A state appeals court ruled yesterday that the Museum of Modern Art cannot return two Egon Schiele paintings to Austria until a criminal investigation into their ownership is concluded.
The ruling, by the Appellate Division of State Supreme Court, reversed the decision of a lower court, which had allowed the museum to return the paintings, which it had borrowed from the Leopold Foundation in Vienna.
The dispute began when a grand jury, at the instigation of the Manhattan District Attorney, Robert M. Morgenthau, issued a subpoena on Jan. 7, 1998, requiring the museum to hold the paintings pending the investigation's outcome. Mr. Morgenthau is examining charges that the paintings, confiscated from Jews by the Nazis, had improperly made their way after World War II into the private collection of Dr. Rudolf Leopold, a Viennese ophthalmologist, who later sold them to the Leopold Foundation, which was financed by the Austrian Government.
The Modern, which had borrowed the works for a huge Schiele retrospective, had moved to quash the subpoena, and last May Acting Justice Laura E. Drager of State Supreme Court in Manhattan had granted its motion. She ruled that the works were protected from seizure of any kind by New York State's 30-year-old Arts and Cultural Affairs Law and that the subpoena was in effect a seizure.
But yesterday the appeals court ruled that the law did not apply to criminal proceedings like Mr. Morgenthau's investigation. The court disagreed with the contention of the Modern and other museums that the law was intended to maintain the free flow of art without any concern about legal challenges.
"No one disputes that intent," the ruling said, "but it is not contended, nor could it be, that the public interest is served by permitting the free flow of stolen art into and out of the state."
In support of that stance, the ruling noted that, during the legislative debate over the law, "law enforcement and criminal defense groups were not heard from for the obvious reason that no one envisioned the legislation as having any impact on criminal proceedings."
Furthermore, the ruling said, a subpoena requiring the Modern to produce the paintings for the grand jury investigation does not constitute "seizure" of them. It said that there was "no evidence" in the subpoena that "the two paintings will be sought to be retained in custody."
After the ruling, Mr. Morgenthau said he felt "vindicated."
At the Modern, Glenn D. Lowry, the director, called the ruling "deeply troubling and disappointing." He added, "We continue to believe that Justice Drager made the right decision, that there are no exceptions to the state law. This issue is a very important one that goes far beyond the fate of the Schieles." The museum said it would appeal the decision.
"We will continue to press the case" with the State Court of Appeals, Mr. Lowry said.
Yesterday's ruling has no bearing on the merits of the criminal case over the two paintings, "Portrait of Wally" and "Dead City III," each of which has been separately claimed by descendants of the Jews from whom the works were confiscated. The claims were made after The New York Times published an article outlining Dr. Leopold's aggressive collecting tactics.
"We will continue to proceed with our investigation to see if a crime or crimes have been committed," Mr. Morgenthau said. "And the paintings will stay at MOMA while the grand jury continues its investigation."