In New York City’s suit to collect
local property taxes on non-diplomatic portions of real estate owned by U.N.
missions of India and Mongolia, Second Circuit rules that liability to pay such
taxes falls within real property exception to Foreign Sovereign Immunities Act
The headquarters of the Permanent
Mission of India to the United Nations (the PMI) lies in a 26‑floor building on
East 43rd Street in New York City owned by the Government of India. The PMI
uses the first six floors, basement, and cellar of this building mainly for diplomatic
offices, while the top 20 floors consist of residential units. Sixteen
diplomatic employees of the PMI (all below the rank of Head of Mission or
Minister Plenipotentiary) and their families, as well as security personnel and
a driver, live in these units; all of these employees are Indian nationals who
receive this housing rent‑free.
A six-story building on East 77th
Street houses the Ministry for Foreign Affairs (MFA) of the People’s Republic
of Mongolia (the PRM) which the PRM owns. The occupants seemingly use the first
two floors for the MFA’s offices and the third floor for the Ambassador’s
apartment. On the top three floors, there are six apartments in which lower‑level
employees of the mission and their families reside, rent‑free. Both missions
claim that, for various reasons, the housing of diplomatic employees on‑site is
essential.
New York law exempts real
property owned by a foreign government from taxation if it is “used
exclusively” for diplomatic offices or for the quarters of a diplomat with the
rank of ambassador or minister plenipotentiary to the United Nations. N.Y. Real
Property Tax L. Section 418. On the other hand, “[i]f a portion only of any lot
or building... is used exclusively for the purposes herein described, then such
portion only shall be exempt and the remainder shall be subject to taxation.”
Id.
The City has been levying
property taxes against the two properties in question for years, but has been
unable to get the missions to pay. By operation of New York law, these unpaid
taxes eventually became tax liens held by the City against these two
properties. According to the City, as of February 1, 2003, the PMI property
owed about $16.4 million in unpaid property taxes and interest, while the MFA
is in arrears for about $2.1 million.
In April, 2003, the City filed
separate complaints in state court seeking judgments establishing the validity
of the tax liens on the mission buildings. Both missions removed their cases to
the New York federal court. After limited discovery, the missions moved to
dismiss for lack of subject matter jurisdiction. The district court denied the
motions in July 2005 solely on the ground that these suits implicate the
“immovable property” exception to the Foreign Sovereign Immunity Act’s (FSIA’s)
general rule that foreign governments are immune from suit. This interlocutory
appeal followed. The U.S. Court of Appeals for the Second Circuit affirms and
remands.
[Meanwhile, Congress has been
actively involved in the issues directly pertaining to this litigation.
Provisions included in appropriations bills enacted in each of the past two
years require that 110 percent of unpaid property taxes owed by any country be
withheld from that country’s foreign aid. For unpaid property taxes to be
subject to this withholding requirement, however, the amount owed must be
determined “in a court order or judgment entered against such country by a
court of the United States or any State or subdivision thereof.” Foreign
Operations, Export Financing, and Related Programs Appropriations Act of 2006,
P.L. No. 109‑102, Section 543 (2005); Consolidated Appropriations Act of 2005,
P.L. No. 108‑447, Section 543 (2004). Thus, this provision cannot be activated
if no court can adjudicate the property tax controversy.]
The Circuit Court first notes
that it reviews de novo the district court’s conclusions of law regarding
jurisdiction under the FSIA. Moreover, the plaintiff who seeks to establish
jurisdiction bears the burden of producing evidence sufficient to support a finding
that a specific exception to its presumptive immunity applies; the foreign
state then bears the ultimate burden of persuasion on this question.
In this case, the City argued
that jurisdiction lies under the FSIA’s “immovable property” exception. It provides
that a foreign state shall not be immune from jurisdiction in any case in which
“rights in immovable property situated in the United States are in issue.” 28
U.S.C. Section 1605(a)(4). The parties take very different stances on how
generously to read this exception. It is a matter of first impression in the
Second Circuit whether the exception only applies to disputes over title,
ownership or possession of the immovable property itself or whether it reaches
more broadly to suits like this one over the validity of a tax lien.
Here, the controversial issue is
the meaning of “rights in” immovable property. Looking at the mere words, the
Court finds that it supports the City’s position. By its terms, it does not
limit itself to cases where the specific right at issue is title, ownership, or
possession. It certainly does not specifically exclude cases where the right at
issue is a lien. The plain language does not restrict this provision to cases
where the foreign government’s rights in the property are at issue. The words
suggest that it would suffice that the City’s rights in the property are in
dispute. There is, however, some ambiguity.
“Until the middle of the last
century, the United States followed what is known as the ‘classical or
virtually absolute theory of sovereign immunity,’ the animating principle of
which was that a sovereign cannot, without his consent, be made a respondent in
the courts of another sovereign. [Cite].”
“In 1952, the Tate Letter
announced the United States’ decision to join most other countries in switching
to the so‑called ‘restrictive theory’ of sovereign immunity, under which ‘the
immunity of the sovereign is recognized with regard to sovereign or public acts
(jure imperii ) of a state, but not with respect to private acts (jure
gestionis).’ It is clear from the legislative history and settled in our
caselaw that Congress’s intent in enacting the FSIA was to largely codify the
restrictive theory of sovereign immunity set forth in the Tate Letter.”
“Applying the general principle
that animates the Tate Letter and, thus, the FSIA itself ‑‑ immunity is
available only where a state is acting in a sovereign capacity, and not with
respect to a state’s ‘private acts’ ‑‑ we think ownership of real estate in a
foreign country must be considered the latter, because ownership itself is not
inherently a sovereign act.”
“However, as actually codified in
the FSIA, the diplomatic property exception applies only to protect property
used for such purposes from attachment or execution following a judgment. See
28 U.S.C. Section 1610(a)(4)(B) (stating that immovable property situated in
United States is subject to attachment, ‘Provided, That such property is not
used for purposes of maintaining a diplomatic or consular mission or the residence
of the Chief of such mission’). Thus, it is quite clear from the text that the
FSIA does not bar jurisdiction, but does bar certain remedies, on the basis of
a property’s diplomatic status.” [Slip op. 7]
Reliable legislative history also
supports this understanding. “In general, the House Report restates the
immovable property exception in terms as broad as, or even broader than, those
used in the text itself. [Cite]. In addition, it confirms that consideration of
a property’s diplomatic status takes place with respect to available remedies,
not with respect to jurisdiction.”
“Moreover, the narrow
interpretation of the immovable‑property exception put forward by defendants is
difficult to square with Congress’s explicit reliance on the courts to adjudicate
the property tax liabilities of foreign governments.[Cites]. Here, adoption of
the defendants’ proposed interpretation of FSIA would make dead letters out of
Congress’s recent enactments, which were intended to address the exact
controversy before us today, because no court could provide the adjudication
required to trigger them. We do not lightly reach such a result, and certainly
will not do so where nothing in the statutory language or legislative history
remotely requires it.”
“Finally, because the FSIA was
intended to codify an already existing practice of following the restrictive
theory of sovereign immunity, and because that policy was itself meant to bring
the United States into conformity with other countries that had already adopted,
or were in the process of adopting, the restrictive theory, it is instructive
to look at contemporaneous expressions of the content of this exception to
sovereign immunity for actions involving real property owned by the foreign
state. ... First, the 1965 Restatement (Second) of Foreign Relations Law of the
United States, the most recent restatement at the time of the FSIA’s adoption,
states that a foreign state’s immunity does not extend to ‘an action to obtain
possession of or establish a property interest in immovable property located in
the territory of the State exercising jurisdiction.’ Id at Section 68(b). Thus,
at the time of the FSIA’s adoption, any action to ‘establish a property
interest in immovable property’ was permissible.”
“Second, [Article 9 of] the
European Convention on State Immunity, which was drafted in 1972 and ratified
in 1976, just prior to the enactment of the FSIA, states: ‘A Contracting State
cannot claim immunity from the jurisdiction of a court of another Contracting
State if the proceedings relate to: (a) its rights or interests in, or its use
or possession of, immovable property; or (b) its obligations arising out of its
rights or interests in, or use or possession of, immovable property and the
property is situated in the territory of the State of the forum.’ The European
understanding ‑‑ presumably known to the drafters of the FSIA ‑‑ was that this
exception covered a broad range of suits, including those arising out of the
foreign state’s obligations stemming from its ownership of property.”
“Of course, we must take note
that Congress elected not to use the far more detailed language of the European
Convention. Yet nothing in the vague but broad formulation used in the FSIA ...
precludes its interpretation as synonymous to the European Convention’s
version. The European Convention version is split into two prongs, the first
covering the foreign state’s rights in the immovable property and the second
addressing the state’s obligations arising out of its ownership of property.”
“Congress did not simply adopt
language tracking the first prong, and thereby limit the reach of the immovable‑property
exception to cases in which the foreign state’s rights in the property are at
issue, but rather passed a provision that does not specify whose rights must be
at issue. As indicated, supra, we think this provision, therefore, is most
naturally read to cover not only the foreign state’s rights in the property but
also its obligations, i.e., rights retained in the property by the local state
or another party.”
“Shortly after the FSIA’s
passage, the International Law Commission (the ‘ILC’) began work on what is now
known as the United Nations Convention on Jurisdictional Immunities of States
and Their Property (UNC). In 1983, it finalized its version of the immovable
property exception, which largely tracks the European Convention’s version.”
“Not only did the ILC draft a
broad and detailed version of the immovable property exception, it gave a
coherent account of why such an exception has always been recognized, even
under the absolute theory of sovereign immunity. [As the ILC points out], [t]he
acquisition and continued ownership of property in a foreign country ‘is made
possible only by virtue of the application of the internal law or private law
of the State of the situs.’ [Cite]... Because ownership itself is only possible
through the operation of local law, ‘[t]he outside State or extraterritorial
State as an outsider must, from the start, fully recognize and respect the
local or territorial internal law which unquestionably governs the legal
relationship between the foreign State and the property so acquired.’” [Slip
op. 8-10]
“Ownership of property connotes a
bundle of related rights and obligations defined by local property law. A
foreign state cannot assume the benefits of ownership ‑‑ including the right to
exclude others from the property with the assistance of the local government
and, significantly, the right to sue those who violate its rights ‑‑ while
simultaneously disclaiming the obligations associated with them. When owning
property abroad, a foreign state must follow all the same laws that pertain to
private owners of such property, except to the extent that it can point to
specific exceptions in that country’s agreements with the United States,
treaties, or other sources of law. This principle ‑‑ when owning property here,
a foreign state must follow the same rules as everyone else ‑‑ long predated
the restrictive theory of sovereign immunity and the FSIA. See The Schooner
Exch. v. McFaddon, 7 Cranch 116 (1812) ... We see no evidence that the FSIA was
meant to alter it.”
“We conclude that the ‘immovable
property’ exception to foreign sovereign immunity should be construed to
include any case where what is at issue is: (1) the foreign country’s rights to
or interest in immovable property situated in the United States; (2) the
foreign country’s use or possession of such immovable property; or (3) the
foreign country’s obligations arising directly out of such rights to or use of
the property. We think this interpretation is the most consistent with the
broad, albeit vague, language of the provision itself, as well as with the
FSIA’s general principle of withdrawing sovereign immunity where states act in
the same manner as private actors.” [Slip op. 11]
“... What is in dispute in this
case is the extent of defendants’ obligations under local law (here, property
taxes) arising directly out of their ownership of real property in the United
States. The immovable property exception thus provides jurisdiction over this
matter. ...”
“The instant dispute appears to
revolve around the proper interpretation of a treaty [the Vienna Convention on
Diplomatic Relations, 23 U.S.T. 3227; T.I.A.S. 7502; 500 U.N.T.S. 95, in force
for U.S. Dec. 13,1972] and the application of that treaty to these facts. The
Supreme Court has made clear that such a controversy is well within the
competence and authority of the federal courts and is not a non‑justiciable
political question.[Cites]. Leaving such construction to the courts does not
threaten the United States’ compliance with international protections for
diplomatic property; rather, the alternative ‑‑ granting dismissal for want of
jurisdiction whenever a defendant can raise a plausible claim of the treaties’
applicability ‑‑ could effectively expand the treaties’ scope.” [Slip op.
12-13]
The Court, however, does not
express any opinion as to whether the City may levy property taxes on those
portions of embassy buildings that are used to house lower‑level diplomatic
employees. The Court only holds that the district court correctly found that it
had jurisdiction to hear the controversy.
Citation: City of New York
v. The Permanent U.N. Mission of India, 2006 WL 1086376 (2nd Cir. April 26).
**** Mr. William B. Blanchard (“Bill Blanchard”) is a Real Estate Attorney with offices in St. Charles and Oakbrook Terrace, Illinois. Bill specializes in representing real estate clients for purchases and sales as well as home owner real estate tax assessment appeals. Mr. Blanchard is General Counsel for Gaia Title, Inc. a title insurance agency and settlement services provider. The Company is owned by real estate attorneys who demand exemplary title insurance services and accurate and efficient settlement services. As General Counsel he is responsible for title examination, commitment and policy review, escrow settlement supervision and regulatory review. - Attorney Profile: https://solomonlawguild.com/william-b-blanchard%2C-esq - Attorney News: https://attorneygazette.com/william-blanchard%2C-esq#40b43d7b-94b2-48d3-b055-1979a636f1e7
