The City Of N.Y. v. The Permanent Mission Of India To The United Nations

618 F.3d 172

The CITY OF NEW YORK, Plaintiff-Appellee,

v.The PERMANENT MISSION OF INDIA TO the UNITED NATIONS, Defendant-Appellant,Great America Leasing Corporation, Jane Doe # 1 through Jane Doe # 20, the names of the last 20 defendants being unknown to the plaintiff, the persons or parties intended to be, persons or corporations, if any, having or claiming an interest in or lien upon the property described in the complaint, Defendants.

The City of New York, Plaintiff-Appellee,

v.The Bayaryn Jargalsaikhan, as principal resident representative to the United Nations of the Mongolian People's Republic, Defendant-Appellant.

Docket Nos. 08-1805-cv, 08-1806-cv.

United States Court of Appeals Second Circuit.

Argued: March 10, 2010.

Decided: Aug. 17, 2010.

COPYRIGHT MATERIAL OMITTED

Michael A. Cardozo, Corporation Counsel of the City of New York (John Low-Beer, Scott Shorr, Sarah Stewart, of counsel), for Plaintiff-Appellee.

Aaron Stiefel, Robert A. Kandel, Marisa Pizzolato, Kaye Scholer LLP, New York, N.Y., David O. Bickart, Kaye Scholer LLP, Washington, D.C., for Defendants-Appellants.

H. Thomas Byron III, Attorney, United States Department of Justice, Civil Division, Appellate Staff, Washington D.C. (Harold Hongju Koh, Legal Adviser, United States Department of State, James H. Thessin, Deputy Legal Adviser, United States Department of State, Susan Benda, Attorney Adviser, United States Department of State, Tony West, Assistant Attorney General, Lev. L. Dassin, Acting United States Attorney, David S. Jones, Assistant United States Attorney, Douglas Letter, Attorney, United States Department of Justice, Civil Division, Appellate Staff, on the briefs), for Amicus Curiae United States of America.

Before: CALABRESI, HALL, Circuit Judges, SESSIONS,¹ District Judge.

CALABRESI, Circuit Judge:

These consolidated appeals arise from a long-standing tax dispute between the City of New York (“the City”) and certain foreign sovereigns who operate missions to the United Nations in the City. For years, the City has assessed property taxes against these missions, maintaining that while those parts of embassy buildings that are used for diplomatic offices are exempt from property taxation under international and state law, other parts of the buildings-those that are used as residences for employees and their families-are not exempt. Appellants, the Permanent Mission of India to the United Nations (the “India Mission”) and the Principal Resident Representative of the Mongolian People's Republic to the United Nations (the “Mongolia Mission”)-collectively “the Missions”-have resisted paying any property taxes to the City. They contend that their entire embassy buildings are tax exempt.

This dispute, and the litigation it engendered, ultimately prompted the United States Department of State (“Department of State” or “State Department”) to act. In June 2009, the State Department issued a notice pursuant to its authority under the Foreign Missions Act, 22 U.S.C. § 4301 et seq., establishing an exemption from real property taxes on property owned by foreign governments and used to house the staff of permanent missions to the United Nations or the Organization of American States or of consular posts. See Designation and Determination under the Foreign Missions Act (the “State Department Notice” or the “Notice”), 74 Fed.Reg. 31,788 (July 2, 2009). The Notice stated that this exemption would preempt inconsistent State and local laws and also that it would apply retroactively to taxes that had been previously assessed against the designated property. Id. We are now called upon to determine whether the action taken by the State Department was within its statutory authority. We conclude that it was. Specifically, we hold that the Foreign Missions Act (“FMA”) permits the State Department to designate affirmative benefits such as tax exemptions and that the Act allows the State Department to make such tax exemptions preemptive of State and municipal tax laws. We also hold that, under the circumstances of this case, the State Department acted within its power in designating this benefit as effective retroactively. Finally, we conclude that the Notice issued by the State Department was procedurally proper because it falls within the “foreign affairs function” exception to notice and comment under the Administrative Procedure Act, 5 U.S.C. § 553(a)(1).

BACKGROUND

I.

The India Mission is housed in a twenty-six story building, located at 235 East 43rd Street, New York, N.Y., and owned by the government of the Republic of India. The first six floors of the building, as well as the basement and the cellar, are used for diplomatic offices. The remaining floors are dedicated to rent-free residential space for security personnel, a driver, and the diplomats of the Mission and of India's consulate in New York (the offices of which are located elsewhere in the City). All of these employees rank below the head of the Mission, whose residence is not on site. The Mongolian Mission is housed in a multi-story building at 6 East 77th Street in New York City that is owned by the People's Republic of Mongolia. The first two floors are used for the Mission's offices. The third floor is used for the Ambassador's apartment. The top two floors are used as rent-free apartments for other employees of the Mission.

The City has consistently taken the position that mission property used for the residences of lower-level employees is subject to taxation, and it has been levying taxes on such properties for years. Both the India Mission and the Mongolia Mission have argued that these residences are exempt from taxation under international and New York law because the residences are used for the purposes of the mission/consulate. They have therefore refused to pay any property taxes to the City. By operation of New York law, the unpaid taxes converted into tax liens held by the City against the relevant properties.

II.

A.

In April 2003, the City filed separate complaints against several foreign missions in New York state court.² Pursuant to 28 U.S.C. § 1441(d), the Missions removed the cases to the United States District Court for the Southern District of New York. In its amended complaints, the City sought judgments for unpaid property taxes (and other unpaid charges) plus interest. The City also sought declaratory judgments to establish the validity of its tax liens against these missions. After limited jurisdictional discovery, the India Mission and the Mongolia Mission moved to dismiss, contending that, pursuant to the Foreign Sovereign Immunity Act (“FSIA”), 28 U.S.C. § 1604, the District Court lacked subject matter jurisdiction. The District Court denied the motion. It concluded that under the FSIA's “immovable-property” exception-which 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. § 1605(a)(4)-the court had jurisdiction to adjudicate the validity of the City's tax liens. See City of N.Y. v. Permanent Mission of India to the U.N. (“Permanent Mission I”), 376 F.Supp.2d 429, 439 (S.D.N.Y.2005).

The Missions filed an interlocutory appeal that was limited exclusively to the jurisdictional issue. We affirmed the judgment of the District Court, holding that the immovable property exception to foreign sovereign immunity provided jurisdiction over the matter because what was in dispute was “the extent of defendants' obligations under local law (here, property taxes) arising directly out of ownership of real property in the United States.” See City of N.Y. v. Permanent Mission of India to the U.N., 446 F.3d 365, 376 (2d Cir.2006). The Supreme Court granted certiorari, 549 U.S. 1177, 127 S.Ct. 1144, 166 L.Ed.2d 910, and affirmed. Permanent Mission of India to the U.N. v. City of N.Y., 551 U.S. 193, 127 S.Ct. 2352, 168 L.Ed.2d 85 (2007).

B.

The cases were then remanded to the District Court for proceedings on the merits. The parties cross-moved for summary judgment on the question of whether the parts of the properties used by India and Mongolia to house their staff were subject to real estate taxation. The District Court held that they were. See City of N.Y. v. Permanent Mission of India to the U.N. (“Permanent Mission II”), 533 F.Supp.2d 457, 460 (S.D.N.Y.2008).

The District Court first addressed the Missions' claimed tax exemption under the applicable Vienna Conventions: a) Article 32 of the Vienna Convention on Consular Relations, (“VCCR”), Apr. 24, 1963, 21 U.S.T. 77, (ratified 1969), for the portions of the premises that house consular staff and b) Article 23 of the Vienna Convention on Diplomatic Relations (“VCDR”), Apr. 18, 1961, 23 U.S.T. 3227, (ratified 1972), for the portions of the premises that house the U.N. Missions. Under the VCCR,

[c]onsular premises and the residence of the career head of consular post of which the sending State or any person acting on its behalf is the owner or lessee shall be exempt from all national, regional or municipal dues and taxes whatsoever, other than such as represent payment for specific services rendered.

VCCR art. 32. “[C]onsular premises” are defined in the VCCR as “the buildings or parts of buildings and the land ancillary thereto ... used exclusively for the purposes of the consular post.” Id. art. 1(j). As the District Court explained, the VCDR “reaches the same result as the VCCR but through a slightly more circuitous route.” Permanent Mission II, 533 F.Supp.2d at 461. Article 1 of the VCDR defines “premises of the mission” ³ to comprise:

the buildings or parts of buildings and the land ancillary thereto, irrespective of ownership, used for the purposes of the mission including the residence of the head of the mission.

VCDR art. 1(i). Article 23, in turn, provides:

The sending State and the head of the mission shall be exempt from all national, regional or municipal dues and taxes in...