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
ART TERMS
ART LINKS
BOOKS
COLLECTING CONTEMPORARY
DAMAGED ART
DETERMINING THE VALUE OF DONATED ART
INVESTING IN ART
INSURING FINE ART
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THE DISCOVERY RULE
an excerpt from
ARTFUL OWNERSHIP
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
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
Disclaimer
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
Printed in the United States of America.
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