(CN) - A 10-year legal battle over the rights to an Egon Schiele painting allegedly looted by Nazis appears headed for trial. A federal judge in Manhattan ruled that the U.S. government and the Leopold Museum in Vienna have enough evidence to possibly lay claim to the "Portrait of Wally."
The painting by Austrian expressionist Schiele in 1912 depicts his mistress and primary model.
The U.S. government confiscated the painting when it was on loan from the Leopold, claiming the museum knew the painting had been stolen by a Nazi in 1939 from its Jewish owner, Lea Bondi.
The Leopold sent more than 100 works by Schiele to New York's Museum of Modern Art in 1997.
Acting on information that two paintings had been looted in Austria during World War II, Manhattan District Attorney Robert Morgenthau seized "Portrait of Wally" and "Dead City" from the museum.
After a series of lawsuits, an appeals court ordered the paintings returned to Vienna.
But the federal government confiscated the paintings, again, before they could be shipped, citing the U.S. National Stolen Property Act. "Dead City" was returned to the Leopold because its former owner had no heirs. "Portrait of Wally" was stored in a warehouse in Queens, where it remains.
The painting was once displayed in the home of Bondi, an Austrian Jew who owned the Wurthle Gallery in Vienna.
The government says it has records proving that the painting was part of Bondi's private collection and was never owned by the gallery.
The parties dispute the circumstances under which Friedrich Welz obtained the piece. Bondi sold her gallery to Welz, a Nazi, under German Aryanization laws that prevented Jews from owning businesses.
The museum argues that "Wally" was part of the sale.
The government's version of how the transaction unfolded is quite different.
It claims Welz visited her apartment in 1939 on the eve of her escape to England. He came to discuss the sale, then saw the painting on her wall and demanded she hand it over, the government claims, citing letters written by Bondi and discovered after her death.
The letters purportedly state that she gave Welz the painting, at the behest of her husband, in fear that the Nazi party member would prevent their escape if she refused.
The Leopold calls the story "pure fiction."
After the war, U.S. forces mistakenly included "Wally" in the list of paintings it ordered Welz to return to the heirs of a man named Heinrich Rieger, who died at Theresienstadt concentration camp. Rieger's heirs sold his collection to the Galerie Belvedere, a national gallery owned by the Austrian government.
The United States says it alerted the Austrians of the mix up, but the gallery accepted the painting anyway, despite knowing that it didn't belong to Rieger.
Rudolf Leopold, one of the world's foremost collectors of Schiele works, traded his "Rainerbub" Schiele for "Wally" in 1954.
Bondi allegedly said she didn't want to pursue legal action against Leopold in Austria, because, as a Jew who fled the country, she didn't like her chances of winning a lawsuit against a prominent Austrian physician.
Leopold sold his collection to the Austrian government in 1994 for $240 million, and spent millions more to build the Leopold Museum. Included in the sale was "Wally."
U.S. District Judge Loretta A. Preska noted that Leopold acknowledges there is no record of Rieger having ever owned the painting.
But the museum insists "Wally" lost its "stolen" tag when it was returned to the Austrian government. And Leopold says his ability to defend against forfeiture has been damaged by the 40-year delay since he last heard from Bondi, because many key witnesses are long dead.
Bondi herself died in 1969. Her heirs will get the painting if it's forfeited to the government.
Judge Preska denied the museum's motion for summary judgment, saying a trial is needed to decide whether Leopold knew the painting was stolen when he imported it into the United States.
Read the Top 8
Sign up for the Top 8, a roundup of the day's top stories delivered directly to your inbox Monday through Friday.