(Editor’s Note: This article is cross-published with Transnational Litigation Blog.)
Last Friday, the U.S. Supreme Court decided Republic of Hungary v. Simon. Writing for a unanimous Court, Justice Sonia Sotomayor held that commingling the proceeds of expropriated property with other government funds, which are then used for commercial activity in the United States, is not enough to meet the requirements of the expropriation exception in the Foreign Sovereign Immunities Act (FSIA). The holding makes it nearly impossible to bring expropriation claims involving fungible property in U.S. courts.
Simon involves claims by victims of the Hungarian Holocaust. In 1944, Hungary rounded up more than 500,000 Jews and transported them to death camps by train, expropriating their property in the process. In 2010, victims and their heirs sued Hungary and its State-owned railway under the FSIA’s expropriation exception, arguing that their property was taken in violation of international law.
Four years ago, in Germany v. Philipp (2021), the Supreme Court read the FSIA’s expropriation exception not to reach a State’s expropriation of its own nationals’ property, limiting the potential plaintiffs in Simon to non-Hungarian victims. Now, the Court has further narrowed the exception by holding that the property establishing the required commercial nexus with the United States must be traceable directly to the expropriated assets.
The Expropriation Exception
The FSIA governs the immunities of foreign States and their agencies or instrumentalities in the United States. It provides that foreign States are generally immune from suit in federal and state courts unless one of the FSIA’s exceptions applies. There are exceptions for waiver, commercial activity, property in the United States, torts in the United States, enforcement of arbitral awards, maritime liens, and terrorism. There is also an exception for expropriations of property in violation of international law, which provides that foreign States are not immune from suit in any case:
in which rights in property taken in violation of international law are in issue and that property or any property exchanged for such property is present in the United States in connection with a commercial activity carried on in the United States by the foreign state; or that property or any property exchanged for such property is owned or operated by an agency or instrumentality of the foreign state and that agency or instrumentality is engaged in a commercial activity in the United States.
In Philipp, the phrase “in violation of international law” was at issue. The plaintiffs argued that expropriations connected with genocide were in violation of international law. But the Supreme Court held that the phrase was limited to the international law of expropriation. Under the so-called “domestic takings” rule, a State’s expropriation of its own nationals’ property is a domestic affair not governed by international law.
In Simon, the phrase “exchanged for such property” was at issue. Plaintiffs alleged that Hungary liquidated the property expropriated from Jewish people, commingled the proceeds with money in a treasury account, and later used funds from that account for commercial activity in the United States. This, the Court held, was not enough to satisfy the expropriation exception.
The Simon Decision
The Court began by noting that the expropriation exception clearly requires tracing for tangible property. If a foreign State expropriates a work of art, for example, a plaintiff would have to show that the work of art, or another work of art exchanged for it, was present in the United States. “The plaintiff could not merely allege … that the foreign sovereign maintains an art collection in the United States.”
“The plain text of the expropriation exception treats all ‘property’ alike,” Justice Sotomayor noted, “whether that property is tangible (like a piece of art) or fungible (like cash).” [I]f instead of exchanging the expropriated artwork for another piece of art,” she continued, “the foreign sovereign sells it and deposits the cash proceeds into a bank account used for commercial activities, that mere fact does not relieve plaintiffs from alleging some facts that enable the reasonable tracing of those proceeds to the United States.”
“Commingling allegations are therefore not enough on their own,” Justice Sotomayor reasoned, “because they do not allow for plausible tracing of specific funds.” Echoing an observation at oral argument about a gift from her mother, she deemed it “an attenuated fiction” to say “that commingling funds in an account, even if done decades earlier, means the account today still contains funds attributable to the sale of expropriated property.”
Justice Sotomayor was at pains to say that liquidating expropriated property does not necessarily doom an expropriation claim under the FSIA. The proceeds might be kept in a separate account, as they were in the Sabbatino case that led to the Second Hickenlooper Amendment and ultimately to the FSIA’s expropriation exception. Or a foreign State might, “soon after commingling funds from the sale of expropriated property, spen[d] all the funds from the commingled account in the United States as part of its commercial activity here.” Or a foreign State might spend more in the United States from the account than the amount of funds unrelated to the expropriation. But these possibilities are bound to be rare. “It is true,” Justice Sotomayor conceded, “that, because money is fungible, it will likely be difficult to trace cash from the sale of expropriated property after it is commingled.”
Justice Sotomayor buttressed her textual argument with considerations of reciprocity and international law. Quoting the U.S. amicus brief, she suggested that reading the expropriation exception more broadly might expose the United States to “retaliatory or reciprocal actions” in foreign courts. At oral argument, Justice Samuel Alito was skeptical of this argument, and for good reason. The United States is the only country with an expropriation exception in its foreign sovereign immunity law, and it seems fanciful to suggest that other countries would change course just to retaliate against the United States.
Justice Sotomayor also worried about “conformity with international law.” She noted correctly that the expropriation exception “departs from the restrictive theory” of foreign State immunity by allowing suits against foreign States based on their sovereign acts. The more narrowly the exception is interpreted, the smaller the risk that the United States is seen to violate international law.
A Word About International Law
It always makes me nervous when Supreme Court Justices talk about international law, because almost invariably they get something wrong. This is even true of Justice Sotomayor who generally does an excellent job understanding how international law works.
The Simon opinion starts by discussing how the restrictive theory of sovereign immunity evolved, the origins of the expropriation exception, and the relationship between the two. “In 1952,” it notes, “the State Department adopted a ‘restrictive’ theory of foreign sovereign immunity, under which a foreign sovereign generally is immune from civil suit for sovereign acts but not for its commercial acts.” To the extent this suggests that the restrictive theory is limited to commercial acts, it is mistaken.
As the International Court of Justice’s decision in Jurisdictional Immunities of the State (2012) makes clear at paragraph 60, the restrictive theory holds that States are not immune from suits based on their “non-sovereign activities.” Non-sovereign activities are ones that persons other than States can engage in. Commercial activities are certainly non-sovereign. But so, I have argued, is terrorism.
On the other hand, expropriation is clearly an act that can only be done by a State. The U.S. expropriation exception is a departure from the restrictive theory and so should perhaps be interpreted narrowly. But it is important to point out that this is only true with respect to claims against Hungary and not with respect to claims against its State-owned railway. Although the FSIA extends State immunity to State-owned corporations, no other country does this, and no rule of international law requires it.
Unanswered Questions
The Court left unanswered what role, if any, common-law tracing principles have to play under the expropriation exception. At oral argument, both parties disclaimed reliance on such principles. In retrospect, that may have been a mistake for plaintiffs, since it appears that some of those principles might have supported its position. Justice Sotomayor did caution that “[c]ourts should not import reflexively those principles and rules into this context,” and this seems likely to discourage lower courts from relying on them going forward.
The Court also found it unnecessary to resolve other questions discussed in the briefs. Among these is which party bears the ultimate burden of persuasion on immunity. As I have previously explained, every circuit to have addressed the question—ten in total—has held that the foreign State bears ultimate burden of persuasion because the FSIA’s legislative history clearly states that “[t]he ultimate burden of proving immunity would rest with the foreign state.” The amicus brief filed by the U.S. government, on the other hand, took the position that plaintiffs must bear the burden of persuasion because immunity under the FSIA is a question of subject matter jurisdiction.
I think that the United States is wrong and that the lower courts are right for reasons that I explain here. The U.S. government will almost certainly make the same argument in future cases. But for now, it remains true that the ultimate burden of persuasion on immunity rests with the foreign State.
Conclusion
The decision in Simon seemingly brings to an end fifteen years of litigation against Hungary by Holocaust victims in U.S. court. Justice Sotomayor tried to end her opinion on a positive note, observing that just because “a particular claim cannot satisfy the expropriation exception” does not mean “that it cannot be brought in any forum.” But the only other forum now available appears to be Hungarian court, and one might reasonably question how likely a suit there is to succeed.