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The Foreign Sovereign Immunities Act bars a lawsuit in New York against the Free State of Bavaria for the recovery of a Pablo Picasso painting that was allegedly part of a forced transfer by the Nazi regime in the 1930s, a federal judge has ruled.

Southern District Judge Jed Rakoff (See Profile) said the sale of Picasso’s “Madame Soler” took place in Europe, not the United States, so none of the “commercial activity” exceptions to sovereign immunity under the act apply in Schoeps v. Free State of Bavaria, 13 Civ. 2048.

“The blot on Bavaria’s title to Madame Soler, if there is one, is entirely based on what occurred in Germany in 1934,” Rakoff said.

The lawsuit was brought by the heirs of the late Jewish banker Paul von Mendelssohn-Bartholdy, who claim that, in 1934, after almost two years of “intensifying Nazi persecution that had devastated him financially, professional and socially,” von Mendelssohn-Bartholdy was made to consign the painting to the Berlin art dealer, Justin Thannhauser, in what the heirs said was a “paradigmatic forced transfer.”

In the spring of 1964, Thannhauser, who had moved to New York, met at his apartment Halldor Soehner, a senior curator and soon-to-be director general of the State Paintings Collections of the Bavarian State Ministry for Education and Cultural Affairs. The purpose of Soehner’s trip was to study modern methods of museum organization, but the plaintiffs alleged that he saw “Madame Soler” at the Thannhauser apartment and the ground was laid for a sale.

In August 1964, Soehner, now director general, traveled to St. Jean, Cap Ferrat, France. On Aug.3, Thannhauser dictated on the letterhead of the Hotel Intercontinental Geneve in St. Jean a confirmation that he was selling “Madame Soler” to the Bavarian State Paintings Collection for 1,775,000 Swiss francs, with the sale to be completed in 1965.

The plaintiff said the equivalent in U.S. dollars in 1964 was $285,700. They estimate in their complaint that the work is now worth approximately $100 million.

The plaintiff heirs agreed before Rakoff that his jurisdiction over the case could not be premised on the parties reaching a binding agreement on the sale at Thannhauser’s apartment in New York in 1964.

“The court further determines that Soehner took no concrete action toward the purchase of Madame Soler until after he returned to Germany and took office as Director General in July of 1964,” Rakoff said.

He inferred that Thannhauser had the letter agreement signed in Europe to avoid paying taxes in the United States. Based on his findings, Rakoff concluded that there was no subject matter jurisdiction over the State of Bavaria because none of the three exceptions to sovereign immunity under the act, 28 U.S.C. §1605(a)(2) were present.

Under that section, jurisdiction over a foreign state can lie where (1) the claim is “based upon” a “commercial activity carried on in the United States by a foreign state;” (2) the claim is “based upon” an “act performed in the United States in connection with a commercial activity of the foreign state elsewhere;” or (3) where “an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere causes a direct effect in the United States.”

Rakoff held an evidentiary hearing on Feb. 28 and March 18 and his conclusion was that, “In no real sense is this suit even ‘based upon’ Bavaria’s acquisition of Madame Soler in 1964-65, let alone activity in the United States.”

“The gravamen of this action is that title to Madame Soler never rightfully passed to Thannhauser in Germany because ‘Mendelssohn-Bartholdy consigned the Painting (to Thannhauser) in 1934 only after nearly two years of intensifying Nazi persecution,’” he said. “Thus, if this action were to ever reach the merits, the focus would be almost exclusively on the circumstances of Mendelssohn-Bartholdy’s original sale to Thannhauser in Europe in the 1930s.”

“And even if, contrary to the evidence, a bargain for Madame Soler had been vetted at the initial New York meeting, an individual preliminary meeting cannot and does not by itself constitute commercial activity” that amounts to “substantial conduct with the United States” under the act, he said.

The plaintiffs also tried to qualify for jurisdiction under the third prong of §1065(a)(2), arguing a series of “direct effects” on the United States, including “the disastrous effect of Bavaria’s commercial misconduct on the policy-sensitive N.Y. art market,” and the alleged criminal conspiracy to evade taxes in the U.S.

“This is balderdash,” Rakoff said, for even as the Second Circuit has held that there is no requirement that the “direct effects” be substantial, “neither the alleged impact on the art market nor the alleged tax evasion are direct effects at all.”

Andreas Frischknecht and James Hosking, partners at Chaffetz Lindsey and associate Andrew Poplinger, represented the Free State of Bavaria.

“We’re very pleased with the court’s ruling,” Frischknecht said Monday. “The Free State of Bavaria always believed that jurisdiction was lacking under the Foreign Sovereign Immunities Act, and the court has now found that jurisdiction is lacking.”

John Byrne and Thomas Hamilton, partners in Byrne Goldenberg & Hamilton in Washington, D.C. for the plaintiff heirs. Byrne declined comment.