ARTICLE
14 March 2025

Supreme Court Clarifies FSIA's Expropriation Exception In Republic Of Hungary v. Simon

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The U.S. Supreme Court unanimously held that a party cannot establish the U.S. commercial nexus required to invoke the FSIA's expropriation...
United States Litigation, Mediation & Arbitration

Key Takeaways:

  • The U.S. Supreme Court unanimously held that a party cannot establish the U.S. commercial nexus required to invoke the FSIA's expropriation exception by alleging a foreign state expropriated property in violation of international law, liquidated the property, commingled the proceeds with other funds, and then spent some of the commingled funds in the United States.
  • If a plaintiff seeks to satisfy the expropriation exception by alleging that funds present in the United States were "exchanged for" expropriated property, then the plaintiff must trace those funds back to the expropriated property.

On February 21, 2025, the Supreme Court issued its decision in Republic of Hungary v. Simon, addressing an important issue concerning the scope of the Foreign Sovereign Immunities Act ("FSIA")'s expropriation exception to sovereign immunity. The exception applies to claims concerning "rights in property taken in violation of international law" if the property, or property "exchanged for" such property, has a commercial nexus with the United States. 28 U.S.C. § 1605(a)(3). In Simon, as discussed in previous client alerts of August 21, 2024 and December 18, 2024, the Court considered whether a plaintiff could establish that "nexus" by alleging the expropriated property had been liquidated and commingled with other money, some of which was later spent in the United States. In a unanimous decision by Justice Sotomayor, the Court held that commingling of funds alone does not satisfy the expropriation exception's commercial nexus requirement.

The plaintiffs are Jewish survivors of the Hungarian Holocaust and their heirs who seek damages for property that Hungary and its state-owned railway company, Magyar Államvasutak Zrt., had systematically expropriated. The plaintiffs allege that Hungary liquidated the expropriated property and commingled the proceeds with other government funds, which, years later, were used in connection with commercial activity in the United States. The District Court and the D.C. Circuit Court of Appeals found these allegations sufficient to establish the required nexus with the United States under the expropriation exception. The D.C. Circuit reasoned that requiring plaintiffs to trace the specific funds from the sale of their expropriated property to commercial activity in the United States would render the exception a "nullity" in cases involving liquidated property.

The Supreme Court reversed, vacated the D.C. Circuit's decision, and remanded for further proceedings. In rejecting the plaintiffs' commingling theory, the Court explained that the FSIA does not treat fungible property, such as money, differently from non-fungible property. To establish the required commercial nexus under the expropriation exception, a plaintiff must show that the expropriated property, or property "exchanged for" such property, is either (1) in the United States in connection with a commercial activity carried on in the United States by the foreign state or (2) owned by an agency or instrumentality of the foreign state that is engaged in commercial activity in the United States. To show that property in the United States was "exchanged for" the expropriated property, the plaintiff must show that it can be traced back to the expropriated property.

Such tracing is easier when expropriated property is exchanged for non-fungible property. For example, if a foreign state expropriates a painting and exchanges it for another painting, then the plaintiff would have to show that the subsequently acquired painting is in the United States in connection with commercial activity. The tracing exercise is more difficult if the expropriated property is sold for money or other fungible property. Nevertheless, fungible property is not entitled to different treatment under the statute. Thus, if the foreign state expropriates a painting and sells it for a sum of money, then the plaintiff would have to show that those specific funds, and not just any funds from the state's treasury, are present in the United States in connection with commercial activity. This requirement applies even if the proceeds of the sale are deposited into a government account and commingled with other funds.

As difficult as it may be to satisfy the tracing requirement as to fungible assets, the Court made clear that it could be done in some circumstances. The Court noted that a plaintiff may satisfy the requirement if, for example, it alleges that a foreign sovereign deposited funds obtained in exchange for expropriated property in an account and then spent all the money in that account in the United States.

The Court explained that its interpretation of the expropriation exception is consistent with the structure and purpose of the FSIA, which codifies the restrictive theory of sovereign immunity. The Court noted that Congress did not intend the expropriation exception to "operate as a radical departure from basic principles of the restrictive theory." Adopting the plaintiffs' theory would be inconsistent with Congress' intention because it would expand the circumstances under which foreign sovereigns could be sued in the United States for public acts. The United States is the only country that recognizes an expropriation exception to sovereign immunity. The Court warned that interpreting the exception expansively would make the United States even more of an outlier and could create risk that other countries would reciprocate by subjecting the United States to the jurisdiction of their courts.

As a result of the Supreme Court's decision, plaintiffs seeking to invoke the FSIA's expropriation exception must be prepared to trace expropriated property or its proceeds to the United States. General allegations of commingling will not suffice.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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