In late March, Frans van Haren and Tony Paalman, Dutch car collectors and business partners, put their 1935 Mercedes-Benz 500K Roadster on display at the Techno Classica car show in Essen, Germany.

The two men had bought the car, Lot 147, for $3,767,500, including buyer’s premium, at RM Auctions’ 2011 sale in Monterey, CA.

Life was good — until the German police, executing a warrant issued by a local court, seized the 500K on the basis that it had been stolen from its rightful owner in 1945.

The two men, who have millions invested in this car, were stunned.

The legal knots are plentiful — and very complicated — in this case. But let’s first look at a little history.

Digging into a murky past

The RM Monterey catalog stated that this 500K, after being featured in the 1935 Berlin Motor Show, was sold to Hans Friedrich Prym in 1935. In the 1970s, it “turned up in the collection of pioneer collector Russell Strauch.” The almost four decades in between were explained by, “Its interim history is unknown at this time.”

That huge gap set Paalman to work researching history. He determined that Prym was a very wealthy man. His family had been industrialists since about 1650.

In 1935, the family company was doing extremely well, having invented the snap fastener used on clothing. But, according to Paalman, Prym had a dark side. “Although no one has proven that Prym was a member of the Nazi Party, he definitely did work for the Nazis,” Paalman said. “The factory had been converted to manufacture airplane parts using about 600 slave laborers, many of whom died on the job.”

The Prym family lost everything after the war, the crowning blow being approximately €30 million they were forced to pay in damages to the families of the slave laborers and fines from their convictions for cartel formation.

The family company survives today but is no longer owned by the Pryms.

The legal claims

German law seems to be fairly similar to U.S. law in one regard. The owner of stolen property can have a court seize the property — to be held under court order — until the ownership can be resolved. In the U.S., the owner would have to provide very strong evidence that he was likely to prevail in the litigation, and he would also have to post a bond to protect the interests of the other party.

Here, the seizure is the result of a court filing from Prym’s surviving son and grandson.

Their claim that the 500K was stolen is based upon their testimony that they had heard Prym say that “the car had been taken from them” and that the car “was stolen by the Americans.” However, there is no record of the car ever reported as stolen or of any previous efforts to recover it.

Paalman thinks that this is pretty skimpy evidence and shouldn’t have been enough to justify seizure, but he attributed the result to the filing for the warrant having been made on a Saturday morning and presented to a fill-in judge.

Paalman thinks the Pryms stand very little chance of success. He also believes the case raises very troubling issues — one being that many Germans very much want to forget everything about the grim Nazi years.

Paalman also claims there has never been a case in which the Americans were found to have stolen anything during their occupation of Germany.
“There are a few cases of Russians having done that, but never an American,” Paalman said. “Every time the Americans confiscated any property, it was always done through proper legal means.”

Maybe the courts move faster in Germany, and this will all sort itself out soon for van Haren and Paalman. Nonetheless, let’s consider some of the interesting legal issues this case raises. What would happen if the car is determined to have been stolen from Prym?

Seller on the hook

There seems to be little doubt that the seller, which in this particular case was the Lyon Family Collection, would be liable. Under U.S. law, a seller of stolen property has no title to the property, and can therefore not pass good title to the innocent purchaser. Since passing legal title is of the essence of the sale, the seller would definitely owe the buyers a full refund.

The seller would then have full recourse against his seller, as he never had good title to the car either. However, that would be limited to the amount he paid for the car — not the amount he got for then selling the car.

That result comes from the theoretical nature of the legal action, which is “rescission.” The innocent buyer is able to rescind (or unwind) the transaction, and put each party where they stood before the sale. That gets the buyer his purchase price back, and he just loses his profit.

And that legal concept goes back in successive levels, from seller to seller (seven in this case), and each is entitled to full refunds. But once the chain is broken — which happens when a buyer cannot find or recover from his seller for any reason — the music stops and he is left holding the bag. He cannot skip over his seller to reach the previous seller because he has no contractual relationship with him.

No auction company liability

Readers may wonder what RM’s liability might be here. In all likelihood, the answer is not much. In an auction transaction, the auction company is not the seller, even though the buyer writes his check to them. Rather, the auction company is regarded as the seller’s agent, merely assisting the seller in the transaction. The auction company may well be required to give up its commissions on the sale, but that is about it. Further, all auction companies use seller and bidder contracts that make that pretty clear.

Should the auction company have found out about this problem beforehand? RM, like all major auction companies, puts great effort into researching the cars in their auctions. They don’t want problems like this to arise, as their business models are focused on creating happy buyers. If their efforts fail, can they be held liable for negligence?

Probably not.

Auction companies’ bidder contracts make very clear that any efforts in this regard are made for their own protection. They do not assume any obligation to the bidder, who is required to perform his own investigation, if any. And that really makes perfect sense. The opposite rule would transform the auction company from a seller’s agent to a seller or an insurer, which is not part of the deal.

But since we’re getting into hypotheticals here, what if the auction company knew about this claim ahead of the auction? That would make things quite different.

Any sensible auction company would bring that to the attention of the seller and ask him to explain matters. After all, it’s his car and therefore his problem. If the seller deals with the problem satisfactorily — or gives the auction company adequate assurances that the claim is unfounded — the auction company should be free to proceed, perhaps even without disclosure to bidders. But if the seller doesn’t handle the situation adequately, then he would be proceeding with a misrepresentation or fraud. And, the auction company would be participating in that, making itself liable to the buyer as well.

International law quirks

In this case, German law seems similar to U.S. law — the rightful owner is protected, while the innocent purchaser is not. But in some countries, the innocent purchaser keeps the car and the rightful owner has to find and sue the thief.

Say, for example, van Haren and Paalman had purchased the car at an auction in Italy, where the law allows the innocent purchaser to keep the car. Would the German court apply the law of Italy, where they bought the car, and let them keep the 500K?

Or would the court apply German law and give it to the Pryms? And if van Haren and Paalman lost the car in German court, what would happen when they went back to Italy to sue the seller? Would the Italian court apply Italian law to conclude that the seller gave them good title so he can’t be sued, making it their problem that they chose to take the car to Germany?

Enough about these hypothetical cases, as the actual case promises to be complicated enough.

We’ll keep track of this case, and keep you posted when some of the legal knots get untied. Don’t expect this to happen quickly.

Comments are closed.