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City of Gotha and Federal Republic of Germany v. Sotheby's and
Cobert Finance S.A
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The plaintiffs now contend, by an amendment during the course of the trial, that when the Minister of Justice of the Land Thüringia purported to dissolve the Art Foundation on 14th October 1950 the painting passed to the Land Thüringia by universal succession. When the Länder were dissolved in 1952, the property of the Länder devolved to the German Democratic Republic [East Germany] and on unification to the Federal Republic of Germany. Cobert accepts that if dissolution had the effect for which the plaintiffs contend then, on unification, title devolved either to the Federal Republic of Germany or to the City of Gotha.
The importance of this contention is that, if it is right, the whereabouts of the painting in 1950 is irrelevant. The Land Thüringia became owner even though the painting was not in its possession but was in the Soviet Union.
The contention raises two fundamental issues.
(1) Did the dissolution pronounced by the Minister of Justice of the Land Thüringia have extra-territorial effect as a matter of German law?
(2) Will an English Court recognise or enforce a claim to title based upon the purported dissolution?
I should record, at the outset, that the Federal Republic of Germany’s reliance upon the dissolution of the Art Foundation to trace their title came very late in the day. There was no reference to it in the original pleadings or in the evidence of Professor Werner exchanged before trial. My comments are not meant as a criticism; inevitably during the course of this case the focus on particular issues changed and new material arrived throughout the trial. Nevertheless the lateness of the submission meant that it was difficult for Cobert fully to deal with it. In particular, criticisms of Professor Brunner’s evidence on this point, which I shall detail later, were not warranted; Professor Brunner’s evidence did not deal with this point in full at the outset because the point had not been made. He was compelled, through no fault of his own or that of Cobert, to deal with the point at the last minute. It would, therefore, be unfair to criticise any omissions in his evidence. Rather, the lateness of the submission requires the evidence on behalf of the Federal Republic of Germany on this point to be scrutinised with particular rigour.
By Article 87 (1) of the BGB:-
"If the fulfilment of the object of the foundation has become impossible, or if it endangers the public interest, the competent authority may give the foundation another stated object or may dissolve it." By Article 88 of the BGB, on the dissolution of a foundation the assets pass to the person specified in the constitution.
This Article was implemented in Thüringia by Article 14 of the Thüringian Implementation Regulation 16 May l923.
According to Professor Brunner, in his original report (paragraph 149):-
"According to Article 14 of the then applicable Thüringian Implementation Regulation to the German Civil Code dated 16 May 1923 upon its abolition, a foundation’s property passed to the state of Thüringia." There was no translation of Article 14 in evidence before me although the plaintiffs asserted that it provides:-
"The property of the foundation falls upon its dissolution to the state, if its constitution does not otherwise provide". Since Professor Brunner agrees that that is the effect of Article 14, I do not think that the absence of a translation matters.
By a decision of 26 June 1941 of the Oberlandesgericht in Jena, Paragraph 10 of the Art Foundation Statutes was altered so as to provide that:-
"Changes in statutes affecting the purposes of the Foundation and its assets, as well as decisions about the application of assets in the case of dissolution of the Foundation requires the unanimous consent of the Board of Directors. The latter is also required for the dissolution of the Foundation." (The previous Statute made no specific reference to dissolution and referred to a majority of at least two thirds).
Paragraph 11 was altered so as to provide:-
"Should the Foundation be dissolved or its former purposes no longer be applicable, its assets, as far as taxation laws do not provide any restrictions, are to be used for public and charitable benefits ..." On 17th July l998, before I had given judgment, I received further written evidence from Professor Brunner as to the effect of the amendment of 26th June l941 and written evidence from Professor Werner in response.
Professor Brunner takes the view that this provision in the Foundation’s Statutes was disregarded when the Foundation was dissolved; there was no resolution of the Board of the Art Foundation, nor was approval of the Family Foundation obtained. The founder’s wishes were to take priority over the provisions of Article 88 of the BGB and Article 14 of the Thüringian Implementation Regulation.
By the time of the dissolution there was no Board of Directors in Thüringia. They had, so far as I am aware, moved to Coburg in West Germany. They made no resolution to specify a beneficiary. In those circumstances, the assets passed to the Land of Thüringia pursuant to Article 14 (Professor Werner relied upon the commentator Seifart in support of that proposition).
Professor Brunner did not dissent from the proposition that if the dissolution was valid and no beneficiary was specified, then Article 14 of the Thüringian Implementation Regulation of 16 May l923 would have the effect that property passed to the Land. However, of more significance was his view that the failure of the Directors to specify the beneficiary confirmed that the dissolution pronounced by the Minister of Justice was in substance an act of expropriation. The absence of any reference to the Board of Directors, either in relation to dissolution or in relation to the specification of the beneficiary on dissolution, merely confirms that the dissolution was a unilateral sovereign act of expropriation. It is to that contention I now turn.
Cobert contend that, although in form the Ministry of Justice purported to dissolve the Art Foundation, in substance this was an expropriation because the Foundation was dissolved for the purpose of expropriating its assets and with the intention that those assets should pass to the Land. This submission is of importance in relation to both the first and second issues (identified at the beginning of this Section). Under German law it is accepted that an act of expropriation will not have extra-territorial effect. Moreover, if, in substance, the dissolution amounted to expropriation, it would not be recognised by the English courts, because, at the time of dissolution, the painting was not in the possession of the Land Thüringia.
Cobert rely on documents leading up to the dissolution in support of the contention that the act of dissolution was in substance an act of expropriation. On 28th July l948, the Ministry of Finance in Weimar requested an examination whether:-
"1. The Foundation of the Duke of Saxe-Coburg-Gotha’s family;
2. The Duke of Saxe-Coburg-Gotha’s Foundation for Art and Science are still existent and to be considered valid entities" A file memorandum from the Ministry for Public Education dated 21 March l949 said:-
"Nothing has come to the attention of the Ministry of Public Education concerning a dissolution of the two Foundations as legal persons under private law by the Ministry of Justice under paragraph 87 (mistranscription in translation) of the Civil Code, due to their inability to fulfil the Foundation purpose. As a matter of fact, the Foundation’s purpose can still be carried out in relation to both foundations. ...(the memorandum then refers to expropriation of private assets in December l948).
The memorandum concludes in a handwritten note:-
"Also to the Arts Department with a request for information whether these two Foundations are to become state property". On 19 August l949, Dr Thiemann from the Ministry of Education wrote to the Ministry of Finance:-
"As there are no moneys available, and without touching on the valuable items in the Collection, not even the salaries of the Foundation employees can be paid, it will be correct to also dissolve this Foundation as per paragraph 87 of Civil Code. As the Foundation Statutes do not contain guidelines as to what is to be done with the assets in such a case, the Land of Thüringia will become the owner as per paragraph 14 of the ... (Regulation 16.5.1923)" The letter continues:-
"The Land of Thüringia would also need to examine the question which of the former Foundation employees could be re-deployed in the State Museum and the State Library." By letter dated 9 December l949 from the Ministry of Public Education to the Ministry of the Interior, Dr Thiemann wrote:-
"In case of dissolution of the Art Foundation under paragraph 87 of the Civil Code, the Foundation assets would - as per paragraph 14 of the Thüringian Order of Execution of Civil Code of 16 May l923 - transfer to the Land of Thüringia, because the Foundation Statutes do not nominate who should receive the assets upon dissolution.
In addition, we refer to our letter of 19.8.l949 whereby the legal situation of the Art Foundation is made perfectly clear." Whilst I do not accept Dr Thiemann’s claim to clarity, in my judgment this correspondence does not establish that the act of dissolution was an act merely concerned to ensure the transfer of the assets of the Art Foundation to the Land. In my judgment, they support the conclusion that the Land was of the opinion that the Foundation was no longer able to fulfil its purposes and, accordingly, should be dissolved under Article 87 of the BGB. This had the effect of passing the assets of the Art Foundation to the Land, but in my judgment that effect was not the intention lying behind the act of dissolution. Dr Thiemann’s statement that the Foundation Statutes did not nominate the beneficiary (letter 9 December l949) was correct. It is apparent that he was unaware of the amendment of l941. This was not surprising but, in my judgment, it does not reveal an intention to disregard the wishes of the Board. It merely reflects the reality that there was no Board of Directors in Gotha. The fact that the Board of Directors had moved from Gotha to Coburg in West Germany leads to Cobert’s next submission relating to the seat of the Foundation.
Professor Brunner was also of the opinion that the purported dissolution of the Foundation by the Minister of Justice of the Land Thürigia was ineffective, because the Land had no jurisdiction to do so. He said that its jurisdiction depended upon the location of the seat of the Foundation. By 1950 he says that the actual management and seat could only have been in Coburg. His reasoning depends upon the facts relating to management of the Art Foundation in the late 1940s and upon his interpretation of Article 80 of the BGB.
A report from the Ministry of Finance of the Land Thüringia complained that records of the Art Foundation’s assets were held in Coburg and that both the Family and Art Foundations were managed in Coburg and refused to hand over documents. (This document was not translated). It is apparent from a letter from Oberlandesgericht Bamberg (in West Germany) to the Oberlandesgericht Erfurt in Thüringia dated 16 March 1950 that the Oberlandesgericht Bamberg was prepared to take over supervision of the Foundation. By a decision of the Oberlandesgericht Bamberg dated 30 June 1951 it was recorded that, in relation to the Family Foundation the supervisory authority formerly exercised by the Oberlandesgericht Gera (in Thüringia) had been moved by the Board of Directors from Gotha to Coburg in accordance with the Foundation Statutes. By a decree of 7 December 1960 the court in Bamberg stated that the Art Foundation should not be left without supervisory authority and recorded that:-
"As the Family Foundation as well as the Art Foundation must not be left without a supervisory authority, and the Administrative Seat for both Foundations is at Coburg, the Bamberg Court of Appeals entailed estate senate will, effective from 1.1.1961, assume supervisory authority also of the Art Foundation". This was recalled in a letter dated 5 February 1968.
The formal decision of the Oberlandesgericht Bamberg recording relocation of the Art Foundation’s seat was recorded by a decision of the Oberlandesgericht Bamberg on 30 March 1976.
In the light of the evidence that the management of both Foundations was being carried out in Coburg from the 1940s onwards Professor Brunner’s view was that the seat of the Foundation was in Coburg at the time of the purported dissolution and accordingly the Land Thüringia had no authority to dissolve the Art Foundation.
I do not agree that the Land Thüringia had no authority to dissolve the Art Foundation. It is true that it would only have authority while the seat of the Art Foundation remained within Thüringia. But in my judgment, whatever the reality as to the actual management of the Foundation, its seat, under German law, by virtue of Article 80 of BGB remained in Thüringia. By Article 80:-
"The seat of the Foundation is deemed, unless otherwise provided, to be the place where its management is carried on." I accept Professor Brunner’s evidence that, in reality, management of the Art Foundation was carried out in Coburg. It could hardly be otherwise since the Art Foundation itself had no control over its property insofar as that property was situated in Thüringia. But I accept Professor Werner’s evidence that the seat of the Foundation remained, as a matter of German law, in Thüringia and that that seat was not changed until 30 March 1976. Pursuant to Article 80 of the BGB the place of the Foundation’s management was not its seat because the Statutes otherwise provided. In those circumstances the competent authority, namely the Land Thüringia, did have power to dissolve the Art Foundation.
The Federal Republic of Germany contend that once it is established that the seat of the Foundation was in Gotha and the competent authority was the Ministry of Justice of Thüringia, then property passed to the Land Thüringia by universal succession. The meaning of universal succession, foreign to English law, was explained by Lord Keith of Avonholm in National Bank of Greece and Athens S.A v. Metliss [1958] A.C. 509. He cites one passage from Stair:-
"Heirs in law are called universal successors quia succedunt in universum jus quod defunctus habuit, they do wholly represent the defunct, and are as one person with him, and so they do both succeed to him active, in all the rights belonging to him, and passive in all the obligations and debts due by him. .... the extinction of a corporation under statute or decree and the passing of all its rights and liabilities to a successor exhibits, in my view, all the features of a universal succession." (530-531) The importance of this contention is that, if there was universal succession, the property of the Art Foundation passed to the Land even if that property, including the painting was situated within the Soviet Union.
Cobert contend, on the basis of Professor Brunner’s evidence, that the doctrine of universal succession cannot apply because at the time the Art Foundation was in fact being managed in West Germany in Coburg. It cannot be said that the act of dissolution had any effect on the Art Foundation in Coburg or works of art under its effective control in West Germany at that time. Mr Brindle QC says that there is no room for the application of universal succession in relation to the Art Foundation once it is accepted that the dissolution did not have the effect of transferring title to works of art in West Germany to the Land Thüringia in East Germany. He submits that either there is universal succession in which event title to all the property passes to the successor wherever it is situated or there is expropriation which will only have effect in relation to assets within the territorial jurisdiction of the expropriating authority.
I do not accept the evidence of Professor Brunner on this point. His proposition that the dissolution did not have extra-territorial effect depended firstly on his view that because the dissolution was an act, in substance, of expropriation it had, like expropriation, no extra-territorial effect. Secondly his views were based on what he described as "German practice concerning the property in Bavaria". The dissolution had no effect on property in Bavaria, and because there was no reason to distinguish between assets in Bavaria and assets in the Soviet Union, it had no effect upon assets within the Soviet Union.
I have already considered whether the dissolution amounted to an act of expropriation. In my judgment it did not and its effect is not therefore to be limited to the territorial jurisdiction of the dissolving authority as it would have to be if that dissolving authority must be regarded as an expropriating authority. As to his second ground, it seems to me that the reason why the dissolution had no effect upon title to the assets in West Germany is not because the doctrine of universal succession did not apply but because West Germany did not recognise the extra-territorial effect of dissolution within East Germany in relation to assets in West Germany. It was the very problem of the effect of dissolution on assets in both parts of a divided Germany which led to the passing in West Germany of the Law for the Supplementation of the Law for the Amendment of Provisions concerning Entailed Estates and Foundations dated 3 August 1967. The problem is familiar to the courts of this country because of the Carl Zeiss Stiftung litigation. (None of the authorities in relation to that litigation were cited to me, but Buckley J.’s review of the history of that action in Carl Zeiss Stiftung v. Rayner & Keeler (No.3) [l979] Ch.506 at 528 to 536 has a certain resonance in this action).
Article 1 of the Act of 3 August l967 amends paragraph 2a of the previous Act dated 28 December 1950 as follows:-
"If the Civil Law Foundation formed on the basis of German legal provisions had its seat on 8 May 1945 outside the territory over which this law has validity (in other words outside West Germany) and if it had assets within the territory of validity of this Act (West Germany) a duly competent superior state authority of the land in which the assets are located can exercise the supervisory function. It can hereby take all decisions which it regards as necessary in order to keep the Foundation alive or continue. In particular it may move the seat of the Foundation without being bound by provisions of the Statutes. The superior state authority may transfer the exercise of its competence to another authority." The law of 1967 was necessary because West Germany did not recognise acts relating to a Foundation in East Germany or that any of those acts had any effect on assets of that Foundation in West Germany The reason why the dissolution of the Art Foundation in East Germany had no effect on the assets in West Germany is not because the doctrine of universal succession did not apply but because West Germany did not recognise the dissolution in East Germany and consequently did not recognise its effect.
For the reasons I have given I am satisfied:-
2. that the Ministry of Justice of Thüringia was the competent authority with power to dissolve the Art Foundation pursuant to Article 87 of the BGB;
3. that the dissolution was not an act of expropriation;
4. that by universal succession, title to the property of the Art Foundation, save insofar as that property was in West Germany, which did not recognise the dissolution, passed to the Land Thüringia. In the light of those conclusions I must now turn to the question as to whether an English Court recognises the Plaintiffs’ title either in relation to expropriation or in relation to dissolution of the Art Foundation.
If, under German law, title to the painting passed to the Federal Republic of Germany, the question arises whether an English court should recognise or enforce that title. Cobert, firstly, relies upon the principle that English Courts will not recognise a governmental act affecting private property rights when the property is situated outside the territory of that government. (Rule 122 in Dicey & Morris, q.v.supra). Secondly, Cobert invokes the principle that English courts will not entertain an action to enforce the penal, revenue or other public laws of a foreign state. (Rule 3 in Dicey & Morris).
These contentions have no bearing on my conclusion that title passed to the Land Thüringia (and thence to the Federal Republic of Germany ) by the expropriatory Law of 9 October 1945 and that the expropriation of the art collection was not repealed by the Law of 4 December 1945. That expropriation was effective and will be recognised by our courts because, at that time, on my findings of fact, the painting was within the territory over which the Soviet Military Administration had jurisdiction (see Princess Paley Olga v. Weisz [1929] 1 KB 718 at 725) and was in the possession of the trustee. The Federal Government of Germany is merely seeking to protect rights of property which had vested prior to this action and to enforce those rights under the general law of property. Professor Mann states in Further Studies in International Law (1990):
"It should also be accepted that if a State confiscates a chattel situated within its territories, but it does not obtain possession, it cannot recover it by action in a foreign country to which its original owner may have been able to take it." (356-7). These contentions are, however, of particular importance in relation to my alternative conclusion that on dissolution, in 1950, title to the painting passed to the German Democratic Republic nothwithstanding that the painting was in the Soviet Union.
The principle, on which Cobert relies, is summarised as Rule 122 in Dicey & Morris:-
"A governmental act affecting any private proprietary right in any movable or immovable thing will be recognised as valid and effective in England if the act was valid and effective by the law of the country where the thing was situated (lex situs) at the moment when the act takes effect, and not otherwise." It is important to emphasise that the submission of Cobert is wider than its earlier submission, in relation to German law, that the dissolution was in substance an expropriation. The act of dissolution of the Art Foundation was, it is said, a governmental act which affected private property rights. In those circumstances the effect of the dissolution namely the transfer of the title to the painting, from the Art Foundation to the German Democratic Republic will not be recognised by the English Court.
The issue turns on the question whether the pronouncement of dissolution by the Minister of Justice of the Land Thüringen was in substance a pronouncement relating to the status of the Art Foundation or was in substance a governmental act transferring property rights to the Land.
It is plain that, in order to make the distinction, I must consider the substance of the action of the Minister of Justice and not merely have regard to its form (see Diplock J in Adams v. National Bank of Greece and Athens S.A. ([1958] 2 QB 59 at 75 and 77). In Studies in International Law (Oxford 1973) Professor Mann writes:-
"It is equally certain that in these matters the court will not allow itself to be misled by appearances: on the contrary, it will investigate whether what the plaintiff asserts is in substance a prerogative right the direct or indirect enforcement of which is being sought. (page 502)" Governmental acts which transfer property rights, fall within that class of case, which Nourse J, in Williams & Humbert Ltd v. W & H Trade Marks(Jersey) Ltd [1986] AC 369 at 378-379, described as those which English courts will not enforce on grounds of public policy ( Class II laws). They are those :-
"whose validity and effect within the territory of the foreign state are recognised but which will not be directly or indirectly enforced in England. This can now be seen to be an application of the wider rule that English law will not enforce foreign laws which purport to have extra-territorial effect :see
Bank Voor Handel En Scheepvaart N.V. v. Slatford [1953] 1 QB 248" (379E). In that case, Devlin J. held that the decree of a foreign government would not be effective to transfer property situated in this country whether or not the law was confiscatory or penal (see page 263). In the House of Lords in Williams & Humbert (q.v. supra) Lord Templeman stated the principle as:-
"The public law of a sovereign state cannot change the title to property which never comes within the jurisdiction of that state." (431G) Such public laws are to be contrasted with those acts which, in substance, are merely concerned with the status of a corporation or foundation. Such acts fall within the principle described as Rule 155 :
"The existence or dissolution of a foreign corporation duly created or dissolved under the law of a foreign country is recognised in England." The contrast may be made between Adams (q.v.supra) and The National Bank of Greece and Athens S.A v. Metliss [1958] AC 509. Metliss affords an example of the English court recognising that a foreign decree was an act relating to the status of a corporation and recognising, accordingly, the consequences of that status. It concerned a decree of 1953 whereby two banks were amalgamated into a third. The effect of the amalgamation was to put the new bank in exactly the same position as the former bank before amalgamation. Since English law recognised the status of the new bank so also it recognised the consequences of its status, namely the assumption of the former bank’s liabilities (see Viscount Simonds at 525 and Lord Tucker at 529).
In Adams (q.v.supra) the Greek Government, by legislative decree of 1956, with retrospective effect, sought to absolve the defendant bank from the obligations of the original guarantor bank in respect of bonds. Diplock J held that the law of 1956 was not a law of succession or a law relating to capacity or status but in substance discharged liabilities and altered rights which had vested in English law. Under English rules of private international law that decree was not effective to discharge the liability of the bank as guarantors under the bonds.
In my judgment the Federal Republic of Germany is correct in its contention that the pronouncement by the Ministry of Justice of the dissolution of the Art Foundation was merely a pronouncement which concerned the status of the Foundation. It was a decision made because:-
"The fulfilment of the object of the Foundation has become impossible" (pursuant to Article 87 of the BGB.) In those circumstances the dissolution should be recognised by this court pursuant to Rule 155 and its consequences ought to be recognised. Those consequences included the transfer of the property of the Art Foundation, pursuant to paragraph 14 of the Land Thüringen Implementation Regulation of 16 May 1923. In my judgment the act of dissolving the Art Foundation was not an act done under that which Lord Templeman describes as "the public law of a sovereign state" or that which is described by Professor Mann as an exercise of a prerogative right or analogous to a foreign decree transferring property. It was, in my judgment, an act concerned solely with the status of the Art Foundation. The Art Foundation was dissolved in accordance with the German Civil Code. The Art Foundation was duly dissolved under the law of its place of creation. English law should, therefore, recognise the effects, under that law, of the dissolution.
Cobert contend that even if the act of dissolution fell outwith Rule 122 nevertheless the action in this case is the direct or indirect enforcement of a public law of a foreign state. Rule 3 in Dicey & Morris (page 97) provides:-
"English courts have no jurisdiction to entertain an action:
(1) for the enforcement, either directly or indirectly, of a penal revenue or other public law of a foreign State; or
(2) founded upon an act of state." The rationale of the Rule is that to enforce a claim based upon a penal, revenue or other public law of a foreign state is to permit an assertion of sovereign authority by one state within the territory of another.
Mr Brindle QC contends that the claim, insofar as it relies upon title derived from the dissolution decree of 1950, falls foul of Rule 3. Even though the law is not penal or a revenue law, it is a public law of a foreign state. It will not be enforced in relation to property that was not within the territory of the Land at the time of dissolution. In support of the proposition that there is a third category of laws, other than penal and revenue laws, which will not be enforced by an English court. Mr Brindle QC relies upon the judgment of Lord Denning MR in AG of New Zealand v. Ortiz [1984] 1AC 20 to 21, a reference to Rule 3 by Lord Mackay in Williams & Humbert at 437C and in particular the decision of the Court of Appeal in United States v. Inkley [1989] QB 255 at 264 to 265. Whilst there remains some doubt as to whether a residual category of public law exists (see Dicey & Morris page 105), in this case I do not think it matters. It is clear that the touchstone of the third category is an act done by a state by virtue of its sovereign authority. (see Lord Denning in AG of New Zealand v. Ortiz at 21A). Acts which do not amount to an exercise of sovereign authority outside that authority’s own territorial limits fall outwith Rule 3. Even if one recognises a third catagory of public law, in addition to penal and revenue laws, it must, at least be eiusdem generis to those laws. It must be an act de jure imperii and not de jure gestionis.
For the reasons I have already given, the act of dissolution by the Ministry of Justice was an act concerned solely with the continuing existence of the Foundation. The decision to dissolve was dictated solely by the condition of the Foundation. It was not an exercise of sovereign authority. Thus, to bring an action which seeks to protect rights which trace their origin to the dissolution is not an attempt to exercise sovereign authority in this country. In my judgment English courts can and should recognise a title derived from the dissolution of 1950 and enforce an action which seeks to protect those rights.
The Federal German Republic’s contention that the painting must have entered the German Democratic Republic in 1987, on its way to West Berlin, led to a spirited argument as to whether that itself had in law the effect of perfecting an inchoate expropriation. Sadly, it is unnecessary to resolve the question whether the fact that the painting may have passed over or through the territory of the German Democratic Republic had that legal effect. No such fact has been established. There is no evidence as to how the painting came into West Berlin. In those circumstances there is no factual basis upon which to found a conclusion, if such a conclusion could be reached, that as a matter of law title was thereby perfected.
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