The DC Circuit Court of Appeals has reinstated the entire set of claims brought by the Herzog heirs against the Hungarian National Gallery, the Budapest Museum of Fine Arts, the Museum of Applied Arts, and the Budapest University of Technology and Economics. The appellate decision focuses on the claim that an agreement was reached after WWII to hold the paintings for their owners, not the claims relating to their wartime fate. In so doing, the court pushed to the side a whole range of defenses for sovereign defendants that have been increasingly successful. The court also reinstated claims to ownership of 11 works whose title was previously litigated, in an opinion that sets a low bar for collatral attacks on foreign judgments.
David de Csepel, Angela Maria Herzog, and Julia Alice Herzog filed the case in 2010. They are the heirs of Baron Mor Lipot Herzog, a Jewish Hungarian collector who died in 1934. As the plaintiffs described it, his collection remained with his wife until her death in 1940, when it was divided among their three children. De Csepel is a descendant of one of the Herzog daughters; the other two plaintiffs are the daughters of András Herzog (a son of the Baron), who died on the Eastern Front in 1942. Their cousins—children of the third Herzog child—assigned all their rights to de Csepel.
The complaint describes the history of Hungary’s alliance with Nazi Germany, and including the passage of increasingly restrictive and anti-Semitic laws throughout the 1930s and 1940s, in addition to other horrors as the war widened. As the complaint points out, when the war turned on Germany and Hungary began considering ways to position themselves with the Allies, Germany occupied Hungary and began the deportation of the country’s Jewish population to the camps in the East.
It was at this turning point that the complaint alleges the collection was put taken away from the family. In May, 1944, laws were issued requiring Jews to declare their property. The Herzogs tried to hide the collection, say the plaintiffs, but the works were discovered and taken to Adolf Eichmann. The plaintiffs allege that the collection was disbursed among various German and Hungarian authorities.
After the war, say the plaintiffs, the Herzogs (who had fled the country) engaged in a series of correspondence about the collection. It is from the correspondence, the plaintiffs allege, that what is known as a bailment resulted. Bailment is simply the act of entrusting an object to another; a coat or car check are the most common examples. Under a bailment, there is no ownership transfer, and the bailee (the person getting the property) is obliged to safeguard it and give it back upon demand.
Thereafter, the plaintiffs allege that they were unable to make any progress in Hungary for various reasons (at least initially) relating to the Soviet-bloc government, culminating in an unsuccessful lawsuit in Hungary after the Iron Curtain fell. The plaintiffs describe that result as follows:
The Budapest Municipal Court initially recognized and acknowledged the Herzog Heirs’ ownership rights in the paintings at issue, but in January, 2008, as a result of proceedings that were not conducted in accordance with international law, an appellate court reversed the lower court’s decision ordering restitution and rejected the demand.
As discussed here many times before, sovereign immunity means that the sovereign (i.e., the state and its instrumentality, cannot be sued without the sovereign’s consent or some statutory exception. The FSIA is one such statute.
The plaintiffs filed suit in 2010 and invoked the federal court’s jurisdiction in two, non-exclusive ways: first, that the federal courts have jurisdiction under 28 U.S.C. § 1605(a)(3), the “expropriation exception” to sovereign immunity under the Foreign Sovereign Immunities Act. It was this provision that Maria Altmann used against Austria, and which has been the springboard for a decade of restitution claims. Namely, where property is taken in violation of international law, and the defendant engages in commercial activity in the United States, there will be jurisdiction. The complaint sets forth five pages of justifications for jurisdiction under this provision.
In the alternative, the plaintiffs argued that the “commercial exception” under 28 U.S.C. § 1605(a)(2) applied. Here, that means that the plaintiffs alleged that the defendants used the very property at issue in commercial activity that had an effect in the United States. In so doing, such a defendant is a commercial actor, and cannot invoke immunity for acts that are not uniquely sovereign in nature. This invocation occupies less than a page of the complaint.
In 2011 the Hungarian defendants moved to dismiss the complaint. They argued, among other things, against the application of the exceptions to the FSIA, that the act of state doctrine barred the claim, that the statute of limitations had expired, that the United States was the wrong forum, and that the previous litigation in Hungary barred the claims as to 11 of the works. Later that year, the District Court in Washington, DC denied the motion in part and allowed it in part. Critically, the court ruled that the Hungarian litigation had addressed the ownership of those 11 works, and that the plaintiffs could not re-litigate the question (a principle known as res judicata). The defendants obtained permission to appeal the parts of their motion that were denied, and the plaintiffs appealed the dismissal of the claims as to those 11 works.
The appellate court took slightly different approach. After reviewing the District Court’s application of the expropriation exception, the appeals court found that it was in fact the commercial exception that applied. The Court of Appeals states at p. 10 of the opinion that (emphasis added) “In their complaint, however, the Herzog family seeks to recover not for the original expropriation of the Collection, but for the subsequent breaches of bailment agreements they say they entered into with Hungary.”
That is simply not so, or to be more accurate, only partially so. As noted above, the plaintiffs argued that one of two provisions of the FSIA justified jurisdiction in the federal courts. As long as either one is satisfied, they have at least won the right to stay in federal court. Indeed, the plaintiffs would otherwise have had no reason to allege the illegal manner in which they say that the collection was first taken. Of course, in trying to preserve their case, the plaintiffs did exactly what one would expect: they made detailed allegations of the illegality of the 1944 takings as well. It may be that the postwar allegations also satisfy the commercial exception, but the expropriation allegations are clearly the heart of the jurisdictional theory. The plaintiff’s approach in this regard is entirely consistent with the bailment claim; if something were wrongfully taken from a plaintiff, then bailed to the sovereign defendant, jurisdiction could still lie under the expropriation exception. As such, it was a puzzling read of the complaint by the appeals court.
With that said, and as Alison Frankel has noted, the bailment theory is what saved the plaintiffs for now. In ruling that plaintiffs seek to recover against a commercial actor who breached a bailment contract, the court took away the defendants’ arguments about acts of state and foreign affairs, arguments that have been increasingly successful in FSIA restitution cases. The plaintiffs will now have to prove, of course, that such an agreement existed, and they will no longer enjoy the presumptions that attach to defending their complaint. Jori Finkel has also covered the case extensively for the Los Angeles Times.
The portion of the opinion restoring the 11 previously-litigated works contains the court’s weakest analysis. The DC Circuit pointed out that deference to judgments from other countries (known as “comity”) is often a fact-sensitive inquiry into whether the foreign proceeding contained “opportunity for a full and fair trial” held under “a system of jurisprudence likely to secure an administration of justice.” In the application, this has proven a nearly impossible standard to meet, reserved for notorious jurisdictions with barley any recognizable legal system at all, but the DC Circuit is absolutely right that that question of application is ordinarily one for later in the case.
Under the Supreme Court’s guidance, however, a plaintiff cannot simply frame an argument as a factual allegation, it must allege specific facts that taken to be true would support the legal conclusion that the plaintiff advocates: “While a complaint attacked by a . . . motion to dismiss does not need detailed factual allegations . . . a plaintiff’s obligation to provide the ‘grounds’ of his ‘entitle[ment]’ to relief requires more than labels and conclusions . . . . Factual allegations must be enough to raise a right to relief above the speculative level . . . [based] on the assumption that all the allegations in the complaint are true (even if doubtful in fact) . . . .” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007).
Where the DC Circuit missed, frankly, is in its application to this complaint. The sole allegation to deflect recognition of the earlier Hungarian judgment is that it followed “proceedings that were not conducted in accordance with international law.” That is the very sort of legal conclusion in the place of factual allegations as a result of which courts routinely dismiss claims (i.e., it doesn’t describe what happened from which one could conclude that it was unfair, only the conclusion itself that it was unfair). The question is not, despite the DC Circuit’s opinion, whether something in the complaint contradicts the defendants’ arguments. Even at this initial stage, the plaintiffs must allege specific facts that set out a case that, true, would carry the burden of proof.
Hard cases make bad law, the saying goes, and this is an example. Remember, enforcement of judgment can apply to any number of scenarios, particularly in the commercial setting in trying to collect on valid debts. Parties routinely seek to avoid valid judgments by making vague allegations of unfairness, and the pleading requirements are there to force them to do so carefully. There are treaty regimes and entire bodies of law about the recognition of foreign judgments, which are hard enough to collect as it is. In our opinion, this decision—entirely distinct from any perceived equities—sets a bad precedent in that regard.
The multi-faceted decision—which can be reviewed either by the entire DC Circuit or, if it wished, the Supreme Court—certainly breathes some life into the FSIA restitution practice and sets the case up for discovery. But so long as the Chabad case lingers in the same court, it is still difficult to imagine that this case will have a dramatic effect on the actual restitution of any cultural objects, or Hungary ever returning the paintings.
UPDATE April 24, 2013
Catherine Hickley at Bloomberg reported today that just last week, “Janos Lazar, chief of staff to Hungarian Prime Minister Viktor Orban, said that his office is preparing a list of works of art of disputed ownership in Hungarian museums with the aim of returning looted objects to the rightful owners. He did not specifically mention the Herzog case, which Hungary is contesting in the U.S. lawsuit.”