Hyunseok Kim | Republic of Hungary v. Simon

INTRODUCTION

This case presents a circuit split on the interpretation of the Foreign Sovereign Immunities Act's (FSIA) expropriation exception, specifically concerning the “commercial nexus” requirement and pleading standards. The dispute arises from a case filed by plaintiffs, mostly foreign nationals, seeking compensation for personal property seized by Hungary or MÁV (the Hungarian national railway) during the Holocaust in 1944. See Simon v. Republic of Hungary, 37 F. Supp. 3d 381, 385–386 (D.D.C. 2014); Simon v. Republic of Hungary, 77 F.4th 1077, 1091–92 (D.C. Cir. 2023) (Simon III).

The FSIA's expropriation exception removes a defendant's immunity when the matter concerns property rights taken in violation of international law, and the property has a “commercial nexus” with the United States. This commercial nexus requirement is met if the property is either located in the United States in connection with commercial activity or owned by foreign state agencies engaged in commercial activity in the United States. See 28 U.S.C. § 1605(a)(3).

The exception requires proof of four elements: (1) property rights are at issue; (2) the property was taken; (3) the taking violated international law; and (4) one of the two commercial nexus requirements is met. Zappia Middle E. Constr. Co. v. Emirate of Abu Dhabi, 215 F.3d 247, 251 (2d Cir. 2000).

Plaintiffs alleged that the District Court for the District of Columbia had jurisdiction under 28 U.S.C. § 1605(a)(3). The court initially dismissed under the FSIA’s treaty exception, holding that the 1947 Treaty of Peace with Hungary provided an exclusive dispute-resolution process. Simon v. Republic of Hungary, 37 F. Supp. 3d 381, 420 (D.D.C. 2014).

The D.C. Circuit reversed. The holding relied in part on an interpretation that the expropriation exception did not incorporate the “domestic takings rule,” under which a sovereign’s taking of property from its own nationals falls outside the scope of international law. Such an interpretation was critical, because if the domestic takings rule was incorporated, Hungary’s taking of the plaintiff’s property did not violate international law, and the expropriation exception could not be applied.

However, the U.S. Supreme Court ruled exactly the opposite. The Court unanimously held that the expropriation exception “refers to violations of the international law of expropriation and thereby incorporates the domestic takings rule.” F.R.G. v. Philipp, 592 U.S. 169,187 (2021). The Court vacated and remanded the case for further proceedings consistent with Philipp. Republic of Hungary v. Simon.

While the case was pending, the district court faced another motion to dismiss. Citing Simon v. Republic of Hungary, the court held that allegations of historical commingling were sufficient to infer that defendants retained some expropriated property. Simon v. Republic of Hungary, 443 F. Supp. 3d 88, 104 (D.D.C. 2020). Because Hungary and MÁV raised a "factual challenge" to the plaintiffs' jurisdictional allegations, the court denied the motion to dismiss, and the defendants appealed.

Following the Supreme Court's remand after Philipp, the D.C. Circuit returned the case to the district court. On remand, the district court found that some plaintiffs had adequately alleged facts supporting reasonable inferences and denied the motion to dismiss for those plaintiffs.

The D.C. Circuit then concluded that the district court should have resolved factual issues still in dispute and remanded for further fact-finding. Republic of Hungary v. Simon, 592 U.S. 207, 208 (2021). However, it affirmed the district court's framework for assessing plaintiffs' allegations and burden allocation. Hungary and MÁV now seek certiorari.

ISSUE PRESENTED

(1) Whether historical commingling of assets is enough to establish that proceeds of seized property have a commercial nexus with the United States under the expropriation exception to the Foreign Sovereign Immunities Act.

(2) Whether a plaintiff must make out a valid claim that an exception to the Foreign Sovereign Immunities Act applies at the pleading stage, rather than merely raising a plausible inference. 

(3) Whether a sovereign defendant bears the burden of producing evidence to affirmatively   disprove a claim that the proceeds of property taken in violation of international law have a commercial nexus with the United States under the expropriation exception to the Foreign Sovereign Immunities Act.

THE ARGUMENTS

The Second Circuit Court of Appeals held that the expropriation exception requires the plaintiff, not the defendant, to “trace the proceeds a sovereign received from expropriated property to funds spent on property present in the United States.” Rukoro v. Fed. Republic of Germany, 976 F.3d 218, 225­–226 (2d Cir. 2020). Therefore, the court held that the assertion of historical commingling of assets is not enough to satisfy the “commercial nexus” prong test.

The court also held that plaintiffs cannot rely on conclusory allegations that property converted into currency and commingled with other funds in a sovereign’s treasury was used for commercial activity in the United States decades later. See id. This interpretation effectively raises the hurdle that plaintiffs must overcome to proceed with their claims. Indeed, the court interpreted Bolivarian Republic of Venezuela v. Helmerich & Payne Int’l Drilling Co., 581 U.S. 170 (2017), to require a “valid claim” or “valid argument” that the expropriation exception applies at the pleading stage. Rukoro, 976 F.3d at 225; Comparelli v. Republica Bolivariana de Venezuela, 891 F.3d 1311, 1326 (11th Cir. 2018).

Regarding the burden of proof issue, the Second Circuit also ruled in favor of defendants: plaintiffs bear the burden of production in tracing proceeds, not sovereign defendants. See Rukoro, 976 F.3d at 224–25.

While the Second Circuit has adopted a stringent approach to the expropriation exception, the D.C. Circuit's position stands in sharp contrast, as it significantly lowers the bar for plaintiffs seeking to overcome sovereign immunity. The D.C. Circuit held that plaintiffs need not “produce evidence tracing property in the United States or possessed by MÁV to property expropriated from them.” The court based this conclusion on policy grounds: once property is commingled, “proceeds ordinarily become untraceable to any specific future property or transaction” and thus a tracing requirement would “thwart most claims under the expropriation exception.” Simon III, 77 F.4th at 1116

The Second Circuit also lowered the pleading standards in favor of plaintiffs as well. The court held that “nothing in Helmerich affects the familiar standard we have consistently applied to review the plaintiffs’ factual allegations in FSIA cases.” Id. at 1104. The Simon III Court squarely held that “plaintiffs had no such burden.”  Id. at 1118. Instead, where commercial activity is present, a plaintiff need only make a conclusory allegation that the proceeds of seized assets were commingled with other funds sometime in the past, and a sovereign nation loses its immunity from suit. 

On the matter of parties’ burdens of proof, the same court held that “the ‘burden of proof in establishing the inapplicability of [the FSIA’s] exceptions is upon the party claiming immunity.’” Id. at 1116. In other words, a sovereign defendant bears the burden of producing evidence to affirmatively disprove that the proceeds of property taken in violation of international law.

LOOKING FORWARD

The consequences of this circuit split extend far beyond the FSIA's expropriation exception. The conflicting interpretations of Helmerich by lower courts potentially affect all disputes over jurisdiction under the FSIA. This impact is amplified by the fact that the D.C. Circuit is the primary venue for FSIA litigation, as 28 U.S.C. § 1391(f)(4) establishes it as a proper venue for all cases against foreign states. Furthermore, the commingling issue is likely to arise frequently in future FSIA cases, making resolution of this split particularly urgent.

The interpretation of the expropriation exception also carries significant international implications. An overly broad application could strain diplomatic relations and potentially lead to reciprocal actions against the United States in foreign courts. The financial stakes are considerable: in this case, the damages sought amount to nearly forty percent of Hungary's annual gross domestic product as of 2011, underscoring the potential for economic destabilization.

Given these far-reaching consequences and the need to maintain a consistent approach to foreign sovereign immunity, the Supreme Court may be inclined to adopt a narrower interpretation of the expropriation exception. Such an interpretation would align with the principle of restrictive sovereign immunity and preserve the exception for truly exceptional cases.

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