September 08, 2010

Second Circuit Adopts “Interest Analysis” Choice of Law Rule in Nazi-Era Stolen Art Dispute

 

International arbitrators sitting in New York will from time to time need to apply or at least consider New York choice-of-law rules. It is therefore noteworthy when those rules evolve in a particular direction. New York “conflicts” rules (as New York lawyers call them) have for many years been a hybrid of “traditional” rules — based on such talismans as the place of a transaction or the nationality of a party in interest — and the more modern view that “interest analysis” should control. The shift in favor of interest analysis gained momentum recently in a decision of the US Second Circuit Court of Appeals. Bakalar v. Vavra, 2010 U.S. App. LEXIS 18343 (2d Cir. Sept. 2, 2010).

 

The case involves a dispute over ownership of drawing by the reknowned early 20th Century Austrian artist Egon Schiele. The work allegedly had been stolen by the Nazis in Vienna in 1938 after its Jewish owner was imprisoned and forced to sign a power of attorney over his large art collection and other personal property. The District Court had ruled in favor of the current possessor,  the plaintiff in the action, an American living in Boston who had acquired the drawing in good faith from a New York gallery that had earlier acquired it from a Swiss gallery in the 1950s. The Swiss gallery, it was alleged, had acquired title in Switzerland from surrogates for the Nazi occupiers of Austria, who had prepared documentation purporting to show that the seller was the sister-in-law of the arrested (later murdered) Austrian Jewish owner.

 

The District Court had applied Swiss law, which provides that a good faith purchaser acquires good title even to stolen property, except that the victim of the theft may assert a superior claim for five years after the property is stolen. Swiss law applied, the trial court concluded, under the traditional New York “conflicts” rule that the law of the situs of a questioned transfer of personal property is controlling. But as the Second Circuit observed, under New York personal property law, a thief cannot pass good title, and, moreover, the burden of proof on the issue of theft rests on the possessor, to prove that there is no theft in the chain of title.

Thus the outcome depended entirely on the choice of applicable law.

The Second Circuit, rejecting the District Court’s reliance upon New York’s “traditional situs rule,” held that this rule “no longer accurately reflects the current choice of law rule in New York regarding personal property.” The Court cited a 1991 New York Court of Appeals case as having rejected the situs rule in favor in “interest analysis,” but acknowledged that the widely-cited Restatement (Second) of Conflicts-of-Law continues to articulate the traditional situs rule but with the caveat that a court may find based on the interests motivating the competing laws at issue that a different choice should be made.

The predominant interest underlying the New York rule that a thief cannot pass good title is, the Second Circuit found, to prevent New York from becoming a more robust marketplace for stolen goods. The Court found no comparably important interest of Switzerland in the application of its rule protecting the expectations of a good faith purchaser.

In the result, the case was remanded for a new determination by the District Court of whether the property had been stolen, under the New York rule placing the burden on the possessor to prove no theft.

 

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