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De Csepel v. Republic of Hungary

United States District Court, District of Columbia

March 14, 2016

DAVID L. de CSEPEL, et al., Plaintiffs,
v.
REPUBLIC OF HUNGARY, et al., Defendants.

MEMORANDUM OPINION

ELLEN SEGAL HUVELLE United States District Judge

Defendants the Republic of Hungary, the Hungarian National Gallery, the Museum of Fine Arts, the Museum of Applied Arts, and the Budapest University of Technology and Economics have moved, pursuant to Federal Rule of Civil Procedure 12(b)(1), to dismiss this case for want of subject matter jurisdiction. (Defendants’ Renewed Motion to Dismiss, May 18, 2015 [ECF No. 106] (“Defs.’ Ren. Mot.").) It is defendants’ third motion to dismiss plaintiffs’ claim on jurisdictional grounds, but the first Rule 12(b)(1) motion filed and argued with the full benefit of jurisdictional and merits fact discovery.

Plaintiffs David L. de Csepel, Angela Maria Herzog, and Julia Alice Herzog are descendants of Baron Mór Lipót Herzog, a Jewish Hungarian art collector who assembled a substantial art collection (the “Herzog Collection”) prior to his death in 1934. Plaintiffs allege that Hungary and Nazi Germany seized the Herzog Collection during World War II. Plaintiffs brought this suit alleging that defendants breached bailment agreements entered into after World War II when they refused to return the pieces from the Herzog Collection to the plaintiffs in 2008.

On February 15, 2011, defendants filed a motion to dismiss, which this Court granted in part and denied in part, holding that it had subject matter jurisdiction under the expropriation exception to the Foreign Sovereign Immunities Act (“FSIA”), 28 U.S.C. § 1605(a)(3). See De Csepel v. Republic of Hungary, 808 F.Supp.2d 113, 132-33 (D.D.C. 2011). The D.C. Circuit affirmed in part and reversed in part. De Csepel v. Republic of Hungary, 714 F.3d 591 (D.C. Cir. 2013). Without addressing the expropriation exception, the D.C. Circuit held that plaintiffs’ Complaint alleged sufficient facts to confer subject matter jurisdiction pursuant to the commercial activity exception to the FSIA, 28 U.S.C. § 1605(a)(2). See Id. at 601. On remand, this Court ordered discovery to proceed. (Order, Dec. 9, 2013 [ECF No. 82].) All fact discovery is now complete.

Defendants assert that, in light of the evidence produced in discovery, plaintiffs cannot carry their burden of proving that this Court has subject matter jurisdiction. In particular, defendants claim that neither the FSIA’s commercial activity exception nor its expropriation exception applies to plaintiffs’ claim.

For the reasons stated below, this Court finds that it has subject matter jurisdiction under the expropriation exception to the FSIA, but that plaintiffs cannot show a factual basis for their claim of jurisdiction under the statute’s commercial activity exception.

BACKGROUND

The factual history of this case has already been described in great detail by this Court and the Court of Appeals at 714 F.3d at 594-97; 808 F.Supp.2d at 120-26; and 75 F.Supp.3d 380, 382-85 (D.D.C. 2014). The Court will therefore focus on the procedural history and facts relevant to this motion.

I. FACTS

Baron Mór Lipót Herzog was a Jewish Hungarian art collector who amassed a collection of over 2, 000 paintings, sculptures, and other pieces of artwork. After his death in 1934 and his wife’s death in 1940, the Herzog Collection was divided up amongst his three children, Erzsébet Herzog (Elizabeth Weiss de Csepel), István (Stephen) Herzog, and András (Andrew) Herzog. (Complaint, July 27, 2010 [ECF No. 1] (“Compl.”) ¶ 39; see also Defs.’ Ren. Mot., Declaration of Irene Tatevosyan (“Tatevosyan Decl.”), Ex. 5.)

During the Holocaust, Hungarian Jews, including the Herzogs, were required to register their art treasuries. In 1943, the Herzog family sought to save their artworks from damage and confiscation by hiding the bulk of the collection in the cellar of one of the family’s factories. Sometime prior to May 23, 1944, the artworks were discovered by the Hungarian government and its Nazi collaborators and were seized. It appears that some of the artworks were transferred to Germany and other territories of the Third Reich, while the rest were stored in Hungary.

Several of the Herzog heirs and their families escaped from Hungary during the war: Elizabeth fled to Portugal and settled in the United States in 1946, becoming a U.S. citizen on June 23, 1952. Plaintiffs Angela and Julia Herzog left Hungary following the deportation and death of their father András and settled eventually in Italy. István remained in Hungary until his death in 1966.

Forty-four pieces from the Herzog Collection are at issue in this litigation. According to interrogatory responses from plaintiffs, twenty-four are owned by the heirs of András Herzog, twelve are owned by the heirs of Erzsébet Herzog, and eight are owned by the heirs of István Herzog. (See id.) Defendants concede that forty of the forty-four artworks named in plaintiffs’ Complaint are still in the museums’ possession.[1] They also concede that forty-two of the forty-four properties were seized by Hungary and the Nazis during the Holocaust as part of Germany’s campaign of genocide against the Jews. The remaining two artworks appear to have been first acquired well after World War II. In 1952, Lucas Cranach the Elder’s “The Annunciation to Saint Joachim” (Compl. ¶ 16(vi)) was seized by the State Security Authority from an attorney, Dr. Henrik Lorant. (Tatevosyan Decl. at Ex. 29). The Cranach seems to have been placed in Lorant’s house by Ferenc Kelemen, who claims to have been keeping it safe for Erzsébet Herzog. (Id.) In 1963, John Opie’s “Portrait of a Lady” (Compl. ¶ 16(xiii)) was donated to the Museum of Fine Arts by an individual named Endre Gyamarthy. (Tatevosyan Decl. at Ex. 32.) It is unclear from the record how Gyamarthy came to possess the painting.

Following the conclusion of the war, certain artworks from the Herzog Collection that had been scattered across Nazi-occupied Europe were shipped back to Hungary, consistent with the Allies’ post-war restitution policy. (Plaintiffs’ Opposition to Ren. Mot., June 24, 2015 [ECF No. 110] (“Pls.’ Opp’n”) at 7.) A one-party Communist dictatorship would eventually come to power in 1948, beginning a period during which “Hungary did not recognize individual property rights.” (Compl. ¶ 93.) However, in the years between the end of World War II and the start of Communist rule (1946-1948), the post-war coalition government in Hungary made some effort to return property confiscated during the Holocaust to its rightful owners.

The parties dispute how much of the art collection seized from the cellars of the Herzog factory was actually returned to the family. As best as the Court can determine, fifteen of the properties seized during the Holocaust were, at least temporarily, physically transferred into the custody of the Herzog family members or their legal representatives in the late 1940s. (See Tatevosyan Decl. at Exs. 7, 9, 10, 11, 14, 15.) All of these transfers occurred in Budapest. Pursuant to multiple customs and smuggling laws from the 1920s prohibiting the export of cultural patrimony, [2] the transfers were conditioned upon the explicit agreement that the paintings remain in Hungary. (See Id. at Ex. 18 (letter from Ministerial Commissioner Sandor Jeszensky about the release of Herzog paintings noting that the “handover protocol” requires “that the art works in question may not…be removed from the country’s territory”).) Indeed, in every known instance in which art from the Herzog Collection was physically returned to the family, the art was handed over in Budapest and has remained there. (See Id. at Exs. 44, 45, 49.) Plaintiffs concede that no member of the Herzog family has ever asked Hungary to return art to the United States. (See Hearing Transcript, Dec. 2, 2015 [ECF No. 118] (“Hearing Transcript”), at 29.)

Ten additional artworks at issue in the Complaint appear to have been legally released to the family on paper, but plaintiffs dispute whether they were ever actually returned to their physical custody. (Opp’n at 8 (stating that “these ‘returns’ were largely on paper or short-lived, and the vast majority of the Herzog Collection either remained in, or was ultimately returned to, Defendants’ possession”); Tatevosyan Decl. at Exs. 8, 12, 18.) Defendants agree that at least some of the properties that Hungary released to Herzog ownership were never physically handed over to plaintiffs or their family members. (Defs.’ Ren. Mot. at 7 (citing Tatevosyan Decl. at Ex. 17).) Plaintiffs have produced compelling documentary evidence suggesting why many of these “paper releases” were never consummated. The financial burden of accepting and removing the art to other countries was enormous. A December 9, 1947 Report by the Ministerial Commissioner in charge of repatriating art collections to Hungary discusses the return of privately owned artworks from Germany on the so-called “Art Treasure Train and the Silver Train” in the following way:

At acceptance, the owners are obliged to pay a duty fee of 11 per cent of the value of the privately owned artworks returned from Germany. It is understandable that the owners of larger collections and artworks of higher value do not hurry to take out their artworks, knowing that such items are in a good place. Thus, I still have 192 artworks in my custody from the consignments of the Art Treasure Train and Silver Train.

(Pls.’ Opp’n, Declaration of Alycia Benenati (“Benenati Decl. II”), Ex. 6.) For those owners who fled the Holocaust and made their new home outside the country-such as Erzsébet, András, and their heirs-they would not only have to pay this “repatriation duty” but also an exorbitant fee to obtain an export license. (See Tatevosyan at Ex. 18 (“According to legislation in force…[and] latest practice, export permits are issued by the National Bank, based on the estimate of the Museum of Fine Arts, in which case 40% of the estimated value [of the painting] is payable for the export permit.”) Not surprisingly, this resulted in many Herzog artworks remaining in the custody of Hungarian museums. In a memorandum dated November 10, 1947, Dr. Gyula Ortutay, the Minister of Religion and Public Education, wrote that several pieces of the Herzog Collection had recently been returned to Hungary from Germany, but notes that “the artworks could only be released [to the owners] in return for the repatriation duty” and that all but two of the pieces “remain in the care of the office of the ministerial commission to this day.” (Pls.’ Opposition to Second Motion to Dismiss, July 25, 2014 [ECF No. 89], Declaration of Alycia Benenati (“Benenati Decl. I”), Ex. D.); see also Tatevosyan Decl. at Ex. 12 (museum document categorizing Greco and Santi paintings as having been “released” but still in museums’ custody because “repatriation duty has not yet been paid”), Ex. 18 (Memorandum from Ministerial Commissioner stating that, while he returned certain Herzog paintings upon payment of the repatriation duty, others “remain in my custody”).

In some cases, Hungary appears to have used the repatriation and export fees as leverage to pressure the Herzogs into depositing or even donating certain artworks to the museums. (See Benenati Decl. I at Ex. F (1948 memorandum from Ministerial Commissioner Jeszensky writing that his office had “found a solution under which it is able to place works from the Herzog collection at the disposal of the Museum of Fine Arts, as a temporary deposit, for the purpose of exhibiting them”); Tatevosyan Decl. at Ex. 18 (“Director General István Genthon also has a confidential suggestion whereby the export of the Herzog art works that are to be returned might be permitted if the painting entitled ‘Christ on the Mount of Olives’ by Greco was donated to the Museum of Fine Arts.”).) Many of the Herzog properties retained by Hungary are now listed in the museums’ “Deposit” rather than “Core” inventories. (Tatevosyan Decl. at Ex. 1.)

Most of the artworks that Hungary did temporarily return to the Herzog family were subsequently re-seized by Hungary in 1952 as part of a criminal action. After allegedly discovering that the former wife of István Herzog (Ilona Kiss) had attempted to illegally smuggle Herzog art out of the country in 1948, the Communist regime prosecuted Kiss, resulting in forfeiture proceedings. In all, twenty artworks were seized by the state, fifteen of which are at issue in this lawsuit. (See Id. at Exs. 19-21, 77.) Hungary claims to own these properties as a result of a legal criminal seizure. After the smuggling action, Hungary halted the return of additional artworks to the Herzog heirs or their representatives. (See Id. at Ex. 22.)

Although Hungary appears to have retained a substantial portion of the Herzog art in a custodial role on behalf of the family, there is evidence of one express bailment agreement, wherein a Herzog heir directly contracted to deposit art with a museum. In a letter dated May 3, 1950, an attorney named Dr. Emil Oppler offered a list of paintings, including ten pieces of art named in the Complaint, on behalf of Erzsébet Herzog for deposit with the Museum of Fine Arts in Budapest. (See Id. at Ex. 23.) An actual “deposit contract” seems to have been finalized, signed, and delivered by a different Herzog attorney (Henrik Lorant) on March 30, 1951. (See Id. at Ex. 63.)

Thus, of the forty artworks in this lawsuit that defendants still possess, the properties appear to fall into roughly four categories: (1) art acquired by defendants after the Holocaust; (2) art confiscated during the Holocaust that was never returned to plaintiffs; (3) art confiscated during the Holocaust that was returned to plaintiffs, and then subsequently seized back by criminal forfeiture; and finally, (4) art confiscated during the Holocaust that was returned to plaintiffs, and then subsequently deposited with the museums by the 1950 bailment agreement.

Over the last few decades, the Herzog heirs have sought to recover art from the Herzog Collection from Hungary (some of it at issue in this lawsuit and some not). In 1989, Erzsébet Herzog (who was then Elizabeth Weiss de Csepel) requested that the Museum of Fine Arts return certain paintings to her. The Museum agreed to hand over the paintings in Budapest, but under a preservation order such that the paintings could not leave the country-and to this day, they remain in Hungary. (See Tatevosyan Decl. at Ex. 44; Hearing Transcript at 35.) In 1998, Julia Herzog (heir of András) wrote to the Museum of Fine Arts from Rome, Italy to request that several artworks not named in the Complaint be returned to her so that she could keep them in her Budapest apartment. (Id. at Ex. 47.) The artworks requested by Julia were apparently never returned. (Hearing Transcript at 27.)

In 1999, Martha Nierenberg (daughter of Erzsébet) filed a lawsuit in Hungary seeking the return of certain artworks once inherited by her mother, many of which are at issue in the present lawsuit. In her complaint, Nierenberg claimed full ownership of all twelve artworks at issue in the 1999 lawsuit and separately identified additional artworks in the Herzog Collection that she attributed to her siblings. To ensure that the interests of all three Herzog siblings were adequately represented, the heirs of István and András Herzog were brought into the lawsuit as co-defendants. Despite the fact that their property interests had been identified in Nierenberg’s complaint, the other heirs declined to litigate their claims. (Id. at Ex. 54.) In 2003, defendants returned one piece of art sought in her complaint to Nierenberg’s representative in Budapest, with the instruction that a preservation order was placed on the painting to ensure that it would not be removed from Hungary. (Id. at Ex. 49.) In 2008, however, the Hungarian Metropolitan Appellate Court dismissed Nierenberg’s claim for the remaining eleven artworks in its entirety.[3]

II. FOREIGN SOVEREIGN IMMUNITIES ACT

Under the Foreign Sovereign Immunities Act, “a foreign state shall be immune from the jurisdiction of the courts of the United States” unless one of several enumerated exceptions applies. 28 U.S.C. § 1604. Plaintiffs rely on the statute's “expropriation” and “commercial activity” exceptions to establish subject matter jurisdiction over their claim.

The expropriation exception abrogates sovereign immunity in any case where “rights in property taken in violation of international law are in issue” and “that property or any property exchanged for such property is owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States.” 28 U.S.C. § 1605(a)(3). The commercial activity exception abrogates sovereign immunity in any case

in which the action is based upon [i] a commercial activity carried on in the United States by the foreign state; or [ii] upon an act performed in the United States in connection with the commercial activity of the foreign state elsewhere; or [iii] upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere that causes a direct effect on the United States.”

28 U.S.C. § 1605(a)(2).

III. 1947 AND 1973 TREATIES

After World War II, Hungary and the Allies entered into a Peace Treaty in 1947. Treaty of Peace with Hungary (1947 Treaty), Feb. 10, 1947, 61 Stat. 2065, 41 U.N.T.S. 135. The 1947 Treaty is an “international agreement[ ] to which the United States [was] a party at the time of the enactment of” the FSIA in 1976. 28 U.S.C. § 1604. The treaty settled a number of issues arising out of wartime hostilities, covering topics as varied as the location of Hungary's post-war frontiers and the regulation of Hungarian railway rates. See 1947 Treaty at Arts. 1, 34. The Treaty also contained provisions addressing the payment of compensation for (or the restoration of) property rights and interests seized by the Hungarian government during World War II. Article 26 pertained to property rights and interests formerly held by non-Hungarian nationals and Article 27 addressed “persons under Hungarian jurisdiction” or Hungarian nationals. Id. at Art. 27(1). It provided:

Hungary undertakes that in all cases where the property, legal rights or interests in Hungary of persons under Hungarian jurisdiction have, since September 1, 1939, been the subject of measures of sequestration, confiscation or control on account of the racial origin or religion of such persons, the said property, legal rights and interests shall be restored together with their ...

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