Scope of Due Diligence Investigation in Obtaining Title to Valuable Artwork

• Publication year: 1999

SEATTLE UNIVERSITY LAW REVIEWVolume 23, No. 3WINTER 2000

ARTICLE

Scope of Due Diligence Investigation in Obtaining Title to Valuable Artwork

Marilyn E. Phelan(fn*)

Table of Contents

I. Introduction................................................................ 633

II. Source of the "Due Diligence" Investigation....... 637

A. Due Diligence Investigation for Purchasers Under New York Law............................................................ 639

B. Due Diligence Investigation Under the Discovery Rule............................................................................ 647

C. Due Diligence Investigation as Principle of Fairness and Good Faith........................................................... 652

D. Overall Necessity for Due Diligence Investigation........ 658

III. Equitable Considerations Requiring Due Diligence Investigation............................................. 659

A. Magnitude and Dynamics of International Stolen Art Trade.................................................................... 659

B. Capability of Common Law and Civil Remedies to Redress Stolen Art Epidemic and Protect Commercial Integrity of U.S. Art Market..................... 663

C. Increasing Notoriety of International Art Theft............ 665

D Significance of State Policy to Protect U.S. Art Market........................................................................ 665

E. Value of Art Objects and Expense of Litigation............ 667

F. Potential Damage to Collectors, Estates, and Trusts..... 668

G. Identity and Comparative Resources of Parties............. 670

H. Fiduciary Responsibilities of Attorneys, Trustees, and Executors.............................................................. 673

1. Tax-Exempt Institutions/U.S. Museums................ 674

2. Attorneys' Legal Liability....................................... 675

3. Trust Institutions and Other Professional Fiduciaries............................................................. 676

I. Extent of Potential Risk in Failing to Take Precautions Against Acquiring Stolen Art.................... 685

J. Repeated Admonitions of Legal and Professional Commentators............................................................. 686

K. Traditional Deficiencies Inherent in Investigating "Provenance" of a Particular Work.............................. 688

L. Art World Resources................................................... 689

M. Precautions to Protect Assets of Comparable Value...... 690

N. Superior Capability of Appropriate Due Diligence Investigation to Protect Legal Ownership Rights.......... 694

0. Cost-Effective Benefits of Expansive Due Diligence Inquiry......................................................... 694

P. Refusal of Courts to Prescribe Specific Criteria for Art Theft Victims........................................................ 695

Q. Flexibility of Laches Doctrine to Protect Buyers and Collectors.................................................................... 697

IV. Laches............................................................................. 697

A. Equitable Basis of the Laches Doctrine......................... 701

B. Appropriate Due Diligence Investigation to Establish Prejudice...................................................... 704

1. Loss of Evidence.................................................... 705

2. Change in the Situation of the Parties or the Position of the Defendant....................................... 705

C. Summary Judgment on the Laches Defense.................. 713

V. Specific Inquiries Required in an Appropriate Due Diligence Investigation..................................... 715

A. Commercial Stolen Art Databases................................ 717

B. Catalogue Raisonne..................................................... 719

C. International Museums................................................ 720

D. Authorities in the Art World....................................... 721

E. U.S. and International Auction Houses........................ 721

F. Collector Groups and Specialty Publications................. 722

G. Fine Arts Dealers......................................................... 723

H. Fine Art Restorers and Conservators............................ 723

1. Insurance Agents......................................................... 724

J. Journalists................................................................... 724

K. Government of Nation Especially Identified with Particular Work or Artist............................................. 725

L. Other Possibilities........................................................ 726

1. The Historic Art Theft Database............................ 726

2. The Holocaust Claims Processing Office of the New York State Banking Commission..................... 727

VI. NEED FOR DOCUMENTING DUE DILIGENCE INVESTIGATIONS............................................................... 727

VII. Policy Benefits of Investigations of Artworks....................................................................... 728

VIII. Conclusion.................................................................... 731

I. Introduction

Stolen art inundates the legitimate market. Over the years, attorneys, estate executors, trustees, and legal commentators have advised art collectors to conduct due diligence investigations to determine whether valuable art objects have been stolen.(fn1) As one observer commented, "[t]he lax commercial conventions of the art trade have resulted in most stolen art being eventually owned by innocent good faith collectors."(fn2) Without a documented record of appropriate inquiries, legal ownership rights in mistakenly-acquired stolen materials cannot be secured.(fn3) The failure to perform due diligence investigations for valuable artworks can also expose unnecessarily the estates and trusts of collectors to potential liability.(fn4)

If property, including artwork, is stolen, the law in the United States prevents a purchaser from acquiring good title regardless of the purchaser's good faith and ignorance of the theft.(fn5) This common law rule, the English nemo dat rule, provides that one who purchases, no matter how innocently, from a thief, or all subsequent purchasers from the thief, acquires no title in the property. Title always remains with the true owner. Thus, in the absence of a limitations bar or a laches defense, a purchaser, whether an individual or an institution, would not acquire good title to valuable artwork if there was a thief anywhere in the chain of title. As a result, even innocent purchasers of stolen artwork are exposed indefinitely to claims of true owners. This potential liability mandates that potential buyers conduct due diligence investigations before acquiring valuable art and collectibles.

Those recommending due diligence investigations for valuable art objects simply are urging collectors and their professional advisors to comply with thirty years of judicial admonitions that persons who buy and sell expensive artworks on the international market take appropriate precautions against trading in stolen property.(fn6) Courts throughout the United States have made it clear that unless collectors can show they took such steps, they may not be positioned to defeat judicial claims brought by former owners seeking to recover stolen materials. Because the innocence or good faith of buyers is irrelevant to the question of title, the question that usually determines the outcome in stolen art cases is whether the claim is precluded by the applicable statute of limitations or the equitable doctrine of laches.(fn7)

Courts decide this question by "balancing the equities" between the parties.(fn8) They not only compare the precautions collectors observed against acquiring stolen art with the steps theft victims took to report their losses,(fn9) but also consider other factors that help determine what is fair and just under the circumstances.(fn10)

For several reasons, courts view this balance as initially tilted in favor of art theft victims. Courts have recognized that persons who suffer art looting often confront extraordinary obstacles in locating their property through the "labyrinth of the international art market."(fn11) Many years may elapse before they can identify what has been stolen or even determine that a theft has occurred.(fn12) Sometimes, as with casualties of the Holocaust, the task of locating looted art falls upon children, grandchildren, or other relatives.(fn13) Moreover, many theft victims lack the resources and art world sophistication to conduct an exhaustive and sustained search. They rarely enjoy the same wealth, access to expertise, and investigative capabilities as art market patrons. Accordingly, courts have placed the initial burden on defendants in possession of stolen artworks. Unless they can show that they diligently searched to determine whether the disputed object may have been stolen, they may not be able to preclude as untimely a judicial action brought to reclaim the object. While ownership of personal property can never be made as secure as title to realty,(fn14) and no...