Expropriation Exception Saves Case, But District Court Holds Commercial Activity Exception Does Not Apply, Claims to Two of the Paintings at Issue are Dismissed as Well

The ongoing litigation between the heirs of Baron Mor Lipot Herzog and several state owned Hungarian museums has produced a new decision interpreting the scope of the Foreign Sovereign Immunities Act (FSIA), a frequent tool used to seek jurisdiction over Nazi-looted art claims brought in U.S. federal court. Relying on Supreme Court and D.C. Circuit cases in the last few months, the U.S. District Court held that claims for all but two of the paintings at issue can proceed under the FSIA’s “expropriation exception” codified in 28 U.S.C. § 1605(a)(3), but that the FSIA’s “commercial activity exception”—which the D.C. Circuit had held applicable in 2013 to the same case—could not be invoked based on the facts in the record developed in discovery. De Csepel v. Republic of Hungary, 2016 U.S. Dist. LEXIS 32111 (March 14, 2016).

The decision is most notable given its kinship to the recent Simon v. Republic of Hungary, because both reject the idea that the persecution of a group of people by its own government, often known as the “domestic takings” rule, or some other corollary of the Act of State Doctrine, should always be immune from U.S. court review. That doctrine still exists, but these decisions together confirm the consensus view that it does not apply to Holocaust claims. In other words, the takings of the Holocaust are genocidal per se, and genocide violates international law regardless of the citizenship of the aggressor and the victim. The ramifications of these two decisions could be far-reaching.

David de Csepel, Angela Maria Herzog, and Julia Alice Herzog filed the case in 2010. They are the heirs of Baron Mor Lipot Herzog, a Jewish Hungarian collector who died in 1934. His remarkable collection included works by El Greco, Velázquez, Lucas Cranach the Elder, van Dyck, Courbet, and Corot. The case alleged that collection was first taken away from the family starting with the German occupation of 1944 (after years of increasing persecution, including the death in a forced labor camp of the Baron’s son András).

Some of the Herzog collection had been recovered by the Allies and returned to Hungary. Hungary entered into a treaty in 1947 that addressed in part Hungary’s role as custodian of heirless works. Hungary did return some of the collection to Herzog family members, but they later characterized that term as “on paper” or in the form of short term loans only (a description that Hungary contests). Under what they deemed harassment, the family allowed some of the works to return to the Museum of Fine Arts for display in 1948. The Herzogs engaged in a series of correspondence about the collection, from which, the current plaintiffs allege, a bailment resulted. Bailment is simply the act of entrusting an object to another; a coat or car check are the most common examples. Under a bailment, there is no ownership transfer, and the bailee (the person getting the property) is obliged to safeguard it and give it back upon demand.

Decades later after the fall of Communism, the family restarted its efforts. The Baron’s daughter Erzsébet negotiated the return of six less significant works before her death in 1992. Martha Nierenberg, Erzsébet’s daughter, pursued legal action in Hungary. Initially, the Budapest Municipal Court recognized their claim and awarded ownership of eleven paintings, but in January 2008 an appellate court reversed the decision. The Herzog heirs have consistently characterized that reversal as politically motivated.

The plaintiffs filed suit in 2010 and invoked 28 U.S.C. § 1605(a)(3), the “expropriation exception” to sovereign immunity under the Foreign Sovereign Immunities Act for claims related to property taken in violation of international law; and the “commercial exception” under 28 U.S.C. § 1605(a)(2).

In 2011 the Hungarian defendants moved to dismiss the Complaint. The District Court denied the motion in most respects, but did dismiss any claim to the paintings that were the subject of the Nierenberg litigation in Hungary. De Csepel v. Republic of Hungary, 808 F. Supp. 2d 113, 128-129 (D.D.C. 2011). On appeal, the D.C. Circuit passed on analyzing the expropriation exception, but did find that the commercial exception did apply. See de Csepel v. Republic of Hung., 75 F. Supp. 3d 380 (D.D.C. 2014). The Court of Appeals also held that neither the 1947 peace treaty between Hungary and the victorious Allies, nor a 1973 property settlement agreement between the United States and Hungary, barred the claims, largely because those agreements dealt with resolution of claims about the rights of persons who were U.S. citizens at the time of the injury, which the Herzogs were not during the war. The case was remanded to the District Court, where a series of motion resulted in decision this week on Hungary’s latest challenge to the FSIA jurisdiction.

Importantly, the D.C. Circuit recently decided another expropriation exception case involving Hungary, in that case concerning claims against the Hungarian railways for their role in the deprivation and deportation of Hungarian Jews. In that case, the D.C. Circuit reversed an earlier dismissal, finding that the expropriation exception applied, and that the 1947 treaty, in fact, did not bar the claims. Simon v. Republic of Hungary, 2016 App. LEXIS 1438, No. 14-7082, at *2 (D.C. Cir. Jan. 29, 2016). Simon endorsed the espousal theory, namely, that the U.S.-Hungary treaty could not be construed to waive on behalf of the United States those claims on behalf of persons who were not U.S. citizens at the time of the claims.

With this new controlling precedent, the District Court found that the Herzog heirs met the expropriation exception, but not the commercial activity exception because it felt that the causes of action arose not out of the alleged bailment contracts today, but rather the post-war conduct of Hungary. Further, the court felt that the bailment agreements alleged did not require performance in the citing a partial performance that took place in Budapest when the Museum of Fine Arts told Erzsébet that an she or her agent could pick up the paintings in Budapest.

The District Court upheld the availability of the expropriation exception, relying heavily on Simon. Although the D.C. Circuit had previously focused on the bailment agreements under the commercial activity exception now held to be inapplicable, Simon had found the expropriation exception because of their association with the Holocaust: “Such takings, the Simon Court held, "did more than effectuate genocide or serve as a means of carrying out genocide. Rather, we see the expropriations as themselves genocide." Id. (emphasis added). The De Csepel District Court did conclude that two works which discovery had shown were not taken from the Herzogs before or during the war did not qualify, and dismissed the claims as to those paintings.

Hungary had also argued that the paintings that were returned at one point to the Herzogs should fall outside the expropriation exception, which requires a taking without prompt, adequate, and effective compensation required by international law. The court disagreed: “It is puzzling to suggest that artwork confiscated during the Holocaust as part of a campaign of genocide loses its status as property ‘taken in violation of international law’ because it is eventually released to its owner after years of deprivation.”

Lastly, relying on the recent years’ Chabad, De Csepel, and Simon decisions from the Court of Appeals, the District Court rejected Hungary’s exhaustion argument. The court concluded that the obligation to seek remedies abroad does not apply to the taking of Jewish property during the Holocaust because, as the Simon court observed, “when the international law violation at issue is genocide, a failure to seek compensation from the foreign state is irrelevant to the jurisdictional analysis.”

The Hungarian defendants will likely appeal interlocutory, as the FSIA allows them to do. Given the dismissal of the claims over two of the paintings, the plaintiffs will likely cross-appeal; they may as well. Much further wrangling no doubt lies ahead absent some kind of compromise.