(Editor’s Note: This article also appears in Transnational Litigation Blog.)
On Tuesday, the U.S. Supreme Court heard oral argument in Hungary v. Simon, a case brought by Holocaust survivors under the expropriation exception of the Foreign Sovereign Immunities Act (FSIA). In 1944, Hungary rounded up Jews and transported them by train to death camps, expropriating their property in the process. More than 500,000 died.
The FSIA’s expropriation exception, 28 U.S.C. § 1605(a)(3), allows suits against foreign States for takings of property in violation of international law but requires that the property or “any property exchanged for such property” is present in the United States in connection with a commercial activity of the foreign State or, in the case of a suit against a State agency or instrumentality doing business in the United States, is owned by the agency or instrumentality. In this case, Hungary sold the property it took from Jews, commingled the proceeds with other government funds, and later used government funds to pay bondholders in the United States.
The case has significant implications for the FSIA’s expropriation exception and for the FSIA more generally. Hungary’s interpretation of the “exchanged for” language would make it virtually impossible to bring expropriation claims when funds are commingled, whereas plaintiffs’ interpretation would allow such claim almost any time a foreign State uses government funds for a commercial activity in the United States. Another question, pressed most forcefully by the United States as amicus curiae, would change the burden of proof in FSIA cases more generally.
Plaintiffs’ First Trip to the Supreme Court
Plaintiffs filed their suit in 2010 against Hungary and its State-owned railway MAV, seeking to represent themselves and a class of other survivors of the Hungarian Holocaust. The district court dismissed on grounds of international comity, but the D.C. Circuit reversed, and the Supreme Court granted cert. (Disclosure: Maggie Gardner and I filed an amicus brief arguing against international comity abstention.)
But the Court did not reach the international comity issue. Instead, it vacated and remanded based on its decision in a companion case, Germany v. Philipp (2021). Philipp interpreted the phrase “taken in violation of international law” not to reach a State’s expropriation of the property of its own nationals. This effectively narrowed the class of plaintiffs in Simon to those who were not Hungarian nationals at the time of expropriation.
On remand, attention turned (among other issues) to the expropriation exception’s commercial nexus requirement. The D.C. Circuit held that commingled assets could be considered “exchanged for” expropriated property to establish a commercial nexus. “Requiring plaintiffs whose property was liquidated to allege and prove that they have traced funds in the foreign states or instrumentality’s possession to proceeds of the sale of their property,” the court wrote, “would render the FSIA’s expropriation exception a nullity for virtually all claims involving liquidation.”
Hungary’s Argument
At oral argument, Joshua Glasgow argued for Hungary that the D.C. Circuit’s commingling approach was inconsistent with the text of the FSIA. “There’s no dispute that ‘to exchange’ means to give one thing in return for another,” he said. “Accordingly, domestic courts have jurisdiction over this case only if some present-day asset having a commercial nexus with the United States was given in return for items taken from 14 individuals in 1944” (p. 3). The United States, represented by Sopan Joshi, agreed that the text required “specific identifiable property and transactions” (p. 27).
In response to a question from Chief Justice John Roberts, Glasgow conceded that “[i]n the vast majority of cases, commingling will make it impossible to trace funds” (p. 7). Justice Elena Kagan then asked, “doesn’t this provide a roadmap to any country that wants to expropriate property? In other words, just sell the property, put it into your national treasury, insulate yourself from all claims for all time?” (p.7).
Glasgow answered that “Congress knew that these types of claims would be rare” (p. 8). He invoked Banco Nacional de Cuba v. Sabbatino (1964) as the kind of case that Congress had in mind when it wrote the expropriation exception. In that case, Cuba sold sugar that it expropriated from a U.S. company. The proceeds ended up in a New York bank account, and Cuba sued to recover them. The Supreme Court held that Cuba was entitled to the proceeds because under the act of state doctrine U.S. courts could not question the validity of Cuba’s expropriation. Congress acted quickly to reverse Sabbatino by passing the Second Hickenlooper Amendment, and the FSIA’s expropriation exception is based on that Amendment.
Arguing for the United States, Joshi agreed that Sabbatino was the paradigm of “exchanged for.” “So we’re not saying it’s got to be exactly like Sabbatino,” he said, “but it’s got to be in the neighborhood of Sabbatino” (p. 31). But Justice Samuel Alito seemed unconvinced. “Congress was obviously upset enough about Sabbatino to enact the Hickenlooper amendment,” he noted (p. 32). But didn’t Congress “care about all the other property owned by U.S. nationals in Cuba that was expropriated,” he wondered (p. 33). Kagan seemed similarly perplexed. “It was true that in the Sabbatino case the money was sitting in an escrow account,” she said, “but Congress would not have been just as upset if, instead of establishing an escrow account, Cuba had put it into a general account?” (p. 34).
Justice Ketanji Brown Jackson wondered whether “exchanged” was the right word to focus on. She understood the argument to be “that property that has been commingled to the extent that it no longer retains its identifiable nature doesn’t satisfy the statute because the statute requires property that is owned or is present as the jurisdictional hook” (p. 52). “I don’t understand this to be an argument that relies on a definition of ‘exchange’ really,” (p. 52) but rather on the word “is” in the statutory phrases “is present” and “is owned.” None of the other Justices, however, shifted away from the word “exchanged.”
Plaintiffs’ Argument
Shay Dvoretsky, arguing for the plaintiffs, advanced a very different interpretation of “exchanged for.” “[W]hen money is commingled, a withdrawal from commingled funds is an exchange for earlier deposits,” he said. “So, when Hungary used commingled funds to pay interest and buy equipment in the United States, it put into the United States property that had been exchanged for the expropriated property” (p. 57).
Roberts thought that this was too broad. “[A]t the end of the day, you’re really just asking us … to throw out the general rule that sovereigns can’t be sued for appropriations of this sort,” he asked. “I mean, once you say commingling counts, … everything’s pretty much fair game” (p. 62). Returning to the Sabbatino case, Roberts observed, “we know that from Sabbatino and the second Hickenlooper amendment that Congress had in mind a much narrower exception than that” (p. 62).
Dvoretsky pushed back, noting that although Congress wrote the FSIA’s expropriation exception “in response to Sabbatino, … the language that it passed wasn’t limited to the facts of Sabbatino. Congress enacted broad language. Sabbatino itself involved fungible property. The Court there recognized traceability problems. Congress knew that but enacted the broad language anyway” (p. 63). Dvoretsky also noted “significant guardrails” under plaintiffs’ theory, specifically that Philipps’s exclusion of domestic takings from the expropriation exception and the need to demonstrate actual commingling of funds (pp. 63-64). And he noted later that “there has not been a flood of cases that have been brought” (p. 79).
Still, plaintiffs’ theory seemed difficult for some of the Justices to swallow. “It’s an interesting concept,” Justice Sonia Sotomayor said, “that that $100 that my mother put in that account the day I was born, that a piece of it is still there 60 years or 70 years or 80 years later. It’s a fiction that takes quite an imagination” (pp. 80-81).
The (Ir)relevance of Tracing Rules
Perhaps searching for a middle ground, Justices Neil Gorsuch (pp. 14, 41) and Alito (p. 22) asked the parties why the Court should not rely on rules for tracing assets that are well established in the law of trusts and in the context of forfeiture. But none of lawyers arguing thought this was a good idea.
For Hungary, Glasgow noted that many of these rules “are legal fictions” (p. 15) and worried in particular about the presumption that “ill-gotten gains were retained” (p. 23). For the United States, Joshi noted that “some courts of appeals have adopted what they call a last-out approach. So, if tainted funds are commingled with clean funds and then there are a lot of transactions, you assume that the tainted funds are the last thing to leave the account” (p. 36). Although such presumptions would favor plaintiffs in a case like this, Dvoretsky also resisted looking to existing rules on tracing because “those are really rules that come out of equity cases” (p. 78), whereas the FSIA is a codification of common law rules of immunity.
Foreign Relations Implications
Justice Brett Kavanaugh seemed particularly concerned with the foreign relations implications of the case. “One of the important things, I think, with making sure we don’t read it too expansively is friction with other countries,” he said, “and, if other countries adopted a similar expropriation and commingling theory, the effects it would have on the United States” (p. 30).
Alito, on the other hand, was skeptical of reciprocity concerns. “You think that if lawsuits are brought in the United States based on the expropriation,” he asked Joshi, “then foreign countries are going to entertain suits based on the expropriation in this country of the property of their nationals?” (p. 33). It is worth noting here that the United States is the only country in the world that allows claims for expropriation to be brought against foreign States.
Kavanaugh also expressed concern about compliance with international law. “[Y]ou can interpret the exception more narrowly or more broadly,” he observed. “More broadly pushes us further out of compliance with international law” (p. 73). Under the so-called Charming Betsy canon “an act of Congress ought never to be construed to violate the law of nations if any other possible construction remains.” As a court of appeals judge, Kavanaugh had been critical of the Charming Betsy canon as applied to non-self-executing treaties and customary international law. I hope that his comments at oral argument reflect a willingness to rethink that position.
The Most Important Question?
In addition to the interpretation of “exchanged for” in the FSIA’s expropriation exception, there are two other questions presented, at least one of which has potentially broad implications for other FSIA cases. That question is who bears the ultimate burden of proof with respect to foreign sovereign immunity. Arguing for the United States, Joshi urged the Court not “to lose sight of the third question presented on the burden shifting. In the United States’ view, that is more important than the commingling theory because it affects every FSIA case” (p. 28).
As I have previously discussed at length, every court of appeals to have addressed the question has held that the foreign State bears the ultimate burden of proving that is immune from suit, based on a paragraph in the FSIA’s legislative history to that effect. In its amicus brief (pp. 30-33), the United States urged the Court to overrule these decisions and put the burden of proof on the plaintiff. Congress made foreign sovereign immunity a question of subject matter jurisdiction, the United States notes, and the burden of establishing that a federal court has subject matter jurisdiction always rests with the party asserting jurisdiction.
I think this is wrong. When it passed the FSIA, Congress couched immunity in terms of subject matter jurisdiction for reasons having nothing to do with burdens of proof. Congress also specifically addressed the burden of proof in the FSIA’s legislative history. At oral argument, Gorsuch noted that “the pre-FSIA cases did place the burden of persuasion on the foreign entity” (p. 11) and criticized the U.S. brief for not discussing these cases (p. 39).
Neither of the parties thinks that the Court needs to decide this question. Glasgow for Hungary noted that Hungary did not preserve the question below (p. 10-11), and Dvoretsky for the plaintiffs agreed that the Court did not need to reach it (p. 82).
Conclusion
Under a middle-ground interpretation of “exchanged for,” the burden of proof might matter more to the parties. But in this case, each of the parties has advanced a more extreme position under which the burden may not matter. In Hungary’s view, as soon as the proceeds of expropriations are commingled with general government funds, they lose their identity and can no longer be used to establish a commercial nexus with the United States. In the plaintiffs’ view, as soon as the proceeds of expropriations are commingled with general government funds, any of those funds can be used to establish the commercial nexus.
Hungary’s theory would effectively eliminate fungible property from the expropriation exception, whereas the plaintiffs would make the exception’s nexus requirement easy to satisfy when fungible property is involved. Unless the Court can think of a middle-ground interpretation, it will simply have to choose.