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

    · Limits of Ownership 1
    · Limits of Ownership 2
    · Statute of Limitations
    · The Discovery Rule
    · Nazi Confiscated Art
    · Abandoned Property
    · Taxation



an excerpt from
by Aaron Milrad

Under the discovery rule an original owner's cause of action does not accrue "until the injured party discovers, or by exercise of reasonable diligence and intelligence should have discovered, facts which form the basis of a cause of action." (The court cited the O'Keeffe case,36 which is discussed below.) In the stolen-art context such facts include the identity of the possessor of the paintings, and the O'Keeffe case held that where a court finds that an owner has diligently searched for a stolen painting but "cannot find it or discover the identity of the possessor, the statute of limitations will not begin to run."37
The court found that "the discovery rule shifts the emphasis from the conduct of the possessor to the conduct of the owner. The focus of the inquiry will no longer be whether the possessor has met the test of adverse possession but whether the owner has acted with due diligence in pursuing his or her property."38 The burden of proving due diligence rests on the original owner.

The court therefore held that the Riziks' efforts must be "measured by the standard of 'reasonable due diligence' and not by a standard of discoverability."39
In addition, the court noted this was not a case of replevin (an original owner suing an innocent purchaser for the return of a work) but a case in which the innocent purchaser was suing the original owner for the return of a work. The court, however, proceeded along the lines of a replevin action, and the discovery rule still rested with the original owner. Looking at prior cases, the court affirmed that the discovery rule is highly fact-sensitive and flexible.

After consideration of the law and the unique facts of the case, the court found that the search efforts of the original owners were reasonable and diligent in the circumstances and that they satisfied the discovery rule. In addition, the balance of equities was in favor of the original owners: the innocent purchasers had purchased the painting without inquiring as to the painting's prior ownership or the identity of the consignor; nor did they make any inquiry to art or law enforcement agencies after learning that the painting was originally in five pieces and that suspicious circumstances surrounded the work. In short, the Erisoty group took a gamble in the purchase of the work at the auction house. The original owners, on the other hand, suffered an intrusive crime, subsequently contacted the FBI, remained in contact with the agency for many years, and finally set in motion the process of recovering the painting through their diligence in contacting IFAR, when they became aware of its existence.

The judgment went on to indicate that the discovery rule is fact-sensitive, so as to adjust the level of scrutiny to that appropriate to the identity of the parties. What are reasonable efforts for an individual relatively unfamiliar with the art world may not be reasonable for a savvy collector, gallery, or museum.

This comment will have significant impact on future cases, as there is obviously a higher duty on an art-related professional than on a nonprofessional, especially one who was not the original purchaser but merely a spouse or successor in title.

Though the court concluded that the Riziks were entitled to maintain possession and ownership of the work, it also gave rights to the plaintiffs to claim against the defendants any increase in the value of the work through the restoration efforts of Stephen Erisoty. (However, later on summary judgment, the court denied Erisoty any compensation for the restoration holding there was no unjust enrichment of the Riziks and, in any event, the restoration was at the risk of Erisoty.40 ) At the time of writing, Erisoty's lawsuit against the auction house and consignor to recover the purchase price paid on behalf of the investment group was still pending.41

(As a matter of interest, various statutes of limitations that could have been applied in the case included those of the District of Columbia or Maryland, each of which had a three-year limitation period, and that of Pennsylvania, which had a two-year limitation period. Under Pennsylvania law, the Pennsylvania limitation period applied; however, inasmuch as the Riziks did not locate the painting until more than three years after the Erisoty group gained possession, the distinction between the two- or three-year limitation period was insignificant.)

The equitable balance in this case was quite distinct from cases such as DeWeerth, in which a sophisticated art collector, who had lost a valuable oil painting by Claude Monet in 1945, failed to seek assistance from the law enforcement agencies; failed to contact any of several post-war agencies created for the specific purpose of locating art lost during the war; and conducted no search during a twenty-four-year period, while for thirty years the painting hung in the New York apartment of a good faith purchaser and on two occasions was displayed in public exhibitions.

The court in the Erisoty case cited O'Keeffe v. Snyder,42 which has become central to the application of the discovery rule. In that case, the artist Georgia O'Keeffe brought an action to recover three of her paintings that had disappeared from a New York City gallery in 1946. O'Keeffe had never reported the theft to police, because she did not feel they would be helpful in recovering stolen art. Nor was there any notice published of the theft, but there were discussions by O'Keeffe with various art world acquaintances. In 1972, O'Keeffe allowed her secretary to report the theft of the three works to the American Dealers Association, which had established an inventory of stolen art as a resource for collectors, dealers, and authorities.

In September 1975, O'Keeffe learned that the paintings were up for sale on consignment in a New York gallery. She was then able to obtain information that the paintings were claimed by Barry Snyder, the owner of the Princeton Gallery of Fine Art. She demanded the return of the paintings in February 1976; Snyder refused. O'Keeffe commenced an action for the return of the paintings (replevin) immediately thereafter.
Snyder defended the action, arguing that the six-year statute of limitations of the state of New Jersey prevented O'Keeffe from bringing the action. The trial judge, however, concluded that Snyder had failed to satisfy the concept of "open and notorious" required to obtain adverse possession of goods, because between the theft in 1946 and 1973 the paintings were never displayed in public. However, the court granted Snyder judgment because it held that O'Keeffe's action was barred by the statute of limitations; more than six years had run from the date of the theft to the time of bringing of the action.

An intermediate appellate court reversed this decision. It held that the statute of limitations did not run until all the elements of adverse possession were established. As the paintings were never openly exhibited until 1973, the six-year statute of limitations did not begin to run until 1973. Since the action was commenced in 1976, it was commenced within the appropriate time frame.

The New Jersey Supreme Court subsequently reversed and remanded the case to determine whether the paintings had actually been stolen.

The court determined that O'Keeffe should be given the benefit of the discovery rule. The doctrine of adverse possession was created primarily for real property and was not easily applied to personal property; unlike real property, jewelry and works of art do not have a fixed location, are portable, and can be concealed easily. It is difficult for the true owner to receive notice of possession of these goods. Accordingly, the Supreme Court dispensed with the tests for adverse possession, stating that these tests were not a fair and reasonable means of resolving this kind of dispute.

The court held that the discovery rule should be applied instead. The discovery rule provides that a cause of action does not accrue until the injured party discovers, or by the exercise of due diligence should have discovered, the facts constituting the basis of the action. The court explained that the rule would avoid the harshness that might result from a mechanical application of any statute of limitations. The New Jersey Supreme Court proposed that the trial court consider whether O'Keeffe exercised due diligence in recovering her paintings, whether there was an effective means of alerting the art world to the theft, and whether registering with an art-theft archive would give a prudent purchaser notice of the theft.

The New Jersey court was more inclined to favor the innocent purchaser and to look to the free transfer of personal property in the marketplace. It refrained from imposing on an art dealer the duty to investigate title before making a purchase; this was substantially different from the New York courts and the approach taken in Porter v. Wertz,43 in which a duty of care was placed on the art dealer to investigate title. The O'Keeffe court placed a burden on the owner, the victim of the theft, to exercise due diligence in seeking to recover the stolen property. The dissenting judgment correctly argued that the major shortcoming of the discovery rule is its failure to consider whether the purchaser exercises due care and reasonable prudence.

In a recent article, law professor Franklin Feldman observed that a New York statute that has direct applicability to any claim brought by non­New York residents has been overlooked. He states that Section 2.02 of the New York Civil Practice Law and Rules (CPLR) known as the "borrowing statute" provides that:

An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.44
Feldman goes on to state:

Thus, where the cause of action arose outside of New York and the plaintiff is a nonresident of New York, the applicable statute of limitation is limited to the time period prescribed by that of the plaintiff's residence. As is obvious, in many situations, this would significantly restrict the claim of a non-New York Holocaust victim to recover his stolen art if the suit were instituted in New York as would be required if the defendant were located here.45

The courts are continually faced with trying to resolve, in a Solomon-like manner, the duties and responsibilities of innocent purchasers with those of original innocent owners of art properties. The facts of each case must determine the thinking of the court. The courts attempt to reach the right result through different means and different tests, taking into account the conduct of the parties, the state or provincial statutes, and the common law. Good business ethics is the best way for vendors to minimize the problem, and good "personal housekeeping" by owners of art objects-having proper inventories, storage, controls, and insurance-will reduce the need for courts to act as arbiters.

California has legislation governing the accrual of a cause of action in the case of a stolen artwork or artifact. It provides that an action must be brought within three years of "the discovery of the whereabouts" of the work "by the aggrieved party." This discovery may occur only after many years and still give rights to the original owner even if purchased by a good faith purchaser years earlier.46

When the California Statute of Limitations was amended in 1983 to include a discovery accrual rule, however, the law did not deal with thefts that may have occurred prior to the 1983 amendment.

In Naftzger v. American Numismatic Society,47 the court of appeals held that actual discovery by the original owner of the identity of the possessor of the property (in this case, a coin collection) was implicit in the pre-1983 version of the statute of limitations, and that the diligence of the original owner was not a component of the pre-1983 discovery rule.

In Society of California Pioneers v. Baker,48 the court determined that the statute of limitations runs anew each time a new purchaser for value obtains possession of the stolen item (in this case an antique cane head), as long as each of these innocent purchasers holds the stolen object for less than the three-year statute of limitations requirement. Thus, if one innocent purchaser held the work for two years and nine months, and then sold it to another innocent purchaser, who held it for two years and seven months, the sale would recommence the time period under the statute of limitations.
The court also decided that fair and reasonable duties of the original owner and theft victim would be what would be fair and reasonable in the community of the original owner.

These decisions are consistent with most recent U.S. case law on the subject of statute of limitations, which holds that the owner is not affected by the statute of limitations until he or she learns that the object has been stolen and is in the possession of a particular person, or until the owner has demanded the return of the object and the new owner, usually a bona fide purchaser, refuses to return it.49

A number of states besides California have now passed legislation containing discovery rules dealing with stolen art, including Indiana, New Jersey, Ohio, Oklahoma, and Pennsylvania.

New York State Statutory Proposal
There is a proposal in New York State that would relate back to January 1, 1998, to add two new sections (206[E] and 214 [D]) to the Civil Practice Law and Rules.50 These sections would provide that both actions for the recovery of damages associated with the detaining of stolen cultural objects and the three-year limitation period within which such actions must be commenced shall be determined solely in accordance with Title N of the Arts and Cultural Affairs Law (Section 38.01 ff).51

There is serious concern that even many years after an object enters legitimate commerce, those who purchased it in good faith may not be protected from a claim by the original owner. The proposed statute attempts to balance the rights of the theft victim and the rights of good faith purchasers. The legislation includes the setting up of an art registry. A theft victim who reports the theft to the art registry within three years of the theft (or, in the case of objects stolen before the setting up of the registry, three years after the date when the registry system goes into effect) could not be adversely affected by the legislation.

If the theft victim filed a theft report with a computerized cultural-objects registry within three years of the theft, no cause of action against the person in good faith possession would accrue until the date when the claimant discovered the object's whereabouts. The claimant would then have three years to commence a court action.
If the claimant filed no theft report within three years of the theft, the cause of action accrues on the third anniversary of the theft; three years thereafter (that is, six years after the theft), the claim would be time-barred.

If a purchaser consults the registry before or after acquiring a cultural object and receives a favorable search report (written confirmation that no theft report has been filed), the claimant's cause of action accrues on the earliest of three dates-the date of the search report, the date of discovery of that theft, or the third anniversary of the theft-and generally would be time-barred three years thereafter.

If a theft report is filed within three years of the theft and someone has requested or subsequently requests a search report, the registry would notify law enforcement agencies and the claimant. Similar notification would be made if a theft report were filed between three and six years after the theft but not more than three years after the registry's issuance of a favorable search report.

There would be certain transition rules, and theft reports filed before the effective date would be grandfathered, giving those theft victims automatic protection under the new law.

The advantages of the proposed statute are:
1. The theft victim who registers the theft in a timely manner protects his or her rights until the discovery of an object's whereabouts. This protection is comparable to the current rights of theft victims under New York's "demand and refusal" rule.
2. It could no longer be argued that a theft victim who files a theft report delayed unreasonably before locating the object or bringing suit.
3. Notification requirements imposed on the registry will facilitate the return of cultural objects to the rightful owner.
4. A purchaser would be able to determine, before acquiring a cultural object, whether it is listed with the registry as missing or stolen.
5. A purchaser would know, generally within six years of acquiring a cultural object, that his or her title to the object no longer could be challenged.
6. Clarity would be brought to an area of the law in which there is great ambiguity and uncertainty both for theft victims and purchasers.

There would also be separate protection for claims made for the return of paintings, sculpture, and other cultural objects stolen in connection with the Holocaust. These would be protected until three years after a survivor or family member discovers an object's whereabouts, providing a theft report is on file with a cultural objects registry before the effective date of the proposed statute or is filed within three years after the effective date.

The cultural objects registry would consist of a computerized database of more than fifty thousand cultural objects that have been reported missing or stolen.
Under New York's Uniform Commercial Code, a good faith buyer of stolen property has four years from the date of the sale to bring an action against a seller for breach of the seller's implied warranty of title. Generally speaking, the proposed statute would preserve such claims until the first anniversary of the date when the buyer relinquishes a stolen cultural object or pays damages to a claimant whose claim is not time-barred.
The statute's proponents believe that if the statute is enacted, it will serve as a model for other jurisdictions. Computer technology may create opportunities to solve some of these legal problems by enabling the creation of a registry system similar to those already in existence for personal property security registrations and for automobile licensing. It will be interesting to see, if and when this legislation is approved, if it will be a catalyst for similar legislation in other states, Canada, and perhaps ultimately worldwide, to deal with the international market in stolen art.

Next Installment: Nazi Confiscated Art

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

Author's Notes
Note from the Editor

ISBN 0-937828-03-3

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

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form by any means, electronic, mechanical photocopying, recording or otherwise, without the prior written permission of the American Society of Appraisers, P.O. Box 17265, Washington, D.C. 20041. (800)272-8258

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