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.
