question of who owns a drawing by the Austrian artist Egon Schiele , known as "Seated Woman with Bent Left Leg (Torso)".
The drawing allegedly was owned by Fritz Grunbaum, an Austrian Holocaust victim, prior to the Second World War. There was compelling evidence that the drawing had been sold in Switzerland to Galerie Gutekunst in Bern by Grunbaum's sister-in-law, Mathilde Lukacs, in 1956, that the drawing soon thereafter was sold to a New York dealer (Galerie St Etienne), who on-sold the drawing to a New York resident (David Bakalar).
When Bakalar decided to sell the drawing at auction in 2005, doubts surfaced concerning the drawing's provenance, and Bakalar brought suit in the Southern District of New York seeking a declaratory judgment that he was the rightful owner of the drawing. Two counterclaimants asserted ownership, alleging that they were the rightful heirs of Fritz Grunbaum. They asserted that the drawing had been confiscated by the Nazis.
The U.S. District Court for the Southern District of New York applied Swiss law to the issue of whether Bakalar acquired title to the drawing and awarded judgment to Bakalar. The district court judge held that Bakalar acquired good title when he purchased the drawing from Galerie St. Etienne, because the drawing had been sold in 1956 in Switzerland. Pursuant to Swiss law a person who acquires and takes possession of an object in good faith becomes the owner, even if the seller was not entitled or authorized to transfer ownership.
The Second Circuit Court of Appeals overturned the district court's decision to apply Swiss law, and held that by application of an interest analysis, New York substantive property law should apply to the issue of whether Bakalar acquired good title to the drawing. A substantial part of the events or omissions giving rise to the claims herein occurred in New York. The court gave weight to the fact that New York property law offers greater protection to owners generally as opposed to good faith purchasers. Furthermore, the court held that New York has a significant interest in preventing the state from becoming a marketplace for stolen goods.
The case was subsequently remanded to the U.S. District Court for the Southern District of New York for further proceedings. The district court held that New York law places the burden on Bakalar, the current possessor, to prove that the drawing was not stolen. Judge Pauley of the district court held that although the evidence showed that it was unlikely that the drawing had been looted by the Nazis, Bakalar was required to show that Lukacs acquired proper title in the drawing, and found that he could not. Mere possession of the drawing by Lukacs was held insufficient evidence for Bakalar to meet his burden of proof on this issue. As a result, the court was unable to rule that Bakalar acquired proper title on acquisition in 1964.
Bakalar nevertheless prevailed in his claim, on the grounds that the court recognized that Bakalar could assert a "laches defense" under New York law, that the heirs and their predecessors, i.e. their parents and grandparents who had more direct knowledge of the situation, had made no effort to locate or claim title to the drawing or to pursue a claim to Grunbaum's art collection. The claim lodged in 2005 by distant relatives was too late. Not because the case had become barred by statute of limitations. Under New York law, dipossessed owners in general may be permitted to file claims decades after a theft of an object. In this case, however, the court held that more diligence could have been expected from the Grunbaum family in pursuing their claim. The heirs subsequently appealed the decision with the Second Circuit Court of Appeals. On 11 October 2012, the court upheld the decision in first instance that it was sound to recognize Bakalar's title on the basis of the laches defense. The appellate court held that it was necessary to impute knowledge of potential intestate rights to the heirs based on previous actions or actions of other family members; the alternative was to reset the clock for each successive generation. In other words, in the event the laches defense applies, this will also bar claims by future generations.
Link to the decision of the Second Circuit Court of Appeals of 11 October 2012
Link to the decision of the U.S. District Court for the Southern District of New York of 17 August 2011
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