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ART LAW
    · Limits of Ownership 1
    · Limits of Ownership 2
    · Statute of Limitations
    · The Discovery Rule
    · Nazi Confiscated Art
    · Abandoned Property
    · Taxation
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STATUTES OF LIMITATIONS

an excerpt from
ARTFUL OWNERSHIP
by Aaron Milrad

Statutes of limitations exist in various states and provinces. They have a fixed term of two, three, or (as in most Canadian jurisdictions) six years within which a claim can be brought forward for actions involving a civil wrong. The issue to consider is: when does this term begin for the original owner?

In Canada, the statute of limitations and its operation have not been as extensively litigated as they have in the United States. The northeastern United States, especially New York, has been the center of trade in art properties since at least the 1950s. A number of situations have required court clarifications. New York and New Jersey courts have taken various approaches to deal with and try to balance the rights of an innocent owner against the rights of an innocent purchaser of a stolen object that may have passed through a number of hands before reaching the innocent purchaser.

In Canada, the period limited by statute for bringing an action usually begins on the date of accrual of the cause of action, that is, when all the elements of civil wrong existed so that a prima facie case can be proved.[17] Whether the cause of action has accrued is independent of whether a complainant knows it has accrued or whether the complainant can give evidence as to the cause of action at that time.

However, recent British cases-that of Anns and Others v. London Borough of Merton,18 in particular-cast uncertainty on this principle. In this case it was held that a cause did not accrue until a person capable of suing discovered, or ought to have discovered, the damage.[19]

A Supreme Court of Canada case, Central Trust Co. v. Rafuse et al.,[20] was decided on this basis. It involved a claim of negligence against a firm of Nova Scotia solicitors acting on a mortgage loan to a company. The court determined that, generally, a cause of action arises when the material facts on which it is based have been discovered or ought to have been discovered by the plaintiff, by the exercise of reasonable diligence.

The Supreme Court of Canada reaffirmed that discoverability rule in 1997 in Peixeiro v. Haberman. [21] Justice John C. Major wrote for a unanimous court:

In balancing the defendant's legitimate interest in respecting limitations periods and the interest of the plaintiffs, the fundamental unfairness of requiring a plaintiff to bring a cause of action before he could reasonably have discovered that he had a cause of action is a compelling consideration.

It would therefore appear that this is now the test in tort matters in the common-law provinces in Canada (all provinces except Quebec). The reasoning in this "discovery rule" is similar to that of many jurisdictions in the United States.

Ordinarily, the six-year limitation period in Canada applies to art thefts, but the limitation period may be postponed, suspended, or extended. For instance, the limitation period affecting the Crown or a public authority may be different from that affecting ordinary individuals. As well, the commencement of a limitation period may be postponed in cases of complainants who are underage or have a disability and in cases where the accused are either trustees or guilty of fraud.[22]

If a statute of limitations does apply, the owner is barred from claiming the return of the work. The intent of a statute of limitations is to have a fixed time frame within which a claim can be made, after which the owner is precluded from reclaiming the work. The innocent purchaser, even if he or she has purchased the work from a thief, is entitled to keep the work free of the claim of the original, rightful owner.

In Erisoty v. Rizik,[23] in the state of New York, the court outlined the various tests for the applicability of the statute of limitations.
Courts have used three basic approaches in determining whether an original owner should be able to maintain an action for the return of stolen goods against a bona fide purchaser beyond the codified limitation period:
1. the demand and refusal rule;[24]
2. the Laches approach,[25] which is based on delay attended by or inducing a change of condition or relation (i.e., a lack of diligence on the part of the complainant to the injury, prejudice, or disadvantage of the accused); and
3. the discovery rule.[26]

The Demand and the Refusal Requirement
The statute of limitations period on the claim to recover stolen property from a good faith purchaser does not begin to run until the possessor refuses to return the object upon demand.

In the case of Menzel v. List,[27] discussed above, List, the innocent purchaser, pleaded that the applicable three-year statute of limitations prevented the owner from retaking possession of the work. The painting was stolen in 1941; in 1955, List obtained possession of the work as an innocent purchaser. The court held that the cause of action against a person who unlawfully comes by a chattel arises on the defendant's refusal to convey the chattel upon demand.

In DeWeerth v. Baldinger,[28] a Monet landscape owned by Gerda DeWeerth disappeared from storage in Germany after American soldiers occupied the family home in 1945. In 1981, DeWeerth learned the painting had been exhibited in 1970 at a gallery in New York City and had been included in the exhibition catalog. The lender of the work was not identified in the catalog.

After several rounds of litigation, the gallery was ordered to disclose the identity of the lender. (The gallery was reluctant because it had sold the work to the lender originally.) DeWeerth then sought the return of the painting from the lender, Edith Baldinger, who denied that DeWeerth had a right to the painting. Baldinger claimed to have received a good title from the gallery when she bought the painting in 1957. The gallery, brought into the action as a third party, pleaded that it had acquired the painting in 1956 from a Swiss art dealer. Baldinger and the gallery asserted that the statute of limitations had now run, barring the action. Also, the equitable doctrine of Laches was asserted (that is, DeWeerth had allowed the work to become "free floating" in the marketplace by not seeking the work through advertising; she had therefore given up rights to it).

The court held that New York state law applied to the action. Under New York law, actions that accrue within the state are governed by the state statute of limitations. New York legislation required that the action be brought within three years of the time that the action accrued. The date of accrual is the date upon which the identity of the party from whom recovery is sought becomes known.

Where the owner proceeds against one who innocently purchases the property in good faith from a thief, the limitation period begins only when the owner demands return of the property and the purchaser refuses,[29] even if it is many years after the theft occurred. Until demand and refusal, the purchaser in good faith is not considered a wrongdoer.
In the DeWeerth case, it was undisputed that DeWeerth initiated the suit within three years of the date that Baldinger refused DeWeerth's demand for the return of the Monet.
Where demand and refusal are necessary to start a limitation period, the demand may not be unreasonably delayed. While this proscription against unreasonable delay has been referred to as "Laches," the New York courts have explained that the doctrine refers solely to an excused lapse of time. The DeWeerth case indicated that the owner is obligated to make a demand for the return of the work without unreasonable delay and to use due diligence to locate the stolen work. The court indicated that an obligation to attempt to locate the stolen property is consistent with New York's treatment of a good faith purchaser. The purpose of the rule, whereby demand and refusal are substantive elements of a conversion action against a good faith purchaser, is to protect the innocent party by giving the purchaser notice before he or she is held liable.

This rule may disadvantage the good faith purchaser; however, if demand is indefinitely postponed, the good faith purchaser will remain exposed to a suit long after an action against innocent parties or even against a thief will be time-barred. This rule is especially appropriate with respect to stolen art. Much art is kept in private collections, unadvertised and unavailable to the public. An owner seeking to recover such property will almost never learn of its whereabouts by chance; yet, the location of stolen art may frequently be discovered through investigation.

In the DeWeerth case, the court also stated that other jurisdictions have adopted limitations rules that encourage property owners to search for the missing goods. In virtually every state except New York, an action for conversion accrues when a good faith purchaser acquires stolen property; demand and refusal are unnecessary. In these states the owners must find the current possessor within the statutory period before the action is barred. Obviously, this creates an incentive to find one's stolen property.[30]
In this case, the court held that the efforts by DeWeerth were minimal. She did not take advantage of the programs available for listing the work as stolen with the various authorities, governments, and agencies. The court felt that to require a good faith purchaser who has owned the painting for thirty years to defend would be unjust and that New York law avoids this injustice by requiring a property owner to use reasonable diligence to locate his or her property. In this case, DeWeerth failed to meet that burden and, therefore, the judgment of the district court was reversed by the New York Court of Appeals.[31]

Thus, though the statute of limitations in various jurisdictions does not transfer title, the successful use of the statute of limitations prevents title being asserted by the prior owner, and that ultimately means that the present owner can pass good title to the work in future transactions.

The Laches Approach
In Solomon R. Guggenheim Foundation v. Lubell[32] the lower court found that the efforts made by the Guggenheim Museum to recover a Chagall gouache were not sufficient. The work was proclaimed to be worth about $200,000 and had been created by Marc Chagall in 1912 as a study for an oil painting. The museum alleged that the work had been stolen in the 1960s by person or persons unknown. The museum learned that the work was in the possession of the defendant, Rachel Lubell, in August 1985. On January 9, 1986, the museum demanded that Lubell return the gouache, but she refused.

Lubell responded that she and her late husband had purchased the work in May 1967, from a reputable Manhattan gallery, for $17,000. At no time did she or her husband know of any defects on the gallery's title. She then raised the three-year statute of limitations, the defense of Laches, the defense of adverse possession, and her status as a good faith purchaser for value.

She then moved for summary judgment, as the statute of limitations had expired since the theft with no effort being taken by the Guggenheim to obtain the painting's return. The court granted the motion and dismissed the action. The Guggenheim had never reported the theft to the police or to industry organizations; the museum had offered no proof that the work had been stolen; and no insurance claim had been made, because the theft could not be proven.

The museum appealed, and the lower court's decision was overturned. The court held that the use of the statute of limitations was incorrect. Instead, it would have substituted a Laches standard. "It then went on to dilute the due diligence standard of DeWeerth as automatically applicable. It instructed the lower court to examine the actions taken by the original owner [the museum] as whether reasonable or not, and whether in accord with industry practice at the time."[33 ]

The defense of Laches is based on an unwarranted delay that would give rise to an assumption that the complainant has waived his or her rights. Typically, a complainant, knowing of his or her rights, does nothing to pursue them and unreasonably delays exercising them. This inaction, it is argued, usually works to the detriment of an innocent party. In this instance, Lubell would need to show that she was prejudiced by the museum's delay in demanding the return of the work.

This case also concluded that the federal court of appeals in the DeWeerth case should not have imposed a duty of reasonable or due diligence on the original owners for the purposes of the statute of limitations. There was, however, a recognition that a true owner who has discovered the location of a stolen or lost property cannot unreasonably delay making demand for the return of the property.

Although the due-diligence requirement on original owners has been all but abolished in New York State, it does continue in other jurisdictions. The jury is still out with respect to future requirements of the original owners and new innocent purchasers in these cases.
For example, the case of Erisoty v. Rizik[34] involved a work by Giaquinto Corrado purchased by Stephen Erisoty at an auction on April 16, 1989. The work turned out to have been stolen in July 1960 from the Washington, D.C., home of Jacqueline and Phillip Rizik. It was one of three works by Giaquinto and two works by other artists stolen at that time.

A day after the theft, the Riziks reported the theft to the District of Columbia Metropolitan Police Department. (Photographs of the stolen works were not then available.) The FBI was informed of the theft the same day and commenced an investigation. Soon after the burglary, the Rizik family provided photographs of the stolen works and other related documents to the police. The paintings were covered by the homeowner's insurance policy issued by Maryland Casualty Company, and shortly after the burglary, the Riziks filed a proof of loss with the company. Maryland Casualty paid the Riziks $15,000 to compensate for the loss of the three Giaquintos.

Local law enforcement authorities dissuaded Phillip Rizik from hiring a private investigator and assured him that the district police, the FBI, and Interpol would do everything necessary to try to recover the works. From time to time there was contact among the Rizik family, the police, and FBI as to possible tips, updates, and continuing investigation, until approximately 1979. There was no contact thereafter until August 1993, when the FBI informed Jacqueline Rizik that the painting at issue had been located. Until September 1992, the Riziks had not published any announcements or notices of the theft of the paintings in any newspapers, magazines, art journals, or other periodicals.
From 1961 to 1991, Jacqueline or Phillip Rizik periodically visited museums to look for the stolen paintings but did not provide any museums with photographs or other documents identifying the stolen paintings. Nor did they provide any auction house with photographs of the stolen paintings from 1960 to 1993 or contact any auction house regarding the paintings from 1971 to 1993. The Riziks were neither art collectors nor participants in the fine art community, and they had no real knowledge of periodicals in that field.

In March 1988, a woman hired a cleaning and removal service to remove unwanted furniture from her home in Philadelphia. The woman removed what she wanted, leaving the remainder to be disposed of. The house was to be left in a "broom clean" condition. While removing the unwanted furniture, the owner of the cleaning service came across a trash bag behind a dresser, which contained the stolen painting. At the time of discovery, the painting was in five pieces. The owner of the cleaning service removed the pieces from the house and thereafter entered into an agreement with Ellen Gerber, an antique store owner, to try to identify the painter and the painting and to estimate its value in exchange for a ten percent finder's fee.

Gerber contacted the Philadelphia Museum of Art and was referred to its curator of European paintings prior to 1900. At her meeting with the curator, Gerber was advised that the painting was in extremely fragile condition and that if it continued to be moved it would be destroyed or suffer major damage. She was asked to leave the artwork at the Philadelphia Museum of Art to be examined by the museum's conservators and to have its condition stabilized by mounting it on a piece of Styrofoam. She agreed.

To obtain information about the painting, the curator contacted various world experts, but none was able to provide any information regarding provenance. They knew only that it was probably a work by Giaquinto.

The cleaning-service owner then arranged for the work to be sold at auction in Philadelphia. No evidence as to the cleaning-service owner's title to the painting was ever given to the museum or the auction house.

Prior to the sale, the auction house prepared a brochure describing the works in the auction. The catalog, which included a reproduction of the painting, was distributed to auction attendees and anyone requesting a catalog prior to the auction. The auction house also placed advertisements in several periodicals and newspapers announcing that there was a painting by Giaquinto in the auction. The work was on public display at the auction house for two days prior to the sale.

Stephen Erisoty learned that the painting would be sold at auction when he received in the mail a brochure from the auction house. He previewed the painting at the auction premises prior to the sale and was told by the auctioneer that the work had been at the Philadelphia Museum of Art; the museum had attributed the work to Giaquinto. Erisoty was not told the name of the consignor of the work. The auction house catalog contained a condition (number 5) as follows: "The auctioneer assumes no risk, liability, or responsibility for the authenticity of the authorship of any property identified in this catalog. All merchandise is sold as is, where is, with no warranties or guarantees, whether specified or not. Not responsible for typographical errors."

On April 16, 1989, the work was purchased at auction for $25,000 by the wife of Gregory Erisoty on behalf of a group of investors. The total price paid, including the commission, was $29,050. Stephen Erisoty, a member of the purchaser group, was a restorer and expended substantial time and effort over a four-year period restoring the work.

At this point, the Riziks were still unaware of what had happened to their painting. In 1992, Jacqueline Rizik learned of the International Foundation for Art Research (IFAR) and its art theft services. That year she reported to IFAR the theft of the three paintings by Giaquinto, and she authorized IFAR to publish a report that the Riziks were offering a reward for information leading to the recovery of the work. There was an announcement of the theft of the three works, including photographs, dimensions, and titles, in the September 1992 issue of IFAR Report. Parties at the Philadelphia Museum of Art saw the announcement in the IFAR publication and advised IFAR that they believed it had been sold at auction in 1989. IFAR passed this information on to the FBI in July 1993. The FBI contacted the auction house, which told the FBI that the painting had, in fact, been sold to the Erisoty group.

In September 1993, the FBI went to the Stephen Erisoty home and demanded the return of the painting. When the FBI told Erisoty that he had no choice, Erisoty handed over the painting, even though he claimed that he had lawfully purchased it. The FBI notified the Rizik family that the painting had been recovered and would be returned to Jacqueline Rizik after she reached an agreement with the Maryland Casualty Company regarding a release. The insurance company agreed to release the painting to the Riziks in exchange for $5,000, one-third of the amount paid in 1960 by the insurer for the loss of the three works. The FBI returned the work to the Rizik residence in Washington, D.C.

Erisoty demanded, in an exchange of letters and ultimately an action, that the work be returned to the Erisoty group. In 1962, although the work was insured for $5,000, the fair market value, based on an appraisal, was approximately $9,000 to $10,000. In 1993 the work had an appraised fair market value of $200,000.

The parties focused their efforts largely on whether the Riziks' efforts to locate the painting were sufficiently reasonable and diligent to overcome the statute of limitations time frame. The Erisoty group alleged that the Riziks did not proceed diligently, even though it conceded that the Riziks had a right to the painting and would have title to it but for their failure to act diligently.

Counsel for the Erisoty group also made two other arguments. The first dealt with the contention that the Riziks gave up title to the work to the Maryland Casualty Company, when they were paid $5,000 in 1960. The Erisoty lawyer cited a New York State opinion that when a claim is paid under a theft policy the "insurance company takes an assignment of ownership of its assured."[35]

In response to this, the court indicated that there was not sufficient evidence to prove that title had passed to the insurance company, and that title was returned to the Riziks only on their $5,000 reimbursement of the insurance company in 1993. The court also held that even if there was evidence of such an assignment, the way insurance companies conduct business evidences a recognition of the insured's ongoing interest and desire for the return of its property. The actions of the insurance company, in cooperating with the insured and accepting the payment of $5,000 for the return of title without question, assumes a recognition of the insured's interest in the work by the insurance company. In any event, the Riziks retained a very real interest in the painting and in its value pending its recovery.

The second argument made by the Erisoty group was that a bone fide purchaser of a painting that has been entrusted to an art dealer should be able to acquire good title against the true owner. However, the court held that this statement is merely an articulation of the principle of entrustment, which provides that entrusting possession of goods to a merchant who deals in that kind of goods gives the merchant the power to transfer all the rights of the entrustor to a buyer in the ordinary course of business. Here the original theft of the painting resulted in a void title, and the principle stands that a bona fide purchaser of a chattel from a thief gets nothing. Title could not vest in the cleaning-service owner through his taking of the painting, and the plaintiffs' subsequent purchase of the painting put them in no better position than the cleaning-service owner.

The court then looked at "the center piece of the litigation"-whether the Riziks' efforts to locate the painting were sufficient to preserve their right to claim title. First, the court had to review the Erisoty group's contention that the Riziks should be barred from asserting their rights to the painting due to the statute of limitations. The court then had to determine the applicable statute and when it began to run. Given the facts of the case, the statute would permit the Riziks either two years or three years, depending on the applicable law, following the Erisoty group's acquisition of the painting in April 1989. The Riziks did not act within either time frame and would be time barred unless other principles were invoked.

The court held that the statute of limitations may be tolled (that is, the bar of the action by statute of limitations removed) if strict enforcement would work an injustice on victims of crime (for example, should an original owner be unable to locate stolen art work for many years despite reasonable search efforts).

The court then set out the three different approaches to determine whether an original owner should be able to maintain a replevin action (an action brought to recover possession of goods unlawfully taken) against a bona fide purchaser beyond the codified limitation period: the demand and refusal rule; the Laches approach, which we have already discussed; and the discovery rule, which follows.

Next Installment: The Discovery Rule

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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