Art Talk is a series of rotating columns which explore current issues in the art market.

ART LAW
    · Limits of Ownership 1
    · Limits of Ownership 2
    · Statute of Limitations
    · The Discovery Rule
    · Nazi Confiscated Art
    · Abandoned Property
    · Taxation
ART THEFT
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INSURING FINE ART

LIMITS OF OWNERSHIP - PART II

an excerpt from
ARTFUL OWNERSHIP
by Aaron Milrad

While the theft history of a particular artwork or art object may be known to the thief and the receiver of the stolen work, what are the consequences of the sale of the work for value to an innocent purchaser who does not know its past history? Who bears the loss if the work is later identified as stolen? Should it be returned to the original owners free of the claim of the purchaser? Should it remain with the new purchaser who is innocent of wrongdoing? What effect, if any, does theft or disputed title have on value? In either case, one innocent person bears the loss.

The Purchaser
Common Law
In the past, under British, Canadian, and U.S. common law, the buyer bore the risk of void or voidable title: caveat emptor, buyer beware, prevailed. However, to deal with today's business realities, mercantile laws were enacted to assist innocent purchasers and to obligate vendors to facilitate proper trade.

In the United States, the Uniform Commercial Code (UCC) offers protection related to warranties of title by the seller-that is, that the title being conveyed is a good title and that the seller has the right to transfer the title free of any security interest, lien, or encumbrance to an innocent purchaser for value (Section 2-312).

In Canada, the various provincial sale of goods acts,[4] factors acts,[5] and personal property security acts6 provide similar protection to innocent purchasers for value.
In addition to these protections, a responsible purchaser of property should:

1. obtain the provenance of the work and a history as to where the art has been reproduced, has been lent, or has appeared in public.
2. check major purchases with the Art Loss Register and the International Foundation for Art Research (IFAR).
3. purchase from a reputable source and be suspicious of the vendor if the sale is taking place out of the usual fashion in the trade.
4. be aware of a fair price. If the price is well below the norm, there is a duty on the purchaser to be wary.
5. obtain a written bill of sale with the appropriate details as to the creator, title, date, medium, and size of the work.
Such information should be available from the vendor of a work, having been obtained at the time of the original purchase. Also, an original written bill of sale covering the initial purchase by the vendor may be important to the new purchaser.

Title from a Thief
Anyone who obtains objects or goods from a thief can have title and ownership to those objects and goods no greater than the title held by the thief. The thief does not have the right to pass on title of stolen goods; therefore, one who purchases goods from a thief has no greater title to those goods than did the thief and cannot legitimately pass title to a future purchaser. Under the Canadian sale of goods acts, anyone without title to goods does not have a legal right to dispose of the title to the goods. Therefore, such a sale will be void.

In the Canadian case of Dowe v. J.J. Pawn Shop,[7] a finder of a lost watch sold it to a pawnshop. The true owners of the watch sued for its return or its value. The pawnshop had relied on the finder having title. However, as the pawnshop owner made no inquiries before he bought the watch, the pawnshop owner was held to have been "willfully blind" and, therefore, not a bona fide purchaser. The watch was returned to the original owner by a decision of the Nova Scotia Supreme Court judge reversing the decision of the adjudicator of the small claims court.

The adjudicator held that "It is well-established common law that a finder, who has possession, is the owner of found goods and has title against all except the true owner. It is also well-established common law that a seller cannot pass a better title than he had himself."[8]

The court then held that, however, in as much as possession is prima facie evidence of ownership, and in as much as the defendant in this case is a purchaser for value, the principles of equity prevail. The title of the owner has no priority over the title acquired by the bona fide purchaser, who has done nothing to disentitle himself to the application of equity.[9]

The general division judge ruled that the watch would remain with the defendant.
The original owner of the watch appealed the ruling, arguing that the Sale of Goods Act of Nova Scotia (Section 24) applied:
For goods that are sold by a person who is not the owner thereof and who does not sell them under the authority or with the consent of the owner, the buyer acquires no better title than the seller had, unless the owner of the goods is by his conduct precluded from denying the seller's authority to sell.

The appellate judge noted that the pawnshop made no inquiries of the vendor as to how the articles in question were acquired. He then went on to indicate that while the pawnshop had good title against nonowners of the watch, the pawnshop could acquire no better title to the goods than the seller had. The seller's interest was subject to the rights of the lawful owners.

The appellate judge then dealt with the duties of the original owner:
There is no positive act, on behalf of the appellant, which would have led the respondent pawnshop to believe that she was in any way foregoing her right to the watch the respondent [pawnshop] did not even inquire of the seller as to how he came to acquire the property in question. I cannot accept that this willful blindness can now be used to assist the respondent in acquiring a better title than he might otherwise have.[10] The watch was thus returned to the original owner.

It is interesting to note that the appellate judge considered the duties of the various parties involved: the original owner had done nothing to disentitle her to the rights to ownership of the watch; on the other hand, the purchaser did not even inquire as to how the vendor came into possession of the watch, which was considered to be "willful blindness."

The facts of every case are carefully considered by the court to determine the conduct of each of the parties making claim to the object and what would be reasonable to expect of each party in the circumstances. This process often appears to result in contradictory decisions in similar cases, but many cases can be reconciled on the basis of what was or was not done by the various parties and what would have been expected of a reasonable person in the circumstances. Often the courts strain to find a legal way to give a just decision based on the facts. This will appear clear in the cases that follow and in the various approaches taken by courts in Canada and the United States to reach a fair result.
Ordinarily, the Canadian sale of goods acts and factors acts enshrine the basic common-law principle that you can't transfer to another person something that you don't have yourself. There are, however, various circumstances under which a nonowner can transfer not just possession but also title. These circumstances generally do not arise in a situation of theft in the usual sense-that is, when a thief has stolen a precious property from an owner. The exceptions generally apply to situations:

1. where goods were given by the owner to another party for purposes other than sale and there is an unauthorized sale by that party to a bona fide purchaser;
2. where the seller is in possession of goods or documents of title to the goods and sells them to a person other than the original purchaser; or
3. where the sale is under special common-law or statutory power of sale or an order of the court.[11]

In these situations, nonowners can pass valid title to a purchaser, as the vendor has a voidable title rather than a void title.

A voidable act is one that was originally valid but may later be voided; it is valid until the "fatal vice" in the transaction has been judicially ascertained and declared. A void act is one that was invalid from the beginning and, therefore, is ineffectual and has no legal force or binding effect. In law, a void title is unable to support the purpose for which it was intended (a transfer of title). The thief at all times has a void title and cannot pass a good title to a purchaser. Nothing can cure a void act, whereas a voidable one has an imperfection or defect that can be cured by an act or confirmation by the appropriate party. (For example, inaction on the part of a legal owner may stop that owner from claiming back property.)

Several provinces in Canada have laws providing that if property is stolen (but not obtained by fraud or other wrongful means), it will revert to the original owner or his or her representatives on conviction of the thief. For example, this concept is seen in the British Columbia Sale of Goods Act (Section 58).[12]

The Canadian Criminal Code (Section 739)[13] states that if any property stolen by a convicted thief was sold to an innocent purchaser, the courts may, on the application of the innocent purchaser and after restitution of the property has been made to the rightful owner, order the convicted thief to pay to the purchaser an amount not exceeding that paid by the purchaser for the property.

Disclaimers
Vendors may try to protect themselves by make disclaimers regarding a work. For example, auction houses include disclaimers in their conditions of sale. Disclaimers may exclude various implied warranties-for instance, as to the condition of the goods-as the goods were available to be examined by prospective purchasers. Merchantability-i.e., that the goods are of the general kind described and are reasonably fit for the purpose for which they have been sold-may be disclaimed; so too, may title or a reduction of rights by a purchaser in the event that title in the work is not clear. For instance, the remedy may be restricted to a return of the purchase price, not to any increased value of the work or the right to receive the work. Auction houses usually have a time limit within which a complaint may be made by a purchaser, especially as to the authenticity or provenance of a work purchased. The courts apply strict interpretation on these restrictions, and if they are uncertain or unclear, the courts are loath to enforce them against an innocent purchaser who has a right to expect what has been bargained for.

The True Owner
If an art object has been stolen, is there any duty incumbent on the true owner after the theft has come to light? The courts are still dealing with this extremely difficult question. For instance, if a work has been stolen, ought the true owner to make inquiries about the theft? Is the owner responsible for informing the outside world of the theft? If the theft is kept secret by the owner (that is, if the owner does not wish to go public with the information), thus preventing the marketplace from knowing that the work is stolen, is he or she violating this responsibility? If so, when the work appears in the market in the future, is it tainted? Consider a situation in which the owner has not given notice of a theft and the work is ultimately sold through a number of hands to a bona fide purchaser. Even if the title is void, is there a statute of limitations prohibition on the original owner from questioning the possession and ownership of the work by the new innocent purchaser? Does the time limit for bringing a court action apply to works that have been stolen with the intent of preventing them from being returned to the original owner?

If an owner has a duty to make the marketplace aware of a theft, does this duty arise when the theft occurs or when the owner becomes aware of the theft? For example, the work may be stolen from a museum, library, or university that does not become aware of the theft for some years. Such situations have occurred with insider thefts from universities and museums: students or curators sell works in a clandestine fashion to dealers or collectors who either do not know that the work is stolen or become parties to the theft and sell the works to innocent buyers.

Courts in both Canada and the United States have held that the original owner has a duty to report the work as stolen and to make efforts to obtain its retrieval, at least from the time the owner becomes aware that the work has been stolen.

The question then arises-what are sufficient efforts? In a prominent U.S. case, Menzel v. List, [14] a number of these areas were canvassed by the court. Erna Menzel and her husband purchased a painting by Marc Chagall at an auction in Brussels in 1932. The Germans invaded Belgium in 1940, and the Menzels fled, leaving behind their possessions, including the Chagall painting. They returned six years later to find that German authorities had removed the painting and left a receipt for it.

In 1955, the work reappeared, having been purchased by Klaus Perls and his wife, who owned an art gallery in New York. They purchased the work from a Parisian art gallery. The Perls were innocent purchasers who made no inquiries and knew nothing about the history of the work. They relied on the reputation of the Paris gallery as to the painting's authenticity and title.

In October 1955, Perls sold the painting to Albert List. In 1962, Menzel noticed a reproduction of the Chagall in an art book, with a note to the effect that the work was part of the Albert List collection. Menzel contacted List and asked him to return the painting. When he refused, Menzel instituted action against him. List, in turn, added the Perls to the action, alleging that if he was liable for returning the work, then the Perls breached the implied warranty of title in selling the painting to him.

The jury brought a verdict in favor of Menzel, and List was directed to return the painting or pay Menzel its current value, which was found to be $22,500. List returned the painting. In addition, the jury found for List, the innocent purchaser, against the Perls in the amount of $22,500, the current value of the painting, plus costs.

The Perls appealed, and the amount payable to List was reduced to $4,000, being the original purchase price, together with interest from the date of purchase. List then appealed the reduced judgment, as the painting was worth $22,500 at the time of the judgment.

The court held that Menzel's action was not barred by the statute of limitations of either Belgium or New York, as her cause of action arose not upon the theft of the painting but from the date of her discovery of the whereabouts of the work and the refusal of the then "owner" to return it.

Upon the further appeal by List, the court held that List was entitled to the fair market value of the work ($22,500), not just the original purchase price plus interest. The court reasoned that List lost the painting and, therefore, lost its current market value, which would have been its worth if proper title had been given to him in the original purchase.

In the end, Menzel got back her painting, and List was awarded the fair market value of the work. The Perls were left having to seek redress from the Parisian art dealer. With the internationalization of art purchases and sales and the expanding market for stolen art and antiques, works stolen in one country may well be sold in another to purchasers unaware of the theft. Also, the laws of the different countries and jurisdictions differ in respect to stolen works and the consequences of such thefts. Therefore, purchasers must take great care to ascertain the provenance of a work, its title, the country of origin of its original owner, and the cultural property laws that may affect the legitimate sale and export of such works.

Checking title to a work is not an easy task. At the very least, inquiries should be made of the International Foundation for Art Research (IFAR) and other monitoring organizations and police forces before the transaction is completed. A warranty of title, even in writing, by the vendor is only as valid as the vendor is reputable; therefore, it is essential to deal with legitimate dealers.

The New York courts have applied the principle established in the Menzel case that damages will take into account any appreciation in value of the work. This was held in Koerner v. Davis [15]. Henry Koerner, an artist, brought an action to recover the value of one of his paintings, which had been stolen in 1964. It had re-emerged at auction in 1983 and was sold to one of the defendants.

In 1964, Koerner apparently brought his painting to New York for framing. He accidentally left the painting in a taxi; the taxi driver kept the painting. Koerner had insured the work for $1,000, and he received that amount from the insurer. In 1983, the work was consigned to the William Doyle Galleries Inc. by Robert Hessler and sold at auction to David J. Davis for $1,200.

At the time of the sale, the auction house knew neither the provenance of the work nor the identity of the artist. After Davis purchased the work, he attempted to ascertain its provenance by writing to various specialists in the field. He was able to determine that Koerner was the artist, and one of his inquiry letters to an expert was forwarded to Koerner for his information. Sometime thereafter, Koerner called Davis and explained the history of the painting and its theft, and demanded its return. Davis refused and placed it with the Gertrude Stein Gallery for sale. Koerner demanded that both Davis and the gallery return the painting to him. The gallery returned the painting to Davis, who did not return it to Koerner. Koerner then commenced an action against Davis and the Gertrude Stein Gallery to recover the work or its fair market value. In the face of the action, Davis delivered the work to Tom Ledell, a Los Angeles antique dealer, for resale. Ledell died, and the painting disappeared once again.

At trial, the court determined that Koerner never voluntarily relinquished title to the painting: it was stolen from him when it was left in the taxi, especially as he had asked the taxi driver to wait for him to return to the taxi. The driver instead sped away with the painting in the car.

It was clear, too, that when Davis purchased the painting, he had no knowledge of who the artist was, of the provenance of the work, or that it was stolen. Nonetheless, Davis had no rights in the painting as against Koerner. The court held that "where property is taken by direct larceny, rather than by trickery or false pretenses, no title to such property is conveyed. To put it another way, a possessor of property originally taken by direct larceny possesses a title that is void and not merely voidable."16 Thus, in the Koerner case, as the work was taken by direct larceny, title never passed from Koerner; therefore, no one in the chain of possession thereafter ever had legal title to it. When Koerner demanded the return of the painting from Davis and he refused, this was a wrongful conversion of the painting, for which Davis was responsible. The Gertrude Stein Gallery was also held liable for conversion when it disposed of Koerner's painting by returning it to Davis. By having full knowledge of the competing claims to the painting but not returning it to its true owner, and by rendering control over the property to another, the gallery converted the painting.

The defendants then argued that Koerner had been paid $1,000 under the insurance policy on the painting; therefore, his rights to the painting were now held by the insurer who had paid him. The court held that if the plaintiff had in fact received the full value of the work from the insurer, the defendants would be correct. However, the insured value of $1,000 was found to be about one-third of the true value of the work at that time. The court also held that when an owner receives insurance proceeds that do not cover the full value of the lost or stolen property, that person still has rights and interests in the property, and they have not passed to the insurance company.

An expert testified that the work would now command a market price of $30,000 because the reputation of the artist had grown during the intervening years. The court accepted the $30,000 value at the time that Koerner sent the demand letters to Davis and the Gertrude Stein Gallery. Judgment was therefore rendered in favor of Koerner in the amount of $30,000.

As we have seen above, in void title cases there has never been a meeting of the minds so as to form an actual agreed-upon contract, nor has there been a mistake of fact or a fraud. In those situations, the contract between the parties is void. However, in cases of voidable title, the innocent purchaser's rights would ordinarily prevail, subject to the law of the jurisdiction of the transaction.

The results may differ between civil-law and common-law jurisdictions, and different rules may apply. For example, in Canada, Quebec cases must be interpreted based on the Quebec Civil Code and ecclesiastical or canon law. In the United States, rules in California and Louisiana may differ from those in states such as New York, which has specialized legislation in respect to precious properties.

A responsible owner should photograph the work and put transparencies or prints in safekeeping so that, if the work is stolen, its likeness can be reproduced by the authorities and professional associations. A notice of theft without photographs is significantly limited in value. Photographs are also essential to an owner for making an insurance claim, and often for the purchase of an insurance contract.

Next Installment: Statute of Limitations

About the Author

Aaron M. Milrad is a member of Fraser Milner, Barristers & Soliciters, a Canadian national law firm headquartered in Toronto. At Fraser Milner he provides specialized legal services to clients across Canda, the United States, and other countries who are involved in the visual, performing, and literary arts, music, publishing, media, and mutlimedia. Mr. Milrad also provides consulting services, including strategic planing and marketing for creators, companies, nonprofit organizations, and foundations and tax estate planning for creators, collectors and arts professionals.

To purchase a copy of Artful Ownership, please contact:
American Society of Appraisers, International Headquarters, 555 Herndon Parkway, Suite 125, Herndon, VA 20170

ISBN 0-937828-03-3

Copyright © 2000 by the American Society of Appraisers and Aaron M. Milrad.

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