Second Circuit Enables Bad Faith Restitution Claims
By: William G. Pearlstein
Whenever an auction house, art dealer or collector publishes an antiquity in a catalogue or on a web-site or exhibits the object in an art fair, gallery or museum, it risks attracting the attention of a potential claimant. These can include foreign nations, federal and state enforcement agencies, archeologists, academics, self-appointed restitution vigilantes and blackmailers.
In our experience, these demands typically identify the object as originating from a particular country (such as Greece, Egypt or Mexico), and insist that the object be removed from the auction or exhibition and returned to the purported country of origin. If the object is not restituted, the claimant may insist that the object is not merely stolen but fake and threatens to contact potential buyers. Sometimes multiple countries make demand to the same object (e.g., Mexico, Guatemala, Honduras in the case of a recent New York auction, or Lebanon, Hungary, Croatia in the case of the “Sevso Treasure”). Typically, the identification is based on stylistic or art historical grounds (e.g., the object is of obvious Pre-Columbian, Near Eastern, or ancient Greek origin), but no specific factual allegations are made that would establish actual or constructive theft or illegal export, such as date and place of excavation or date of export. Such unsupported demands are best regarded not as a serious demand for restitution made in the expectation of enforcing the restitution claim but as a form of anti-market harassment intended to block the sale and chill the market for antiquities from the alleged country of origin (or the antiquities market generally).
Compounding the problem for the market is that the claimants often have access to archival materials to which the art market does not. In particular, the largest smugglers of classical material in the 1990’s—Becchina, Medici and, perhaps, Edoardo Almagia —maintained detailed archives of the objects they handled, including photographs and site-specific details of illegal excavation. Substantially all of the material in those databases was looted. Foreign enforcement agencies, such as Italy’s Carabiniere Della Belle Arti, sometimes selectively share archival material with U.S. federal and state enforcement agencies (such as Department of Homeland Security or District Attorney of New York (“DANY”)), which can then initiate forfeiture proceedings. These are usually supported by probable cause. Or they can share the archives with anti-market academics who use them to police the auction market and publicize suspect material with claims that may lack probable cause and would not support a government forfeiture action or private claim for replevin or conversion, and amount to little more than a threat made in bad faith intended to chill the market. Selective disclosure of looter archives creates an unequal playing field for market participants. It deprives auction houses, dealers, collectors and museums of the ability to research provenience (place of origin) and provenance (chain of title) on a fully-informed basis and puts good faith purchasers at risk of unintentionally purchasing, selling or gifting stolen objects. (It also puts claimants at risk of a successful laches defense to a title claim in the event of civil litigation).
In Barnet v. Ministry of Culture and Sports of the Hellenic Republic,the U.S. Court of Appeals for the Second Circuit recently held that Greece’s demand on Sotheby’s and its consignor to restitute a Greek antiquity was a “sovereign act” that failed to satisfy the “commercial activity” test under the Foreign Sovereign Immunity Act (“FSIA”), thus depriving the U.S. District Court of jurisdiction over the plaintiffs’ suit against Greece for declaratory judgment over title to the artifact. In doing so, the Court of Appeals erred by elevating an unsupported claim by Greece intended only to chill the sale of the artifact (and the market for Greek antiquities) into a meritorious claim to enforce Greece’s national patrimony laws by restituting the artifact. The effect is to give foreign claimants and their enablers license to stand offshore and lob bad faith claims into the United States, disrupt the public antiquities market and “burn” licit material acquired in good faith, while avoiding the jurisdiction of U.S. courts, thus depriving U.S. auction houses, dealers, collectors and museums of an effective remedy in the United States, the jurisdiction where the harm was inflicted.
Background of the Case.
In 1973, Howard and Saretta Barnet purchased a 14-centimeter tall ancient Greek Bronze Horse dating to the 8th Century BC. In 2012, ownership of the Horse was transferred to a trust, of which Howard, Peter and Jane Barnet are the trustees. In July 2017, the Barnet trustees consigned the Horse to Sotheby’s for sale, along with other items from the Barnet collection. Sotheby’s planned to sell the Horse at an auction scheduled for May 14, 2018, in New York, New York.
As is customary, on April 25, 2018, Sotheby’s published an auction catalog online that included the Horse. The auction catalog described the provenance of the Horse as follows: on May 6, 1967, the Horse was sold at a public auction in Switzerland by Münzen und Medaillen, to an undisclosed buyer. Robin Symes thereafter acquired the Horse from the 1967 auction purchaser. Howard and Saretta Barnet acquired the Horse from Mr. Symes on November 3, 1973.
On May 11, 2018, the Friday before the Monday auction, the Greek Ministry of Culture and Sports emailed a letter to Sotheby’s demanding that Sotheby’s immediately withdraw the Horse from the auction and repatriate it to Greece. The Ministry asserted, among other things, that (i) three photos of the Horse were included in the Symes-Michailides photo archive, (ii) the Horse is of Greek origin and subject to Greece’s patrimony laws of 1932 and 2002 which declare historic Greek artifacts to be the property of Greece, and (iii) there were no records in the Ministry’s archives “(i.e. an export permit from Greece) to prove that this figurine has left the country in a legal way.” Greece reserved all right to take “necessary legal action in the competent courts in order to repatriate the coin [sic].” Sotheby’s and the consignors decided that the demand letter, regardless of its merit, placed a cloud over the Horse’s marketability, impairing Sotheby’s ability to sell it. Accordingly, Sotheby’s immediately withdrew the Horse from the auction. Several days later, Sotheby’s responded to the demand letter, rejecting Greece’s claim of ownership, and inviting the Ministry of Culture to provide any other evidence to support its ownership claim. The Ministry provided no additional evidence.
The District Court’s Decision.
The Barnet trustees and Sotheby’s filed a Complaint on June 5, 2018 seeking declaratory judgment that the Trust was the lawful owner of the Horse and that Sotheby’s could sell the Horse on its behalf. The Ministry contended that the Horse was illegally removed from Greece and should be repatriated. However, rather than resolve the title dispute through litigation, the Ministry asserted immunity from litigation, and moved to dismiss Plaintiffs’ Complaint. Specifically, the Ministry argued that the District Court lacked subject matter jurisdiction over Plaintiffs’ claims pursuant to the FSIA, 28 U.S.C. §§ 1602-11, and that Sotheby’s lacked standing because it did not sufficiently allege injury.
The fact that Greece declined to pursue its title claim and moved to dismiss for lack of jurisdiction is troubling. It creates a strong inference that Greece never had a good faith basis for its restitution demand other than Symes’ belated appearance in the provenance. If Greece had a substantial factual basis to support its allegations of illegal excavation, illegal export, or actual or constructive theft it would have done so, and the best forum to introduce such evidence and prove its claim would have been Plaintiffs’ declaratory judgment action. However, winning dismissal for lack of jurisdiction would not merely save Greece the embarrassment of losing its title claim but accomplish a larger purpose: it would render the Horse unmarketable while sending a message to the antiquities market as a whole that Greece could, and would, destroy the marketability of any antiquity of ostensibly Greek origin that comes to its attention by asserting an unsubstantiated claim disputing title without fear of liability in the United States.
The District Court denied the Ministry’s motion. Greece argued that the District Court lacked jurisdiction to consider Plaintiffs’ claims due to Greece’s sovereign immunity. However, the District Court found that the act in question —the Ministry’s delivery of the demand letter, which halted the auction of the Horse — fell within the FSIA’s “commercial activity exception.” As a result, Greece was not immune from suit.
The FSIA provides the sole basis for obtaining jurisdiction over a foreign state in federal court. Under the FSIA, a foreign state is generally immune from federal court jurisdiction, unless a specific exception in the FSIA applies. If such an exception applies, the foreign state is liable in the same manner and to the same extent as a private individual under like circumstances. 28 U.S.C. § 1606. Plaintiffs argued that Greece’s behavior fell within the “commercial activity exception” to the FSIA. The third prong of that exception, known as the “direct-effect clause,” denies sovereign immunity when the action is based upon (i) an act outside the territory of the United States (ii) in connection with a commercial activity of the foreign state elsewhere and (iii) the act causes a direct effect in the United States. 28 U.S.C. § 1605(a)(2).
The principal disagreement between the parties pertained to whether Greece, as a foreign sovereign, was engaged in commercial activity. Plaintiffs argued that the act of sending the demand letter, was a commercial activity, while Greece asserted that the act was purely sovereign in nature. The District Court agreed with Plaintiffs.
The FSIA provides that “[t]he commercial character of an activity shall be determined by reference to the nature of the course of conduct or particular transaction or act, rather than by reference to its purpose.” 28 U.S.C. § 1603(d). The District Court framed “the question [as] not whether the foreign government is acting with a profit motive or instead with the aim of fulfilling uniquely sovereign objectives” but “whether the government’s particular actions (whatever the motive behind them) are the type of actions by which a private party engages in commerce.”
The District Court thus found that the nature of Greece’s activity — attempting to intervene in the market to assert and enforce its purported property rights — is the type of activity that private persons can, and often do, engage in. When title to a work of art is disputed, private parties routinely assert their property rights in the disputed piece, often triggering declaratory judgment actions.
Greece attempted to characterize the conduct at issue, not as an assertion of property rights, but as a uniquely governmental effort to police the heritage of its nation. Because the letter was sent “in fulfillment of the Ministry’s public purpose,” the Ministry argued that “it could not have been sent by a private party,” and therefore the act was not commercial in nature.
However, the District Court found that, though the purpose of sending the demand letter may have been to fulfill the Ministry’s constitutional mandate to protect Greece’s cultural heritage, the nature of the act was analogous to a private citizen attempting to enforce his property rights. Furthermore, Greece’s assertion that “[t]he protection of heritage has never been considered commercial activity by the Second Circuit, the Supreme Court, or any other court,” only went so far. While the Second Circuit had not had the opportunity to address the issue, other courts had found that acts taken in furtherance of a sovereign’s cultural mission can be commercial in nature.
Finally, the District Court held that Sotheby’s had standing to sue for several reasons, including Sotheby’s economic interest in being able to sell the Horse and earn a commission upon the sale, Sotheby’s obligation to inform potential buyers of Greece’s competing claim to ownership, and Greece’s threat of legal action against Sotheby’s.
Greece then filed an interlocutory appeal of the District Court’s order, and the District Court stayed proceedings pending appeal.
The Second Circuit’s Decision.
On appeal, the Second Circuit reversed and remanded with instructions to dismiss for lack of jurisdiction. The Court of Appeals agreed with the District Court that the challenged act was Greece’s delivery of the demand letter. However, the Court of Appeals found that the District Court erred in treating Greece’s act of sending the demand letter as both the predicate “act” and the related “commercial activity” required by §1605(a)(2). The Court of Appeals found instead that the connected activity was Greece’s enactment and enforcement of patrimony laws that declared the Horse to be the property of Greece. The enactment and enforcement of such patrimony laws are “archetypal sovereign activities” that did not provide the requisite connection to commercial activity that would authorize suit under the FSIA.
The Court of Appeals agreed with the Ministry that Greece’s insistence on recognition of obedience to its patrimony laws are not “the type of actions by which a private party engages in ‘trade or commerce,’ nor is that activity analogous to a private commercial transaction.” Instead, “nationalizing property is a distinctly sovereign act.” Thus “adopting its patrimony laws and insisting on compliance with those laws is enough to establish that its activity was sovereign rather than commercial.” “Even though a private party might be able to send a letter disputing ownership of an object, no private party could nationalize historical artifacts and regulate the export and ownership of those nationalized artifacts.” In short, “[a]lthough the district court was correct that merely claiming ownership or encouraging cultural heritage are not uniquely sovereign activities, the district court did not appreciate that Greece’s act of sending its letter was connected to the sovereign activity of claiming ownership through nationalization and enforcement [emphasis added] of patrimony laws.”
The Court of Appeals distinguished between the act of sending the demand letter and the connected activity and focused on whether the connected activity was commercial or sovereign. But in analyzing the two-part test, the Second Circuit mischaracterized both Greece’s predicate act of sending the demand letter and nature of the connected sovereign activity.
First, the Court avoided examining the nature of Greece’s demand letter and whether the act of sending the demand letter was taken in good faith with a bona fide expectation of effecting restitution. The 1967 Swiss auction sale predated Symes’ purchase; Greece was unable to plead any additional facts evidencing actual or constructive theft. Plaintiffs thus argued that Greece’s patrimony laws might not apply to the Horse because it was unclear whether it left Greece before the patrimony laws went into effect or because those laws might be unenforceable in the U.S. This was a reference to the requirements of the McClain and Schultz line of cases, which are applicable to criminal prosecutions and forfeiture actions under the National Stolen Property Act and to civil suits by foreign claimants for replevin and conversion of cultural property.
The Court sidestepped this issue by stating that the ownership of the Bronze Horse was inextricably bound up with sovereign activity. Thus, “litigation of Plaintiffs’ claims would require the district court to evaluate the validity, scope, and application of Greece’s patrimony laws—putting at issue precisely those sorts of sovereign acts for which Greece enjoys sovereign immunity.” In other words, “permitting the cause of action here would appear to undermine the immunity Congress intended to confer on [Greece] under the FSIA.”
Litigation of the Plaintiffs’ claims would indeed have required the District Court to evaluate the validity, scope, and application of Greece’s patrimony laws. But federal courts are required to make this kind of analysis to resolve claims based on a breach of foreign patrimony laws in other contexts such as criminal prosecutions and civil forfeiture actions, plaintiffs’ declaratory judgment suits to clear title, and civil suits for conversion and replevin brought by foreign claimants. Without such an evaluation, Greece would have no ability to enforce its patrimony laws and seek restitution, either in the context of a plaintiff’s declaratory judgment suit to clear title or by suing in its own name for conversion and replevin. Such an evaluation would also be required in a criminal prosecution or a civil forfeiture action by U.S. authorities based on a breach of Greece’s patrimony laws. One irony of the Second Circuit’s holding is to excuse a judicial evaluation of a foreign country’s patrimony laws where the foreign claimant makes a meritless demand with the intention only of chilling the market but not where it has a bona fide intention of litigating to enforce its claim.
Second, although the Court emphasized the sovereign nature of Greece’s protection of its cultural heritage through the “nationalization and enforcement [emphasis added] of its patrimony laws,” the Court sidestepped the implication of the Ministry’s decision to avoid contesting the Plaintiffs’ title claim and moving to dismiss for lack of jurisdiction. By moving to dismiss, Greece deliberately avoided any effort to enforce its patrimony laws. Thus, the Court mischaracterized the nature of Greece’s sovereign activity taken in connection with its predicate action in sending the demand letter.
In sum, the Second Circuit made two mistakes. First, it overlooked Greece’s failure to allege any facts supporting its allegations of illegal export. Second, it mischaracterized Greece’s sovereign activity as one of enforcement rather than avoidance of enforcement. In the absence of facts to support its claim of illegal export, Greece could not overcome the legality implied by the 1967 sale. Greece therefore declined to pursue its title claim in Plaintiffs’ declaratory judgment action and moved to dismiss for lack of jurisdiction, thus recasting its restitution demand from a bona fide enforcement action to a bad faith attempt to spoil the sale of the Bronze Horse and chill the market. By failing to focus on the reality of Greece’s posture, the Court of Appeals elevated a meritless demand letter and treated it like a meritorious effort to enforce Greece’s patrimony laws by litigating for restitution of the Horse.
In doing so, the Court of Appeals handed Greece (and other nations) a license to disrupt the stream of legitimate commerce in the United States by making weak patrimony claims that it has no intention of enforcing while denying the victims access to U.S. courts. In this case, the effect is that the Horse will remain in the U.S., presumably unmarketable, and Greece will make no effort to enforce its patrimony laws by suing for restitution because it lacks any evidence that the Horse was exported in violation of its patrimony laws. It seems unlikely that Congress had this scenario in mind when it crafted the “direct-effect clause.”
Implications for Collectors, Dealers and Auction Houses.
In deciding whether to accept the Horse for consignment to a public auction, the specialists and compliance lawyers at Sotheby’s were presented with an interesting choice. On one hand, the Horse had an apparently good provenance from the 1967 auction in Switzerland. On the other hand, given Symes s appearance in the provenance in 1973, they could have reasonably expected that the Horse would draw the attention of anti-market vigilantes or foreign claimants. In deciding to consign the Horse, they were ultimately betting that the prior sale in 1967 would insulate the Horse from adverse claims. Unfortunately, they were wrong and Greece made demand (focusing on Symes but not on the implications of the 1967 sale).
Sotheby’s subsequent decision to withdraw the Horse from auction and commence a declaratory judgment action for title is more problematic, especially given the uncertainty over the threshold issue of jurisdiction. In retrospect, Sotheby’s might have been better advised to proceed with the auction or even re-consign the Horse to a subsequent auction, confident that the Greeks lacked any information to support its claims of illegality and overcome the presumption of legality created by the 1967 auction. Sotheby’s could have considered offering bidders a special indemnity and against litigation in support of express and implied warranties of title.
Barnet et al. v. Ministry of Culture and Sports of the Hellenic Republic has troubling implications for the antiquities market and for the broader art market as well. National patrimony laws, transfer restrictions and export controls on art are proliferating and extend beyond antiquities to all manner of art works and collectibles deemed to be important to the national heritage. The lesson for auction houses, dealers and collectors is not be intimidated by unsubstantiated claims and to proceed with the sale unless the claimant persuasively demonstrates probable cause. Unless the claimant is willing to bring suit in the U.S., the marketability of the piece outside the U.S. may only be impaired in the claiming country itself.
 Under U.S. federal law, forfeiture and restitution are typically based on (i) violation of U.S. customs requirements on import, such as a material misstatement of country of origin, description or declared value, (ii) actual theft from the inventory of a cultural institution or possession of a private owner or illegal excavation from a state-owned archeological site, or (iii) constructive theft by virtue of illegal export after the date of an effective national ownership law (subject to due process concerns regarding publication, clarity and domestic enforcement). See infra notes 9, 10 and 11 and accompanying text.
 By contrast, established dealers, such as Symes-Michailides and Robert Hecht, handled a high volume of material including many objects from old collections and maintained inventory lists containing a mix of legitimate, provenanced objects and objects fresh to market, including some objects sourced from Medici.
 Rule E of Federal Rules of Civil Procedure, Title XIII – the Supplemental Rules for Admiralty or Maritime Claims and Asset Forfeiture Actions, which governs asset forfeiture cases in the United States, safeguards against abusive forfeitures based merely on unsubstantiated suspicions. It requires the Government to state sufficient particularity in its pleading to enable a claimant to investigate the facts and frame a response. Supplemental Rule G(2)(4) further requires “sufficiently detailed facts to support a reasonable belief that the government will be able to meet its burden of proof at trial.” Thus, in forfeiture cases adjudicated by U.S. federal courts involving antiquities the government’s pleadings have generally stated the factual and legal bases for alleged illegal excavation, export and import. See, e.g., United States v. An Antique Platter of Gold, 991 F. Supp. 222 (S.D.N.Y. 1997), aff’d, 184 F.3d 131 (2d Cir. 1999) (forfeiture of Italian artifact); United States v. Schultz, 333 F.3d 393 (2d Cir. 2003), aff’g 178 F. Supp. 2d 445 (S.D.N.Y 2002), cert. denied, 540 U.S. 1106 (2004) (prosecution for conspiracy to smuggle Egyptian artifacts). Forfeiture claims by DANY are governed by New York State criminal law, which is less developed than the Federal Rules of Civil Procedure and lacks a variety of the procedural safeguards provided by the FRCP. Nevertheless, asset forfeiture claims by DANY are generally well-plead as to the underlying facts of the alleged theft.
 For example, Cristos Tsirogiannis is an archeologist on the faculty of the Institute for Advanced Studies in Aarhus, Denmark. “Most of his images were seized in police raids and given to him by prosecutors in Greece and Italy. Working independently, Tsirogiannis matches the photos with objects that surface at auctions or museums and then works to repatriate the pieces. […] Tsirogiannis takes great caution to keep the images from prying eyes. The archive itself—30,000-plus pictures depicting more than 100,000 objects—is a digital one, taking up a half-terabyte on a server in an undisclosed country in the South Pacific, accessed with passwords he changes twice a week. “There is no actual copy with me or in my house or in my working space,” he said.” https://www.artmarketmonitor.com/2018/06/26/the-strange-case-of-christos-tsirogiannis/
 Barnet et al. v. Ministry of Culture and Sports of the Hellenic Republic, 391 F. Supp. 3d 291 (S.D.N.Y. 2019), rev’d 2d Cir., June 9, 2020, No. 19-2171-cv.
 In the absence of other “red flags,” provenance documented to a 1967 public auction is generally regarded as sufficient among prudent auction houses, dealers and collectors. Although Robyn Symes became infamous for dealing in tens (hundreds?) of millions of dollars of looted antiquities during the 1990’s, Symes’s subsequent purchase of the Horse between May 1967 and November 1973 is not a “red flag” of potential illegality because the piece had already been documented in the stream of commerce.
 The reference to “the coin” (appearing twice in the demand letter) implies that the Ministry simply recycled a prior demand letter relating to an ostensibly Greek coin and that the demand was a routine exercise, triggered by the appearance of Symes’ name in Sotheby’s lot description.
 The inference is that Greece sent the Demand Letter without review by U.S. counsel and that Greece only engaged U.S. counsel after Plaintiffs commenced their declaratory judgment action. It was only then that Greece’s counsel realized that Symes appeared in the provenance after the 1967 auction sale in Switzerland, which would fatally compromise Greece’s title claim given the absence of any evidence that the Horse had been actually or constructively stolen from Greece.
 At oral argument, Plaintiff’s counsel argued that the “whole thesis of our complaint is that [the figurine] doesn’t fall within the law because there’s no proof that it was stolen.” “There are potential defenses as a matter of due process. If the Patrimony Law hasn’t actually been communicated or actually enforced, there is a vein of caselaw to that effect, under U.S. caselaw, that I think might be applicable.”
 United States v. McClain, 545 F.2d 988 (5th Cir. 1977), aff’d in part, rev’d in part,593 F.2d 658 (5thCir. 1979), cert. denied, 444 U.S. 918 (1979) (evaluating applicability of Mexican cultural patrimony law); United States v. Schultz, supra note 3 (evaluating applicability of Egyptian cultural patrimony law). The holder of foreign-sourced cultural material can be prosecuted under U.S. criminal law and/or the material can be subject to civil forfeiture and restitution if the government can show that the material was stolen from its source country or imported in violation of U.S. law. The legal analysis starts with whether the object was subject to a foreign national ownership claim immediately prior to export and whether a foreign national ownership law was breached at the time of export. The McClain and Schultz line of cases have defined the following elements for a criminal prosecution under the National Stolen Property Act (“NSPA”) arising from the “theft” of cultural property by virtue of its export in violation of a national ownership law:a foreign law vests title to the object in the state from and after a certain date; the national ownership law must be clear and unambiguous and published in terms understandable to an American; the national ownership law was domestically enforced and not a sham; the object was exported after the effective date of the foreign ownership law; andthe exporter (or a subsequent owner or holder) knew (or “consciously avoided” knowing) at the time of export (or later comes to know) that the object was exported in violation of the national ownership law. In general, to obtain a conviction, any criminal prosecution under the NSPA (or for civil forfeiture) would need to prove the status of the property in question under the law of the country of discovery on the date of export, and in particular whether the property was state-owned or private property at the time of export. The prosecution would also need to prove that the material subject to the claim had been exported from that country, and not from one of the neighboring countries. See also United States v. a 10th Century Cambodian Sandstone, 12 Civ. 2600 (GBD) (S.D.N.Y. March 28, 2013) (evaluating applicability of Cambodian cultural patrimony law in challenge to Sotheby’s New York auction of a Koh Ker Duryodhana).
 For example, a U.S. Court of Appeals ruled against Peru’s claim for the return of cultural objects for several reasons, including Peru’s inability to prove that the items in question had been exported from Peru, as opposed to one of its neighbors. The Court also examined the domestic enforcement of Peru’s national ownership laws to determine whether they were in effect an export control scheme. Peru v. Johnson,720 F. Supp. 810 (C.D. Cal. 1989), aff’d sub nom. Peru v. Wendt, 933 F.2d 1013 (9th Cir. 1991). The applicability of Turkey’s patrimony laws are in issue in the litigation among Turkey, Christie’s and Michael Steinhardt over a “Stargazer” figure of purportedly Anatolian origin. See Republic of Turkey v. Christie’s Inc., Michael Steinhardt, Anatolian Marble Female Idol of Kiliya Type, 17 Civ. 2086 (S.D.N.Y. Sep. 30, 2019).
 The Court of Appeals noted that the Plaintiffs asserted only a title claim and did not assert claims for money damages or injunctive relief, perhaps implying that any future plaintiffs who can obtain jurisdiction should consider bringing such claims as well as seeking to clear title. Unsupported attacks on title (or authenticity) might also support a claim for commercial disparagement.