Rethinking the laws of good faith purchase

Columbia Law Review

Volumn 111, Issue 6, 2011, Pages 1332-1384

  Schwartz, Alan ^a   Scott, Robert E ^b  

^a YALE SCHOOL OF MANAGEMENT   (United States)

^b Columbia University ^*  (United States)

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EID: 80054906487     PISSN: 00101958     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (237)

1. The facts are reported in DeWeerth v. Baldinger, 836 F.2d 103, 104-06 (2d Cir. 1987). The plaintiff sued within the three-year New York statute of limitations, which runs from the time the owner demands the good's return and the purchaser refuses. Id. At 106-107.
2. Id. at 107-08. The "theft" rule is an application of the fundamental common law principle that one cannot convey greater rights in property than one has. It applies to sales transactions through U.C.C. § 1-103 (2011). The rights of good faith purchasers when the goods have been voluntarily transferred to a miscreant are embodied in subsections (1) and (2) of U.C.C. § 2-403.
3. Clayton P. Gillette, Robert E. Scott & Alan Schwartz, Payment Systems and Credit Instruments 44-45 (2d ed. 2007).
4. Alan Schwartz & Robert E. Scott, Commercial Transactions: Principles and Policies 491-526 (2d ed. 1991) [hereinafter Schwartz & Scott, Commercial Transactions].
5. DeWeerth, 836 F.2d at 110.
6. The trial court granted summary judgment for the purchaser, following the DeWeerth precedent. The Appellate Division reversed on the ground that, under New York's demand and refusal rule, no due diligence was imposed on the owner to search for stolen goods. Solomon R. Guggenheim Found. v. Lubell, 550 N.Y.S.2d 618, 621-22 (App. Div. 1990), aff'd 569 N.E.2d 426 (N.Y. 1991). The New York Appellate Division did recognize the potential right of the buyer to use the lack of due diligence by the owner to support a laches defense. Id. at 622. Laches would lie, however, only if "it [was] clear that a plaintiff unreasonably delayed in initiating an action and a defendant was prejudiced by the delay." Robins Island Pres. Fund, Inc. v. Southold Dev. Corp., 959 F.2d 409, 423 (2d Cir. 1992).
7. Guggenheim Found., 569 N.E.2d at 428. For an excellent discussion of the case.
8. Ashton Hawkins, Richard A. Rothman & David B. Goldstein, A Tale of Two Innocents: Creating an Equitable Balance Between the Rights of Former Owners and Good Faith Purchasers of Stolen Art, 64 Fordham L. Rev. 49, 55-69 (1995).
9. 569 N.E.2d at 428-29.
10. The owner's right to recover stolen goods in jurisdictions, such as the United States, that follow the theft rule is contingent on the owner bringing suit within the statute of limitations for an action in replevin. See infra text accompanying notes 17-20 for discussion of the wide variety in limitation periods.
11. See infra note 16.
12. Art theft is the third most profitable worldwide crime behind drug smuggling and illegal arms trading. William Tuohy, Picture This: Art Thievery Is Thriving, L.A. Times, Aug. 16, 1994, at H1. The market for stolen artwork and looted artifacts reaches an estimated two billion dollars annually.
13. David Holmstrom, Stolen-Art Market Is a Big Business at $2 Billion a Year, Christian Sci. Monitor, Aug. 11, 1994, at 1.
14. Alan Schwartz & Robert E. Scott, Sales Law and the Contracting Process 508-512 (2d ed. 1991)
15. [hereinafter Schwartz & Scott, Sales Law] (criticizing American theft rule on efficiency grounds).
16. Menachem Mautner, "The Eternal Triangles of the Law": Toward a Theory of Priorities in Conflicts Involving Remote Parties, 90 Mich. L. Rev. 95, 151-152 (1991).
17. Barak Medina, Augmenting the Value of Ownership by Protecting It Only Partially: The "Market-Overt" Rule Revisited, 19 J.L. Econ. & Org. 343 (2003)
18. (arguing for relative efficiency of "Market-Overt" rule in protecting rights of good faith purchasers of stolen goods).
19. Harold R. Weinberg, Sales Law, Economics, and the Negotiability of Goods, 9 J. Legal Stud. 569 (1980)
20. (arguing for efficiency of American "theft rule" protecting rights of original owners of stolen goods in contests with good faith purchasers).
21. We review the laws of leading jurisdictions in Part V.
22. See infra Appendix (canvassing good faith purchase laws of several countries, each of which adopts nemo dat principle).
23. U.C.C. § 2-403(1) (2011) provides: A person with voidable title has power to transfer a good title to a good faith purchaser for value. When goods have been delivered under a transaction of purchase the purchaser has such power even though (a) the transferor was deceived as to the identity of the purchaser, or (b) the delivery was in exchange for a check which is later dishonored, or (c) it was agreed that the transaction was to be a "cash sale", or (d) the delivery was procured through fraud punishable as larcenous under the criminal law.
24. U.C.C. § 2-403(2) provides: "Any entrusting of possession of goods to a merchant that deals in goods of that kind gives him power to transfer all rights of the entruster to a buyer in ordinary course of business." U.C.C. § 1-201(9) defines "buyer in ordinary course of business" as "a person that buys in good faith, without knowledge that the sale violates the rights of another person in the goods, and in the ordinary course from a person, other than a pawnbroker, in the business of selling goods of that kind."
25. Jurisdictions that have some version of the Market Overt rule include Brazil, Canada (Québec), China, France, Germany, Israel, Italy, Japan, Mexico, and Spain. See, e.g., Código Civil [C.C.] art. 1268 (Braz.) (Leslie Rose trans., Renovar 2008).
26. Civil Code of Québec [C.C.Q.] arts. 1713-14 (Can.) (Jean-Maurice Brisson & Nicholas Kasirer trans., Éditions Yvon Blais 2002).
27. Xianxing Fagui Huibian [Property Law] art. 107 (China) (trans. on file with the Columbia Law Review); Code civil [C. civ.] art. 2277 (Fr.) (John H. Crabb trans., Fred B. Rothman & Co. 1995).
28. Bürgerliches Gesetzbuch [BGB] [Civil Code] § 935 (Ger.) (Langenscheidt Translation Serv. trans., Fed. Ministry of Justice 2010).
29. Sale Law, 5728-1968, § 34 (Isr.), translated in 1 Business Laws of Israel 1.5-79, 1.5-85 (Louis Garb et al. eds. & trans., 2006).
30. Codice civile [C.c.] art. 1153 (It.) (Mario Beltramo et al. trans., Oceana 2010); Minpō [Minpō] [Civ. C.] art. 194 (Japan) (Ministry of Justice trans., 2009).
31. Código Civil Federal [CC] art. 799 (Mex.) (Julio Romanach, Jr. trans., Lawrence Publ'g Co. 2002).
32. Código Civil [C.C.] art. 464 (Spain) (Julio Romanach, Jr. trans., Lawrence Publ'g Co. 1994).
33. Sources cited infra in Appendix. The rule traces its lineage to the Code of Hammurabi, the Ordinances of Manu (India), early Saxon law, and early Hebraic laws.
34. Daniel E. Murray, Sale in Market Overt, 9 Int'l & Comp. L.Q. 24, 29-32 (1960).
35. In order to qualify as a Market Overt, the merchant-dealer must display the goods openly for sale. In the true Market Overt, the good faith buyer who purchases in a qualifying market gets good title to the purchased goods. See, e.g., Sale of Goods Act, 1979, c. 54, § 22, (Eng.); C. civ. art. 2277 (Fr.).
36. BGB § 935 (Ger.).
37. Sale Law, 5728-1968, § 34 (Isr.), translated in 1 Business Laws of Israel, supra note 15, at 1.5-79, 1.5-85.
38. C.c. art. 1153 (It.). In many civil law jurisdictions, as well as in regimes ranging from early India to Japan, the original owner is entitled to the return of his goods, but only if he pays the buyer the purchase price the buyer paid to acquire them. See, e.g., Property Law art. 107 (China); C. civ. art. 2277 (Fr.); Civ. C. art. 194 (Japan).
39. CC art. 799 (Mex.).
40. C.C. art. 464 (Spain). We criticize this version of the theft rule at infra text accompanying notes 133-135. A number of jurisdictions-Canada, England today, India, and Russia-reject the Market Overt rule and follow the American rule allowing the original owner to recover stolen goods from the good faith purchaser. See infra Appendix. The American rejection of the Market Overt rule evolved as an artifact of the revolutionary period and path dependence largely explains why it remains to this day. Early U.S. courts declined to import the English rule of Market Overt in the period just after the Constitution was ratified because, as Chancellor Kent stated in an early New York case, "[There is] no usage or regulation within this state, no Saxon institution of markets-overt, which controls or interferes with the application of the common law." Wheelwright v. Depeyster, 1 Johns. 471, 480 (N.Y. 1806). The common law rule in England permitted the good faith buyer to prevail over the original owner if he bought in any "open" market (that is, a market where the goods were openly displayed to customers) in the City of London or in any of the country fairs that were regularly held.
41. Peter M. Smith, Valediction to Market Overt, 41 Am. J. Legal Hist. 225, 226-230, 242-244 (1997).
42. The English rule continued unchanged for several hundred years until repealed by statute in 1994. Sale of Goods (Amendment) Act, 1994, c. 32, § 1 (Eng.). The repeal was not prompted by a principled preference for vindicating the original owner's rights, but because the British courts apparently encountered line-drawing problems. Smith, supra, at 248-249.
43. Under New York law, the statute of limitations for a suit in replevin is three years. N.Y. C.P.L.R. § 214(3) (McKinney 1990). The demand and refusal rule, under which the statute of limitations is not triggered until a demand is made and return refused, was adopted by the New York Court of Appeals in Gillet v. Roberts, 57 N.Y. 28, 30 (1874). See also Menzel v. List, 267 N.Y.S.2d 804, 809 (Sup. Ct. 1966) ("[T]he cause of action against a person who lawfully comes by a chattel arises, not upon the stealing or the taking, but upon the defendant's refusal to convey the chattel upon demand."). The rule has been justified on the grounds that it protects the purchaser who, as a result of the rule, is not liable in conversion until a demand is made.
44. Andrea E. Hayworth, Note, Stolen Artwork: Deciding Ownership Is No Pretty Picture, 43 Duke L.J. 337, 361 (1993)
45. "This requirement makes the innocent purchaser aware that a claim against the property is pending and offers an opportunity to return the property before being treated as a wrongdoer.". At least one foreign jurisdiction has adopted a similar statute of limitations. See Občanský zákoník [Civil Code] č. 102, 134/2001 Sb. (Czech) (Trade Links trans., 2002) (stipulating owner can assert property right against good faith purchaser for three years from when said right was asserted to good faith purchaser).
46. See, e.g., C. civ. art. 2276 (Fr.); Civ. C. art. 193 (Japan); Code Civil [CC] arts. 722, 728 (Switz.) (Rebecca Brunner-Peters et al. trans., Schulthess 2007).
47. See, e.g., S.F. Credit Clearing House v. Wells, 239 P. 319, 321 (Cal. 1925) (finding possession lacked continuity and openness, thereby precluding operation of adverse possession); Reynolds v. Bagwell, 198 P.2d 215, 216 (Okla. 1948) ("The statute of limitations as to personal property, though stolen, when held in good faith for value, open and notoriously, runs in favor of such adverse possession so as to bar a recovery by the true owner after the expiration of [the statutory period]." (quoting Shelby v. Sharner, 115 P. 785, 785 (Okla. 1911))). The adverse possession rule suffers from a verifiability problem: Proving open and notorious possession of personal property is more problematic than it is in the case of real property. For discussion of the adverse possession rule, see infra notes 104-105 and accompanying text.]
48. See, e.g., Autocephalous Greek-Orthodox Church of Cyprus v. Goldberg & Feldman Fine Arts, Inc., 717 F. Supp. 1374, 1391 (S.D. Ind. 1989) ("[T]he plaintiffs' cause of action did not accrue until they knew or were reasonably on notice of the identity of the possessor of the [stolen goods]."); O'Keeffe v. Snyder, 416 A.2d 862, 870 (N.J. 1980) (adopting discovery rule for action in replevin); see also Property Law art. 107 (China).
49. Grazhdanskii Kodeks Rossiiskoi Federatsii [GK RF] [Civil Code] arts. 196, 200, & 234 (Russ.) (William E. Butler trans., Wildy, Simmonds & Hill Publ'g 2010).
50. For examples of recent cases see infra notes 103, 139, 146.
51. See cases cited infra notes 141-146.
52. For an excellent discussion of the "chaos" that results from the interaction of disparate good faith purchase laws and neutral choice of law rules.
53. Patricia Youngblood Reyhan, A Chaotic Palette: Conflict of Laws in Litigation Between Original Owners and Good-Faith Purchasers of Stolen Art, 50 Duke L.J. 955 (2001).
54. A "thief" is either the person who actually steals goods, or is a voluntary transferee who wrongfully misappropriates the goods and sells them to a third party. As an example of this latter case, the transferee/thief acquires the goods in return for a check or a promise to pay cash later. Subsequently, the check is dishonored or the cash is not paid, and the thief sells the goods to a third party.
55. U.C.C. § 2-312 (2011). If sellers in the relevant trade disclaim this warranty, the demand curve will reflect the risk that buyers bear, so a seller cannot entirely escape the consequences of selling untitled goods.
56. Under property law principles, the original owner can maintain an action in conversion against any person, even an innocent third party, who takes possession of her goods without her permission. Carey v. Cyr, 113 A.2d 614, 616 (Me. 1955). Much prior analysis overlooks the possibility that owners can sue dealers for conversion. A notable exception is Hanoch Dagan, Takanat Ha-Sahuk Bituakh [The Market Overt as Insurance], in Mekhkarey Mishpat Likhvodo Shel Yehoshua Weisman [Essays in Honor of Joshua Weisman] 15-42 (S. Lerner & D. Lewinsohn-Zamir eds., 2002) (trans. on file with the Columbia Law Review).
57. We argue below, however, that dealer/buyers should face higher damages than ultimate purchasers. See infra text accompanying notes 72-77.
58. We define an "involuntary transfer" as the theft of goods from O, or a voluntary transfer from O after which the transferee sells the goods to another without O's authorization. See supra note 24.
59. In economics, difficulties of this kind are referred to as "double moral hazard" problems. For discussion of the problem of double moral hazard in the tort law context, see Steven Shavell, Foundations of Economic Analysis of Law 203-04 (2004) [hereinafter Shavell, Foundations] (explaining why neither negligence nor strict liability regimes induce parties to take optimal level of care).
60. Most jurisdictions that have adopted the theft rule also have the voidable title and entrustment rules as well, thus creating the dilemma for the buyer that is described in the text. See infra Appendix.
61. See infra notes 60-62, 67 and accompanying text.
62. Canada (Ontario), England, and India also apply two rules to the same goods. See infra Appendix. In these jurisdictions, the buyer wins if the goods were stolen but the owner's conduct was such as to estop her from asserting her title. The owner wins, however, if she was merely negligent. When an ultimate buyer purchases, he does not know how the original owner behaved.
63. In Part III.C, we discuss the cases that a negligence solution does not resolve: when O and B both are negligent or when neither is negligent. We argue there that owners should prevail when neither is negligent and buyers should prevail when both are negligent.
64. As we show infra in text accompanying notes 107-109, there is no need for courts to evaluate buyer behavior. Under our proposed reform, the buyer always loses to the owner who takes efficient precautions and always prevails over an owner who does not.
65. Negligence proxies can also be implemented as revisions to the statutes and civil codes that govern good faith purchase contests in other commercial jurisdictions. See infra Appendix.
66. U.C.C. §§ 3-404 to 406 (2011); see also infra text accompanying notes 90-94.
67. An example of a customary standard is the installation of a burglar alarm. We discuss these proxies infra in Part III.B.
68. Failure to make reasonable search efforts would include a failure to make a reasonable investigation of a voluntary transferee. This obligation is necessary when O would lose to a good faith purchaser and thus, we show, would search suboptimally.
69. Shavell, Foundations, supra note 29, at 285-87. A negligence standard in tort functions suboptimally because the expected liability of a potential injurer is not the damage he causes times the probability of harm, but rather the damages of litigious victims times the probability of their harm. The potential injurer takes suboptimal care because his expected liability is less than the actual harm he causes.
70. See infra text accompanying notes 76-77. Alternatives to tort fines include punitive damages or subsidizing litigation (by awarding attorneys' fees to successful plaintiffs). Tort fines are discussed in Shavell, Foundations, supra note 29, at 272-275.
71. See infra Part II.A.
72. Richard A. Posner, Economic Analysis of Law 31-33 (7th ed. 2007).
73. Frank I. Michelman, Ethics, Economics, and the Law of Property, in Nomos XXIV: Ethics, Economics, and the Law 3, 25 (J. Roland Pennock & John W. Chapman eds., 1982).
74. Posner, supra note 42, at 205. A more extensive discussion of this point.
75. Richard L. Hasen & Richard H. McAdams, The Surprisingly Complex Case Against Theft, 17 Int'l Rev. L. & Econ. 367, 370-374 (1997).
76. These authors argue that when a theft is for resale, which a large number are, the thief values the goods for their "exchange value": The price the thief can get for the goods in the market place. The owner values the goods in excess of their exchange value, else the owner would already have sold the goods. Thus, in the usual case the owner has a higher valuation than the thief.
77. We note here that the domain of this Essay is tangible goods; we do not consider the stealing or "appropriation" of the creative goods that are the subject of the patent and copyright laws. In those domains, the case against theft is more nuanced and complex.
78. Jonathan M. Barnett, What's So Bad About Stealing?, 4 J. Tort L., no. 1, 2011 at 1+7-11+13-17.
79. An owner may be thought to overinvest in protection if she chooses a pathological precaution, such as installing a spring gun on her property. The law specifically deters such behaviors. See, e.g., Katko v. Briney, 183 N.W.2d 657, 660-61 (Iowa 1971) (collecting cases finding liability when property owners injure tresspassers with spring guns).
80. See infra Part II.C.3.
81. Formally, the value of found goods is: = The term outside the braces is the probability that the goods are stolen times the probability that they are found. The first term in braces is the expected value of the goods if the owner repossesses them; the second term is the expected value of the price the buyer pays to keep them (when his value is higher). The a before the integral indexes the owner's bargaining power (0 < a < 1).
82. Technically, we assume that the marginal benefit of precaution and search is positive, starting at the zero level; that precaution and search costs are convex; and that it is suboptimal to protect or search infinitely. The assumption that the optimal level of precaution exceeds zero is explained below. See infra note 53. The assumption that the owner always searches is relaxed below. There seems no reason to believe, as a general matter, that v(t0) is higher or lower than v(t3). Some goods may fall in value due to later use or abuse. Other goods, such as art and jewelry, may increase in value. As a practical matter, owners only search for valuable goods, so the conflicts the law must resolve, and thus the domain of our analysis, concern valuable goods.
83. Recall that the probability that the owner finds stolen goods is x(z), so the probability that the goods remain hidden is 1-x(z).
84. Our model is similar to the model.
85. William Landes & Richard A. Posner, The Economics of Legal Disputes over the Ownership of Works of Art and Other Collectibles, in Economics of the Arts: Selected Essays 177, 185 (V.A. Ginsburgh & P.M. Menger eds., 1996).
86. Landes and Posner's excellent analysis of the art market omits dealers, and assumes that the owner can recover stolen art with certainty, that the owner and the buyer place the same value on stolen goods, that the buyer attempts to conceal his possession, and that parties function under some legal uncertainty. These assumptions are plausible for the art market but not generally, so we do not make them. For example, the buyer of a stolen Matisse may display it in a locked room, but the buyer of a stolen machine must openly use it. Also, because Landes and Posner focus on the art market, they do not derive generally applicable legal reforms nor do they make a comparative law analysis. A thoughtful paper by Omri Ben-Shahar also considers the incentives of owners and buyers.
87. Omri Ben-Shahar, Property Rights in Stolen Goods: An Economic Analysis (Univ. of Mich., John M. Olin Ctr. for Law & Econ. Working Paper No. 99-15, 1999).
88. Ben-Shahar stays largely within the property rights paradigm and omits dealers but he helpfully integrates the thief's incentives into the owner's problem. Doing this here would not change our policy proposals. Ben-Shahar also does not consider how courts could apply a negligence solution, nor does he make a comparative analysis.
89. The representation of the buyer's problem above is oversimplified. The buyer actually faces what is called an optimal stopping problem. He should incur inquiry costs in checking title until it is optimal for him to stop, which is when the probability that the seller's title is good is sufficiently high to make further inquiries not worth their cost, or when the probability that the seller's title is bad is sufficiently high to make further inquiry not cost-justified. The mathematical representation of optimal stopping problems is complex. The complexity is unnecessary for our purposes. In an optimal stopping model, the buyer will stop searching too soon because he discounts the productivity of search by the likelihood that the owner will not find him. The text represents the buyer's problem as choosing a level of inquiry into title because this yields the same result in a more intuitively obvious way.
90. t3.
91. 0). When the owner can recover stolen goods, she chooses a precaution level such that the bracketed term lies between zero and one, which is inefficient.
92. 0)). To be sure, delay does not necessarily reduce the value of discovery in all cases. For example, the owner, in pursuing an action in conversion against the buyer, may be able to recover the depreciated value of found goods.
93. U.C.C. § 2-403(1) (2011).
94. Id.
95. Even though the goods in this case are not "stolen" from the owner but rather are misappropriated, it is appropriate to designate this transferee as a "thief" because his acquisition of the goods is accomplished through "larceny by trick," and thus is a violation of the criminal law. Id. cmt. 2.
96. Atlas Auto Rental Corp. v. Weisberg, 281 N.Y.S.2d 400, 403-404 (1967).
97. vt)vr = 1, which reflects a suboptimal level of search.
98. Our assumption here accurately describes jurisdictions that adopt the Market Overt rule, which protects good faith purchasers from merchants.
99. U.C.C. § 1-201(20).
100. Id. cmt.
101. Id. § 2-403(2).
102. Id. §§ 1-201(9), 2-403(2).
103. See, e.g., Sale Law, 5728-1968, § 34 (Isr.), translated in 1 Business Laws of Israel, supra note 15, at 1.5-79, 1.5-85 (mandating that good faith purchaser of stolen goods from merchant-dealer who takes possession of goods prevails over rights of original owner).
104. See supra notes 55-62 and accompanying text (discussing inefficiencies of voidable title rule).
105. A sophisticated buyer may assign probabilities to the various legal possibilities and then choose an intermediate inquiry level. There is no reason to believe that the result would be more efficient than the result either rule alone induces.
106. See infra notes 70-72 and accompanying text. Formally, a negligence rule, if effective, changes the owner's maximization problem to the problem that Expression (1) solves rather than the problem that Expression (4) solves. That is, the owner is induced to take first-best precautions. The standard does not affect the problem that Expression (3) solves because the owner does not search for goods unless she loses them.
107. Under a comparative negligence rule, if both the injurer and the victim fail to take due care, each party bears a fraction of the accident losses. The fraction is based on comparing the degree to which each party's actual precautions departed from the optimal level. The incentive effects of a comparative negligence rule are discussed in Shavell, Foundations, supra note 29, at 187. As we note below, the current version of Article 3 of the U.C.C. adopts a comparative negligence rule in allocating responsibility between owners and good faith purchasers of forged or altered negotiable instruments. See U.C.C. §§ 3-404 to 3-406; infra note 92.
108. See supra Part II.B (modeling owner's precaution level).
109. See supra Proposition One. Note that the presence of owner's insurance should not negatively affect the incentives to search for stolen goods, as the insurer is subrogated to the owner's rights-the insurer, that is, has an absolute right to keep what it finds. Hence, the insurer would search efficiently so as to reduce losses from settling claims. On the other hand, a negligence rule will increase the insurer's incentives to monitor the actions of the insured and to use its expertise to propose precautions: More effective precautions by the owner reduce the insurer's risk exposure. Thus, by raising premiums or deductibles, or by requiring certain precautions (e.g., an alarm system attached to a valuable painting), insurers can induce conduct that the owner would not otherwise have taken.
110. Victor P. Goldberg, The Devil Made Me Do It: The Corporate Purchase of Insurance, 5 Rev. L. & Econ. 541, 544 (2009).
111. Here precaution entails optimally investigating a transferee.
112. For discussion of this underenforcement concern.
113. Steven Shavell, The Social Versus the Private Incentive to Bring Suit in a Costly Legal System, 11 J. Legal Stud. 333 (1982).
114. For discussion of both approaches.
115. Louis Kaplow, Private Versus Social Costs in Bringing Suit, 15 J. Legal Stud. 371 (1986).
116. Peter S. Menell, A Note on the Private Versus Social Incentives to Sue in a Costly Legal System, 12 J. Legal Stud. 41 (1983).
117. Susan Rose-Ackerman & Mark Geistfeld, The Divergence Between Social and Private Incentive to Sue: A Comment on Shavell, Menell, and Kaplow, 16 J. Legal Stud. 483 (1987).
118. Under a gross-up solution, let there be Q owners whose goods were stolen, and let q of them find the ultimate buyer. Then a buyer faces the probability q/Q = a of being dispossessed. A buyer who is found would have to pay vr/a as damages. This liability could be large because the probability of being found, a, is usually small.
119. The benefit of using civil fines to improve incentives was first proposed.
120. Michael Spence, Consumer Misperceptions, Product Failure and Producer Liability, 44 Rev. Econ. Stud. 561, 566-567 (1977).
121. The full fine should not be paid to the losing party because that would defeat the incentives the negligence solution creates. A small bounty is needed, however, to insure that a nontrivial fraction of losing parties report that their dealer sold untitled goods.
122. The difficulty of verifying compliance with broad negligence standards has been noted. See, e.g., Solomon R. Guggenheim Found. v. Lubell, 569 N.E.2d 426, 430 (N.Y. 1991) (criticizing proposal to impose due diligence obligation on owner because "the facts of this case reveal how difficult it would be to specify the type of conduct that would be required for a showing of reasonable diligence"). The court also stated that "it would be difficult, if not impossible, to craft a reasonable diligence requirement." Id. at 432. For discussion of due diligence, see Hawkins et al., supra note 5, at 81-83 (highlighting fact- intensive nature of due diligence inquiry); Ben-Shahar, supra note 50, at 15-21 (analyzing owner's incentives to take care under negligence regime).
123. Schwartz & Scott, Commercial Transactions, supra note 2, at 18-27.
124. Restatement (Second) of Contracts ch. 11, intro. note (1981).
125. The strong preference for strict liability in common law contract exists although contract doctrine appears in some areas to invite a negligence analysis. For example, if a promisor carelessly fails to take efficient precautions ex ante which results in breach ex post, the "willful breach doctrine" invites courts to increase damages to deter such inefficient behavior. Yet an analysis of decided cases shows that courts decline to employ the doctrine to deter an inefficient breach. Similarly, if the promisee fails to take efficient precautions prior to the breach that would reduce or eliminate losses, the mitigation principle invites courts to apply a "contributory negligence" bar to recovery. Yet courts adhere strictly to the rule that the promisee's mitigation responsibility is not triggered until the promisor breaches. For a discussion of plausible reasons why courts adhere to strict liability in these settings.
126. Robert E. Scott, In (Partial) Defense of Strict Liability in Contract, 107 Mich. L. Rev. 1381 (2009).
127. For discussion of rules versus standards in contracts.
128. Robert E. Scott & George G. Triantis, Anticipating Litigation in Contract Design, 115 Yale L.J. 814, 839-855 (2006).
129. For discussion of how negligence standards may yield unpredictable results.
130. Kenneth S. Abraham, The Trouble with Negligence, 54 Vand. L. Rev. 1187 (2001).
131. Scott & Triantis, supra note 82, at 836-839.
132. Id. To illustrate, assume parties wish to pair particular future contingencies with corresponding performance obligations, i.e., when X occurs, the promisor must pay $Y. The parties can define X in several ways. X may be a rule, which conditions on a relatively specific fact, such as the delivery of a widget with a specified weight. Here, parties delegate to the court only the determination of what evidence is sufficient to satisfy X. Alternatively, X may be a standard, such as the delivery of a widget in excellent condition. Here the court must determine not only what evidence is sufficient to establish the weight of the widget, but also the degree to which weight is relevant to the determination of whether the widget satisfies the standard. Id. at 826 ("Courts do not observe facts directly; rather, they make factual determinations by relying on proxies for the truth. The performance of a contractual obligation is proved or disproved by the presentation of evidence rather than by the court's direct observation.").
133. We use the term "proxy" in this Essay to describe what proceduralists refer to as the "operative facts" that are relevant to establishing compliance with rules or standards. A precise rule narrowly confines the content of the operative facts. Indeed, in the limiting case the rule directly specifies the evidentiary proxy. A vague standard defines a broader space within which a court can select the evidentiary proxy that best establishes compliance with the standard.
134. Justice Holmes famously predicted that repeated transactions would permit the evolution of negligence proxies: But supposing a state of facts often repeated in practice, is it to be imagined that the court is to go on leaving the standard to the jury forever? Is it not manifest, on the contrary, that if the jury is, on the whole, as fair a tribunal as it is represented to be, the lesson that can be got from that source will be learned?.
135. Oliver Wendell Holmes, The Common Law 98 (Mark DeWolfe Howe ed., 1963) (1881).
136. See, e.g., The T.J. Hooper, 60 F.2d 737, 739-40 (2d Cir. 1932) ("Indeed in most cases reasonable prudence is in fact common prudence.... Courts [however] must in the end say what is required."); Sinclair v. Block, 633 A.2d 1137, 1141-42 (Pa. 1993) ("The law provides that '[w]here competent medical authority is divided, a physician will not be held responsible if in the exercise of his judgment he followed a course of treatment advocated by a considerable number of recognized and respected professionals in his given area of expertise.'" (quoting Jones v. Chidester, 610 A.2d 964, 969 (Pa. 1992)) (alteration in original)); Abraham, supra note 83, at 1199 ("[D]esignating a practice as 'custom' tends to cut down the degree of rule-making discretion exercised by the finder of fact.").
137. Abraham, supra note 83, at 1201; see also Martin v. Herzog, 126 N.E. 814, 815 (N.Y. 1920) (holding unexcused violation of safety statute is "negligence in itself" rather than merely evidence of negligence).
138. In addition to the example of commercial paper, negligence principles have also been applied potentially to preclude the owner of real property from reclaiming mineral rights under a misappropriated deed that was transferred to a good faith purchaser. Hauck v. Crawford, 62 N.W.2d 92, 94 (S.D. 1953).
139. The nemo dat principle applies to negotiable instruments as well. Thus, as a general rule, neither a thief nor a good faith purchaser from the thief can acquire property rights superior to that of the original owner. Article 3 of the U.C.C. then provides several exceptions to the nemo dat principle. In addition to the familiar rule that a thief of bearer paper can transfer good title to a holder (U.C.C. § 3-201(b) (2011)), sections 3-404, 3-405, and 3-406 specify exceptions to the theft rule that apply to instruments that require an indorsement by the owner to transfer title. That these exceptions rely on negligence principles is perhaps less surprising once we recall that the principal drafter of Article 3 in the initial U.C.C. project was William Prosser. For discussion of the negligence rules in Article 3.
140. Clayton P. Gillette, Rules, Standards, and Precautions in Payment Systems, 82 Va. L. Rev. 181 (1996).
141. U.C.C. § 3-404(a), (d). The 1990 revisions to Article 3 of the U.C.C. adopted a comparative negligence rule in section 3-404(d) (as well as in sections 3-405(b) and 3- 406(b)) in lieu of the pure contributory negligence principles that applied under the pre- 1990 Code. While there are differences in terms of proportionate responsibility, the underlying incentive effects are similar.
142. U.C.C. § 3-405(b).
143. U.C.C. § 3-103(a)(9). See HSBC Bank USA v. F&M Bank N. Va., 246 F.3d 335, 337-39 (4th Cir. 2001) (observing that leaving open space on check such that it could be altered was not failure to exercise due care).
144. Bank of Tex. v. VR Elec., Inc., 276 S.W.3d 671, 682-83 (Tex. App. 2008) (holding bank's failure to maintain written or clear verbal policy regarding when checks should be manually examined constituted failure to observe prevailing industry standards).
145. Other examples of anonymous goods include electronic equipment that is untagged, chopped-up automobiles, melted silverware, and cut-up diamonds. Whether goods are anonymous or identifiable may depend on when they are taken. Thus, while an individual GPS may be anonymous, a carton of them would be identifiable if the merchant owner found the carton before it was broken up.
146. When x(z), the probability of recovering stolen goods, is zero, the owner solves the same maximization problem that the social planner solves, so she invests efficiently in precaution. Referring to Part II.C above, Expression (4) reduces to Expression (1).
147. Formally, when x(z) = 0, the left-hand side of Expression (5) becomes zero: The marginal return from buyer inquiry vanishes so the buyer will not incur costs to check title. Stepping outside the analysis, the purchaser may incur liability to public authorities if he violates criminal statutes against knowingly receiving stolen goods.
148. There are a number of proxies indicative of negligence in protecting artwork. These include factors that occur on an owner's premises, such as setting up a functioning alarm system, placing functioning security cameras in strategic locations, hiring guards, and placing glass protectors over paintings to preclude viewers from actually touching artwork in a museum. Proxies also include actions post-theft, such as reporting the loss to local police or domestic Interpol or customs officials, registering the stolen item with a country's customs office and with organizations such as the Art Loss Register, a group based in New York that tracks lost or stolen works of art and employs private investigators to track it. See, e.g., 11 from Egypt Ministry Sentenced for Negligence, N.Y. Times, Oct. 13, 2010, at C3 (describing how "[e]leven employees of Egypt's cultural ministry were sentenced to three years in prison for negligence that led to the theft of a van Gogh painting from a museum in Giza in August... [which had] only some working cameras and no working alarms").
149. Kristen Chick, The Thieves Had It Easy in Cairo Art Heist, Christian Sci. Monitor, Aug. 24, 2010, at 13-14.
150. Enumerating failures that led to negligence charges, including (1) "[n]one of the alarms meant to protect the artwork in the museum sounded," (2) "[o]nly seven of 43 security cameras were working," (3) paintings lacked glass protectants and hung easily within reach of viewers, and (4) "guards were scarce enough that the thieves were able to drag a couch underneath the painting to stand on while cutting the $55 million painting from its frame in broad daylight". Julian Radcliffe, founder of The Art Loss Register, which maintains a stolen art database, explained: "[P]roperly protecting artwork is no simple task. It requires costly technological safeguards, such as burglar alarms and camera surveillance, and guards in every room." Id.
151. Search Results for "Anti-Theft Tagging", Google.com, http://www.google.com/search?q=Anti-Theft+Tagging (last visited Sept. 12, 2011) (on file with the Columbia Law Review).
152. As one archeologist observed: "The classic rule in preservation is that you can't preserve something until you know you have it."
153. Randy Kennedy, In History-Rich Region, a Very New System Tracks Very Old Things, N.Y. Times, Aug. 25, 2010, at C1 (quoting Timothy P. Whalen, Dir. of Getty Conservation Inst.).
154. Id.
155. Examples of transiently identifiable goods include goods that are in an original, labeled package or have not had tags disabled.
156. See, e.g., Guillermo Contreras, Painting Sold in S.A. Ruled to Be Stolen, San Antonio Express-News, Jan. 15, 2010, at B3 (citing U.S. Immigration and Customs Enforcement and Art Loss Register as critical players in returning stolen art from San Antonio to French museum from which it was stolen in 1980s by notifying French authorities after stolen painting was submitted to auction).
157. Greg Quill, Canada Hot for Stolen Art, Toronto Star, Mar. 27, 2010, at 4.
158. Suggesting various options for owners of stolen artwork, including reporting theft to local Interpol office, or registering stolen item with country's customs and with Art Loss Register.
159. John P. Dawson, Fraudulent Concealment and Statutes of Limitation, 31 Mich. L. Rev. 875, 897-901 (1933)
160. "With the positive result of adverse possession, in transferring title to the adverse possessor of chattels, there need be no quarrel and there is very little doubt in American decisions.".
161. Patty Gerstenblith, The Adverse Possession of Personal Property, 37 Buff. L. Rev. 119 (1988).
162. R.H. Helmholz, Wrongful Possession of Chattels: Hornbook Law and Case Law, 80 Nw. U. L. Rev. 1221 (1986).
163. Nicholas D. Ward, The Georgia Grind: Can the Common Law Accommodate the Problems of Title in the Art World, Observations on a Recent Case, 8 J.C. & U.L. 533 (1982).
164. See, e.g., Gaillard v. Hudson, 8 S.E. 534, 534-35 (Ga. 1889) (permitting buyer to tack prior purchasers' periods of possession); Dragoo v. Cooper, 72 Ky. 629, 632 (1873) ("[W]e perceive no valid reason why the rule of construction adopted in suits relating to realty shall not be applied in actions for the recovery of personalty."); Burroughs Adding Mach. Co. v. Bivens-Corhn Co., 119 P.2d 58, 59 (Okla. 1941) (holding that using typewriter in plain view at business for long period of time constituted "open and notorious possession"); Hull v. Davidson, 25 S.W. 1047, 1047-48 (Tex. Civ. App. 1894) (finding for buyer who had been "claiming and holding [a horse] notoriously and adversely"); Dee v. Hyland, 3 P. 388, 388-89 (Utah 1883) (finding for purchaser whose use of horse was open and notorious).
165. See supra note 20 and accompanying text. A growing number of American jurisdictions have adopted the "discovery" rule for triggering the statute of limitations in replevin.
166. Steven A. Bibas, Note, The Case Against Statutes of Limitations for Stolen Art, 103 Yale L.J. 2437, 2446-2448 (1994).
167. See supra text accompanying notes 68-69.
168. See infra notes 113-114 and accompanying text.
169. See infra note 114 and accompanying text.
170. When a market exhibits price dispersion, purchase at a price that is more than one standard deviation below the mean would be considered to be in bad faith, as such a price is likely to be below the cost of reputable dealers.
171. This argument shows that our analysis illuminates the case when neither party is negligent. Courts and commentators sometimes express sympathy for buyers who may be dispossessed though they apparently purchased in good faith. We offer two comments by way of rebuttal. First, buyers keep anonymous goods because owners do not search for them; a buyer will not lose a sweater or a stereo. Second, buyers can repurchase goods from owners who find them. Hence, a buyer would be dispossessed only when the owner values the goods more highly than he does. This suggests that the owner who never finds the goods is the more sympathetic party.
172. See Schwartz & Scott, Sales Law, supra note 10, at 491 ("Metaphors of freely flowing commerce or unclogged channels of trade do not illuminate [the good faith purchase] issue.").
173. In this case, the owner's immediate transferee cannot respond in damages, so she asserts an in rem claim to the goods in the hands of the third party.
174. A virtue of this result, as stated above, is that there is no need for courts to evaluate buyer behavior: Buyers always lose when owners are not negligent, and buyers always win when owners are negligent. An objection to letting negligent buyers prevail is that buyers would behave strategically by seeking out negligent owners from whom to purchase. This objection seems implausible. Owners behave optimally in equilibrium. In practice, this means that many owners would behave well, so that buyers would have to search extensively to find possibly negligent owners. Also, whether an owner invested efficiently in precautions may not be conveniently observable to an outsider. The costs to buyer search for negligent owners thus probably exceed the gain. Also, permitting "passively" negligent buyers to prevail but barring "actively" negligent buyers creates another litigation issue: A negligent owner would have an incentive to litigate the category of buyer negligence. The social gain from so expanding good faith litigations seems too slight to justify the expansion.
175. Alan Schwartz & Robert E. Scott, The Political Economy of Private Legislatures, 143 U. Pa. L. Rev. 595, 633-638, 645-650 (1995)
176. Modeling high probability that group lobbying private legislature to maintain status quo will defeat similarly sized group lobbying for rule change. One of us has applied the insights from this model to the products of the groups formulating international rules governing the sale of goods.
177. Clayton P. Gillette & Robert E. Scott, The Political Economy of International Sales Law, 25 Int'l Rev. L. & Econ. 446, 459-473 (2005)
178. Arguing efforts to accommodate diverse political and economic interests result in highly abstract rules. A similar analysis of the products of such international treaties can be found.
179. Paul B. Stephan, The Futility of Unification and Harmonization in International Commercial Law, 39 Va. J. Int'l L. 743, 756-787 (1999).
180. See supra notes 76-77 and accompanying text.
181. We are grateful to Paul Stephan for this point.
182. There is an analogy to the cigarette companies, who did not oppose bans on advertising in many popular media. The companies' increased cost of reaching buyers was outweighed by the ban-created barrier to the entry of new competitors.
183. E. Woodrow Eckard, Jr., Competition and the Cigarette TV Advertising Ban, 29 Econ. Inquiry 119 (1991) (analyzing empirical study showing cigarette advertising restrictions reduced competition and increased profit margins).
184. Ulrich Boser, The Gardner Heist: The True Story of the World's Largest Unsolved Art Theft 20-21 (2009) (discussing why stolen pieces of art often take years to resurface).
185. O'Keeffe v. Snyder, 416 A.2d 862, 869 (N.J. 1980) (describing how discovery rule gained acceptance in negligence cases); supra text accompanying note 106.
186. Simone Weil, The Need for Roots: Prelude to a Declaration of Duties Toward Mankind 34 (Arthur Wills trans., G.P. Putnam's Sons 1952) (1949).
187. "Private property is a vital need of the soul.... All men have an invincible inclination to appropriate in their own minds anything which over a long, uninterrupted period they have used for their work, pleasure or the necessities of life.".
188. John Locke, Two Treatises of Government 287 (Peter Laslett ed., Cambridge Univ. Press 1988) (1690).
189. "Though the Earth and all inferior Creatures be common to all Men, yet every Man has a Property in his own Person."
190. Charles A. Reich, The New Property, 73 Yale L.J. 733, 771 (1964)
191. Arguing property "performs the function of maintaining independence, dignity and pluralism"
192. Margaret Jane Radin, Property and Personhood, 34 Stan. L. Rev. 957, 1005 (1982)
193. Arguing rich theories of personhood and human flourishing are inconsistent with commodification and property rights in persons.
194. Milton Friedman, Capitalism and Freedom (1962).
195. Under U.C.C. § 2-403(1) (2011), an owner's voluntary transfer enables her transferee to convey good title to a good faith purchaser if the "goods have been delivered [to the transferee] under a transaction of purchase." See also U.C.C. § 2-326 (stating consignor loses to a good faith purchaser).
196. Alan Schwartz & Robert E. Scott, Contract Theory and the Limits of Contract Law, 113 Yale L.J. 541, 556 (2003)
197. Arguing business firms are "artificial persons whose autonomy the state need not respect on moral grounds, and whose morality is ordinarily required by positive law".
198. The void/voidable title distinction seems to have become part of U.S. law in consequence of a poorly thought out borrowing from the English common law. See supra note 16. Other countries also make the distinction, however. See infra Appendix.
199. Some cases apparently apply this distinction. In West v. Roberts, the court distinguished the voidable from the void title cases because in the former the owner made a voluntary transfer of his property. 143 P.3d 1037, 1045 (Colo. 2006).
200. Alison McIntyre, Doctrine of Double Effect, in Stanford Encyclopedia of Philosophy (Edward N. Zalta ed., 2009), http://plato.stanford.edu/archives/fall2009/entries/double-effect (on file with the Columbia Law Review).
201. Id.
202. The following discussion owes much to Thomas Scanlon.
203. T.M. Scanlon, Moral Dimensions ch. I (2009) (reviewing and analyzing relevant literature).
204. Reasons for the lack of uniformity in good faith purchase laws are discussed.
205. Saul Levmore, Variety and Uniformity in the Treatment of the Good-Faith Purchaser, 16 J. Legal Stud. 43 (1987).
206. See infra Appendix. In England, Canada (Ontario), and India the owner cannot recover under the theft rule if the owner's conduct precludes him from denying the seller's authority to sell. However, mere negligence by the owner in failing to take precautions against theft does not constitute grounds for invoking an estoppel. See Sale of Goods Act, R.S.O. 1990, c. S.1, § 22 (Can. Ont.).
207. Sale of Goods Act, 1979, c. 54, § 21 (Eng.).
208. P. Ramanatha Aiyar, The Sale of Goods Act 112 (K. Venkoba Rao & R.D. Saxena eds., 3d ed. 1988)
209. Rreproducing § 27 of Indian Sale of Goods Act as amended by Act No. 33 of 1963. As indicated in the Introduction, these jurisdictions create a legal origin problem for buyers because two legal rules can apply to the same goods. Our unitary reform proposal would eliminate this additional inefficiency. In Germany and Mexico, the theft rule applies in part: The owner loses to a good faith purchaser who bought at a public auction. See, e.g., Bürgerliches Gesetzbuch [BGB] [Civil Code] § 935 (Ger.) (Langenscheidt Translation Serv. trans., Fed. Ministry of Justice 2010); C ódigo Civil Federal [CC] art. 799 (Mex.) (Julio Romanach, Jr. trans., Lawrence Publ'g Co. 2002). 133. See infra Appendix.
210. 3)] < z. The left-hand side of (1) is the expected value of searching for goods under the pure theft rule (finding probability times value); the righthand side is search costs. The left-hand side of (2) is the expected value of searching for goods under the reimbursement version of the theft rule. The first term is the (lower) probability that the owner finds the goods under this rule; the term in brackets is the owner's net gain from recovery. As is apparent from (2), as the current price approaches the buyer's current value, search costs are more likely to preclude owner pursuit.
211. Spain adopts the reimbursement version of the theft rule for goods bought at a public sale and China adopts the version for goods bought at auction or at a public market. See infra Appendix.
212. Countries that adopt the voidable title rule include the Czech Republic, England, France, Italy, Germany, Japan, Russia, and Switzerland. Countries that also adopt the entrustment rule include England, France, Germany, Italy, Russia, and Switzerland. See infra Appendix.
213. Italy has the most buyer-friendly version of the Market Overt rule. Article 1153 of the Italian Civil Code provides: "He to whom movable property is conveyed by one who is not the owner acquires ownership of it through possession, provided that he be in good faith at the moment of consignment and there be an instrument or transaction capable of transferring ownership." Codice Civile [C.c.] art. 1153 (It.) (Mario Beltramo et al. trans., Oceana 2010) (internal citations omitted). Article 1153 also provides that "[o]wnership is acquired free of rights of others in the thing, if they do not appear in the instrument or transaction and the acquirer is in good faith." Id. Other countries with a pure Market Overt rule include Israel and Germany (public auction only). Brazil, China, France, Japan, Mexico, Spain, and Switzerland have the reimbursement version of the Market Overt rule under which the owner can reclaim his property from the good faith purchaser if he reimburses him for his original purchase price. See infra Appendix.
214. Some illustrations of short limitation periods include Canada (one year); China and Japan (two years); France, Mexico, and Spain (three years); and Switzerland (five years). See infra Appendix.
215. For discussion of the trafficking in stolen art and the problem of safe haven jurisdictions.
216. Harriet Crawley, Forget the Video, It's Your Paintings They're After, Daily Telegraph (London), June 16, 1992, at 16 (discussing rise of sophisticated thieves who exploit safe havens).
217. The Hidden Art of Theft, U.S. News & World Rep., Apr. 2, 1990, at 13 (noting Japan's laws protecting bona fide purchaser).
218. Stanley Meisler, Art & Avarice, L.A. Times Mag., Nov. 12, 1989, at 8+11 (discussing Swiss law that allows good faith purchaser to keep stolen goods).
219. James Walsh, It's a Steal, Time, Nov. 25, 1991, at 86+87 (commenting on laws of Switzerland, Liechtenstein, and Cayman Islands).
220. Recall that under the demand and refusal rule, the statute of limitations does not begin to run until the owner finds the stolen goods in the possession of the buyer, the owner demands their return, and the buyer refuses to return them. See supra note 17 and accompanying text.
221. No. 03 Civ. 4119 (RLE), 2006 WL 2239594 (S.D.N.Y. Aug. 4, 2006).
222. Id. at *1-*2.
223. Id. at *2.
224. See Kunstsammlungen Zu Weimar v. Elicofon, 536 F. Supp. 829, 833 (E.D.N.Y. 1981) ("It is a fundamental rule of law in New York that a thief or someone who acquires possession of stolen property after a theft cannot transfer a good title even to a bona fide purchaser...." (internal quotation marks omitted)); Candela v. Port Motors Inc., 617 N.Y.S.2d 49, 50 (App. Div. 1994) ("[I]f it is proven that [buyer] purchased the vehicle from documentaan actual car thief, or from the successor in interest to a car thief, then [buyer's] title would be void, and not merely 'voidable.'").
225. Section 34 of Israeli Sales Law states: Where any movable property is sold by a person who carries on the sale of property of the kind of the thing sold, and the sale is made in the ordinary course of his business, ownership passes to the buyer free of every charge, attachment or other right in the thing sold even if the seller is not the owner thereof or is not entitled to transfer it as aforesaid, provided that the buyer buys and takes possession of it in good faith. Sale Law, 5728-1968, § 34 (Isr.), translated in 1 Business Laws of Israel, supra note 15, at 1.5-79, 1.5-85. For discussion of Market Overt in Israel.
226. Eyal Zamir, Market Overt in the Sale of Goods: Israeli Law in a Comparative Perspective, 24 Isr. L. Rev. 82 (1990).
227. Zarian, 2006 WL 2239594, at 2 (citing Greek Orthodox Patriarchate v. Christie's, Inc., No. 98 Civ. 7664 (KMW), 1999 WL 673347, at 4 (S.D.N.Y. Aug. 30, 1999); Wertheimer v. Cirker's Hayes Storage Warehouse, Inc., No. 105575/00, 2001 WL 1657237, at 5 (N.Y. Sup. Ct. Sept. 28, 2001)). In applying the law of the jurisdiction where the property was located at the time of the transfer, the New York court in Zarian was following the widely recognized lex locus situs rule of private international law. This rule focuses on the law of the transaction that led to the possession of the goods by the buyer, a transfer that typically involves, as we have seen, a sale from a dealer to a bona fide purchaser. The lex locus situs rule thus neglects the issues surrounding the rights of the original owner, issues that are relevant in common law jurisdictions that retain the theft, voidable title, and entrustment rules. In this way, the lex locus situs rule facilitates the laundering of stolen goods by protecting transfers from intermediaries to good faith purchasers in jurisdictions that follow Market Overt. See Winkworth v. Christie Manson & Woods Ltd., [1980] Ch. 496 at 501-02, 513-14 (Eng.) (discussing lex situs rule in English law and holding that Italian law determined titled to goods stolen in England, sold in Italy, and later brought back into England).
228. Robin Morris Collin, The Law and Stolen Art, Artifacts, and Antiquities, 36 How. L.J. 17, 22-25 (1993).
229. "The lex locus situs rule permits the manipulation of stolen art in such a way that the goods will obtain market value, resulting in substantial profits."
230. For discussion of relational contracting in the diamond trade and its global implications.
231. Barak D Richman, Ethnic Networks, Extra-legal Certainty and Globalisation: Peering into the Diamond Industry, in Contractual Certainty in International Trade: Empirical Studies and Theoretical Debates on Institutional Support for Global Economic Exchanges 31 (Volkmar Gessner ed., 2009).
232. Barak D. Richman, Firms, Courts, and Reputation Mechanisms: Towards a Positive Theory of Private Ordering, 104 Colum. L. Rev. 2328, 2351-2354 (2004) (describing extralegal mechanisms for ordering and sanctioning behavior within the diamond industry).
233. Zarian, 2006 WL 2239594, at *10.
234. Id. at *4.
235. Id.
236. Id. at *2.
237. See supra note 16.