This recap was authored by D. Marko Cimbaljevich, a summer associate at Akin Gump and a student at Catholic University of America – Columbus School of Law.
Does a federal court have jurisdiction over a lawsuit by a U.S. city to declare the validity of a tax lien, even if that tax lien is imposed on property owned by a foreign government? By a vote of seven to two, the Supreme Court today held that federal courts do have jurisdiction to hear such cases.
According to Benjamin Franklin, “in this world nothing can be said to be certain, except death and taxes.†However, the Permanent Missions of India and Mongolia to the United Nations have vehemently defied these famous words by refusing to pay over eighteen million dollars in property taxes and interest imposed by New York City. In assessing the taxes, the city relied on a state law providing that, although real property owned by a foreign government is generally exempt from property taxation if it is “used exclusively†for either diplomatic offices or housing an ambassador to the United Nations, taxes may be imposed on any portion of the property not used for these purposes. Here, India used twenty of the twenty-six floors in its Manhattan building to house lower-level mission employees and their families, while Mongolia used three of its floors to house its lower-level employees.
After the governments refused to pay the property taxes, the city filed suit in state court seeking judgments to establish the validity of tax liens on the two properties. Both countries removed their cases to federal district court, where they argued that they were immune from suit under the Foreign Sovereign Immunity Act (“FSIAâ€). The district court rejected this argument, invoking the “immovable property†exception to FSIA, which applies when “rights in immovable property situated in the United States are in issue.†On appeal, the Second Circuit agreed with the district court that this exception encompassed a declaratory judgment on a tax lien. The court of appeals liberally construed the “immovable property†exception to the FSIA to include any cases involving: (a) the foreign country’s rights to or interests in immovable property; (b) the foreign country’s use or possession of the property; or (c) the foreign country’s obligations arising directly out of such rights to or use of the property. The Supreme Court granted cert. to determine whether the declaration of a tax lien falls within the “immovable property†exception and whether New York City may look to international treaties, not signed by the United States, for guidance towards interpreting the underlying intent of the FSIA exception.
In an opinion by Justice Thomas, the Court today held that the FSIA does not immunize a foreign government from a lawsuit to declare the validity of tax liens on its real property. In determining the exception’s scope, the Court, “as always,†began examining the text of the statute. Emphasizing that the exception “focuses more broadly on ‘rights in’ property,†the Court couched its inquiry as whether “an action seeking a declaration of the validity of a tax lien places ‘rights in immovable property . . . in issue.†Although the statute did not specifically list a “tax lien†exception, the Court examined the definitions of “lien,†“incumbrance,†and “tax lien†and concluded that liens are interests in real property. Indeed, Justice Thomas noted, a tax lien “inhibits one of the quintessential rights of property ownership – the right to convey.†Therefore, the Court determined, the text of the “immovable property†exception makes it “plain†that a suit to establish the validity of a lien falls within the exception.
Turning to Congress’s purpose in enacting the FSIA, the majority also identified two well-recognized purposes of the FSIA as supporting its textual analysis: “adoption of the restrictive view of sovereign immunity and codification of international law at the time of the FSIA’s enactment.†Under the restrictive theory, public acts by sovereign governments are immune from suit, while private acts are not. Property ownership, the majority explained, is not an inherently sovereign or public function. Furthermore, the Court noted, international practice at the time of the FSIA’s enactment also supports the city’s argument. Finally, the Restatement of Foreign Relations Law in effect when the FSIA was enacted also established an exception for any “action to obtain possession of or establish a real property interest in immovable property.â€
Justice Stevens, joined by Justice Breyer, dissented. In his view, none of the exceptions to the FSIA addresses actions brought to establish the validity of a tax lien. Moreover, the dissent noted, the purpose of Congress in enacting the FSIA was not to waive sovereign immunity in tax litigation. Justice Stevens also warned that, under New York’s municipal law, tax liens may arise out of routine civil controversies, such as landlord-tenant disputes and sidewalk slip-and-falls. In the case of foreign governments, the city could enforce the liens and potentially pierce sovereign immunity, creating an exception that would, in the dissent’s view, “swallow the rule.â€
The Court’s narrow holding today provides New York City with some relief as the city tries to collect over eighteen million dollars in unpaid property taxes. However, the Court left open a much broader issue: whether a U.S. court may look to international treaties, not signed by the United States, for guidance in interpreting the underlying intent of U.S. statutes. Only time will tell when this issue will come to the Court’s attention again. For now, the governments of India and Mongolia have learned their lesson: heed Benjamin Franklin’s wise words.
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