After seven years, Second Circuit denies claim to stolen art by heirs of Holocaust victim

Lexology 28 October 2012
By Oren J Warshavsky

Cases about Nazi era stolen artwork can present some of the more complicated issues. Stemming from cross border theft, these disputes often include difficulties regarding venue, complex factual scenarios, the sovereign decisions of foreign governments, and other issues of public and private international law. But although these issues and more were present in a recent case about the ownership of a Egon Schiele drawing, the decision by the Court of Appeals for the Second Circuit avoided these thorny issues and focused on a more traditional issue: laches.

The case was of significant interest to the art community because of its determination of when a claimant to a work of art loses the right to demand that it be confiscated from a good faith owner. The case may have provided some elucidation on that point, though it appears to still be a case-specific inquiry.

The facts of the case are as follows:

The Drawing. The long running legal dispute concerned the ownership of a drawing by the artist Egon Schiele, known as “Seated Woman with Bent Left Leg” (the “Drawing”).

Click here to view the Drawing.

Franz and Elisabeth Grünbaum. Franz “Fritz” Friedrich Grünbaum was a Jewish Austrian cabaret performer and songwriter, who owned 449 artworks, 81 of which were by Schiele, including the Drawing. Grünbaum was arrested by the Nazis and imprisoned in Dachau. While at Dachau, Grünbaum was forced to sign a power of attorney to his wife, Elisabeth. This power of attorney enabled the Nazis to compel Elisabeth to dispose of Grünbaum’s assets, which were auctioned off. Grünbaum died in January 1941, and according to Elisabeth, there was no estate. Elisabeth was arrested by the Nazis in October 1942 and died shortly thereafter.

The Grünbaums’ Siblings. Franz was survived by his brother Paul, who died in 1942, and his sister, Elise Zozuli (“Zozuli”), who died in 1977. Elisabeth was survived by four siblings including her sister Mathilde Lukacs-Herzl (“Lukacs”) and brother Max Herzl (“Herzl”).

Interaction between Zozuli and Lukacs. In the 1950’s, Zozuli, who then lived in Czechoslovakia, made a claim to Grünbaum’s music royalties. The Austrian and Czech governments told Zozuli that those royalties were being paid to Lukacs, then living in Brussels. Zozuli made no further claims to any rights or property belonging to Grünbaum.

Milos Vavra and Leon Fischer. Zozuli had one daughter, Marta Bakalova. Milos Vavra (“Vavra”) is Bakalova’s nephew, and upon Bakalova’s death in 1994, Vavra became an heir to Grünbaum’s estate. Herzl died in 1946, survived by his daughter, Rene. Rene had a son, Plaintiff Leon Fischer (“Fischer”). In 1999, an Austrian court declared Vavra and Fischer to be the Grünbaum heirs and awarded each a 50% interest in the Grünbaum estate. Interestingly, in 1963, a German Court ruled that Grünbaum’s cousins (Rita and Paul Reift) were his heirs, but they were unsuccessful in a claim to recover a different Schiele painting from the Museum of Modern Art in New York.

Disposition of the Drawing. There is no direct evidence of what happened to the Drawing between 1941 and 1956. However, the Drawing was purchased along with forty-five other Schieles by Galerie Gutekunst, a Swiss art gallery, in February and May of 1956. The seller was Lukacs. Later that same year, on September 18, 1956, the Drawing was purchased by the Galerie St. Etienne and was shipped to New York. On November 12, 1963, David Bakalar (“Bakalar”) purchased the Drawing for $4,300. In 2004, Bakalar sold the Schiele at Sotheby’s for about $675,000. However, the sale was interrupted when Vavra and Fischer asserted that the Drawing was stolen.

First Set of Proceedings

In light of the interrupted Sotheby’s sale, Bakalar brought a declaratory judgment action in 2005. United States District Court Judge Pauley, conducted a bench trial and applied Swiss law to determine that Galerie Gutenkunst and Galerie St. Etienne purchased the Drawing in good faith, establishing a clear chain of title to Bakalar.

In 2010, the Second Circuit reversed and remanded, finding that the district court should have applied New York law, which would require Bakalar to demonstrate that the Drawing was not stolen. The Second Circuit also required the district court to consider the issue of laches.

The District Court’s Decision

When the case went back to the district court, Vavra and Fischer argued two competing theories: (1) that the Drawing may have been stolen by the Nazis; and (2) that Bakalar cannot establish that Lukacs acquired possession in a manner that permitted her to convey title. Ultimately, although the district court found that it was unlikely that the Nazis stole the Drawing, it also found that Bakalar was unable to prove that the Drawing was not stolen.

Thus, Judge Pauley turned to the affirmative defense of laches and considered whether (1) Vavra and Fischer were aware of their claim, (2) inexcusably delayed in taking action, and (3) Bakalar was prejudiced as a result. Judge Pauley explained his dilemma: “On the one hand, a finding of no unreasonable delay would deprive Bakalar of property he purchased in good faith almost fifty years ago. On the other hand, a ruling for Bakalar will deprive Grünbaum’s rightful heirs of a Drawing that, but for the atrocities of the Holocaust, might have remained in the family until today . . . But ultimately . . . Vavra and Fischer are bound by the knowledge of their respective families.” With respect to the issue of diligence, Judge Pauley explained that “given the inevitable vagaries in property rights arising from the Holocaust, World War II, and the subsequent political and economic turmoil, a certain amount of delay or lack of specificity might be excused,” but that as of the 1950’s Zozuli was in a position to lay claim to Grünbaum’s property, much as she did with the music royalties. Judge Pauley found that Bakalar clearly was prejudiced, and thus found that laches should bar the claims by Vavra and Fischer. Judge Pauley’s decision is attached here.

Second Circuit Decision

On appeal, Vavra and Fischer focused predominantly on the claim that the Drawing was stolen by the Nazis, and that Bakalar did not purchase the Drawing in good faith. According to an article appearing in Law360, counsel for Vavra and Fischer stated that Bakalar’s 1963 purchase was the “legal equivalent of buying it off the back of a truck.” Like Judge Pauley, the Second Circuit expressed skepticism about the heirs’ hypothesis that the Nazis stole the drawing only to later return it to Lukacs. However the Second Circuit found that laches prevented the challenge by Vavra and Fischer. A copy of the decision is here.

Vavra and Fischer challenged Judge Pauley’s decision to impute the knowledge of their ancestors. But the Second Circuit found that such imputation was proper: “[i]t was obviously necessary for the court to do just that; the alternative was to reset the clock for each successive generation.” Likewise, the Second Circuit rejected Vavra and Fischer’s legal arguments about whether their ancestors acted diligently, as well as the factual arguments about what their ancestors knew or should have known.

When it comes to stolen property, the law in New York strictly favors the rights of dispossessed former owners over the rights of good faith purchasers. The Second Circuit’s decision may create a balance, so that good faith purchasers may defend their title against older claims. The Court’s finding that the laches defense does not reset with each successive generation may create a greater challenged for the descendants of dispossessed owners. Thus, in future cases, heirs to Holocaust victims and other victims of stolen property may need to demonstrate additional facts about awareness and timely investigation in order to resist a laches defense. However, as these cases tend to have unique factual settings, and the laches defense requires a factual analysis, the precise contours of this decision are far from clear.
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