The empty wall in Berlin's Brücke Museum tells an extraordinary tale. Until this month, it was home to Berlin Street Scene, a masterpiece of German expressionism by one of the movement's greatest talents, Ernst Kirchner. Restitution of art looted or stolen by the Nazis has become big business, as the latest high-profile case shows, writes Derek Scally

Seven decades ago, the picture was the jewel in the collection of German Jewish businessman Alfred Hess, considered the first and most important collector of German expressionist art.

Sold in disputed circumstances in the 1930s, the picture landed by a circuitous route in the state-owned Brücke Museum in 1980.

Last month, after four years of negotiations, the city of Berlin handed over Berlin Street Scene to Anita Halpin, Hess's granddaughter and chairwoman of the Communist Party of Britain. Within days, the picture was listed for auction at Christies and sold for a record $38 million (€28.5 million).

Portrayed at the time as a case of delayed justice, the Kirchner case is in fact far more complex, with lawyers' fees and record auction prices playing an important role. Now German galleries are bracing themselves for an extended fight with Halpin's lawyers; at stake are some of Germany's greatest masterpieces.

Alfred Hess was born in the eastern German city of Erfurt in 1879. After returning from the first World War, he became one of the city's leading businessmen employing almost 2,000 people at the M & L Shoe Factory.

Hess was a well-known philanthropic figure in Erfurt, financing apartments for his workers and aiding local schools. However his life's passion was contemporary art and, beginning in 1919, he began putting together a legendary collection that would eventually number over 4,000 paintings, graphics and sketches by emerging artists.

His Erfurt villa soon became a haven for modern art and modern artists and regular visitors included Paul Klee, Wassily Kandinsky, Lyonel Feininger, and Erich Heckel, founder of the Dresden "Brücke" (Bridge) movement. Other guests included composers Paul Hindemith and Kurt Weill, who visited with his wife Lotte Lenya.

But by the late 1920s, Erfurt was filling up with brown-shirted Nazis jealous of wealthy, prominent figures like Hess even though, by that stage, the world economic depression had bankrupted his business.

In 1930 Hess was forced to begin selling works from his collection to pay debts and, after he died a year later, his widow Tekla continued the practice.

After Hitler's rise to power in 1933, she brought the collection to safety in Switzerland but continued to sell works.

Sometime in 1936 or 1937 she sold Kirchner's Berlin Street Scene for 3,000 Reichsmarks to the collector Carl Hagemann before emigrating to England and her son, Hans. Kirchner's Berlin Street Scene remained in Germany and was sold to West Berlin in 1980 for 1.9 million Deutschmarks.

Four years ago, the Berlin government was contacted by New York lawyer David J Rowland, a specialist in restitution claims, on behalf of Anita Halpin, granddaughter of Tekla Hess. The lawyers produced documentation that suggested that Tekla was forced by the Gestapo to sell artworks and that Halpin was therefore the rightful owner of Berlin Street Scene.

Rowland was drawing on the 1998 Washington Agreement signed by Germany and 43 other countries agreeing to return all art stolen, looted or sold at an artificially low price during the Nazi era.

The agreement places the burden of proof on the current owner and, in this case, Berlin was unable to prove that Tekla Hess sold the Kirchner of her own free will and that she actually received the 3,000 Reichsmarks payment from Carl Hagemann. The city handed over the picture in secret, to huge protest.

"Hagemann was a well-known collector and considered an honourable man in art circles," said Dr Wolfram Morath-Vogel, curator of Erfurt's Anger Museum, which had close ties to the Hess family. "He had the money and there's no doubt in my mind that he paid Tekla Hess the money, which was more than a fair price at the time."

AS WELL AS anger, the hand-over of one of the country's most prized works of art has generated fear that, in doing so, Berlin has set a costly precedent for other galleries.

Halpin's lawyers have lodged at least six further restitution claims for pictures worth over €150 million.

The Wilhelm Hack museum in Ludwigshafen has received a claim for another Kirchner, Judgment of Paris. The Sprengel museum in Hanover has been asked to hand over a work by Franz Marc, Cat Behind a Tree.

The Staatsgalerie in Stuttgart could lose two prized works, Marc's Little Blue Horses and Barefoot Church I by Lyonel Feininger.

All of the galleries have begun piecing together documents to establish the provenance of their pictures, often a hopeless task because of records lost during the war.

They say they are glad that this restitution issue is finally being discussed but warn of oversimplified versions being peddled by lawyers.

"This all has the bitter aftertaste of lawyers and auction houses," remarked Andreas Hüneke, a leading art historian.

He has put together a dossier on the Hess collection and its break-up which casts doubt on the dramatic version painted by Halpin's lawyers of late-night Gestapo visits and forced sales.

"It's clear that Jews were persecuted and killed and driven out of the country," says Hüneke. "But things didn't become life-threatening with one stroke in 1933. Yet if one in any way questions the nature and time of the persecution one is always placed in a bad moral light by lawyers."

He has produced evidence to suggest that financial necessity rather than political pressure forced Tekla Hess to sell the highlights of her collection in the 1930s.

Other art historians and curators have pointed out that there was an active network of dealers in 1930s Germany who made it their business to work against the Nazi regime by supporting artists and collectors. They say it is an oversimplification to say that every work that changed hands in the period was as a result of Nazi pressure.

"It's a much more differentiated picture," says Sean Rainbird, director of the Stuttgarter Staatsgalerie. "The added aspect that everyone's picking up on there seems to be an active role of third parties. Also that the market in Expressionism has gone through the roof. When money's in play, sometimes the motivation is sharpened."

LATE LAST MONTH, leading curators met the federal cultural minister for a high-level meeting in the Chancellery in Berlin. Scant details emerged from the meeting, but there are signs that the loss of Berlin Street Scene has united the German art world against the looming legal onslaught from New York.

Most of the experts who have come into contact with Rowland are scathing of his methods, dubbed by one a "fishing expedition" where the claim net is cast wide to include any picture that was once part of the Hess collection, regardless of its provenance.

Berlin's Neue Nationalgalerie rejected Rowland's claim for Kirchner's Potsdamer Platz after it produced a photograph showing the work in its possession in 1931, long before Nazi persecution. Erfurt's Anger Museum was furious when Rowland demanded back a posthumous portrait of Alfred Hess that Anita Halpin had sold the museum in 1992. Museums in Hanover and Switzerland report similar claims for pictures they could prove were acquired legitimately.

A source close to the negotiations over Berlin Street Scene says Halpin was offered €15 million for the picture to remain in Berlin but that Rowland refused the offer. When he deducts his fee, and Christie's takes their cut, Halpin is likely to be left with less money than the Berlin offer.

"For a lawyer, a fee based on $30 million [€22 million] is more interesting than a fee based on €15 million," said one of the participants in the Chancellery meeting who declined to be named.

"We can never allow ourselves as Germans not to recognise the terrible crimes of this period," he said. "But it is also our responsibility to make sure that if we give back a picture, that we have good reason and enough time to check everything as much as possible. We want a fair and just solution but we won't allow ourselves, as Berlin did in the Kirchner case, to be beaten over the head with a moral cudgel."