SIDLEY AUSTIN BROWN & WOOD LLP AND AFFILIATED PARTNERSHIPS

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1 SIDLEY AUSTIN BROWN & WOOD LLP AND AFFILIATED PARTNERSHIPS BEIJING CHICAGO DALLAS GENEVA HONG KONG LONDON LOS ANGELES NEW YORK SAN FRANCISCO SHANGHAI SINGAPORE TOKYO WASHINGTON D.C JULY 2002 LOAN AND MORTGAGE TRANSACTIONS WITH FOREIGN PERSONS ENTITLED TO IMMUNITY GENERAL A few years ago, the Second Circuit refused to approve the eviction of a tenant that had accumulated a staggering $400,000 in rental arrears on a luxurious leased midtown Manhattan office space. The reason: diplomatic immunity of the tenant, the Permanent Mission of Zaire to the United Nations ( UN ). In sending the disappointed landlord home with empty hands, the Court of Appeals offered a piece of advice: A landlord in [appellant s] position that desires to rent to a foreign mission may... be able to protect itself by requesting a waiver of inviolability in advance or by demanding additional security... If a sophisticated landlord like [appellant] fears some risk in renting to a UN mission, it is not without notice of the diplomatic immunities with which it may later become entangled. 767 Third Avenue Associates et al. v. Permanent Mission of the Republic of Zaire to the UN, 988 F.2d 295, 303 (2d Cir. 1993). The risks, and the advice set forth above, apply equally to financial institutions that lend money to foreign diplomats to buy real property. Moreover, the problems discussed above are not limited to permanent missions of foreign countries to the UN. A multitude of other entities, such as foreign embassies (located in Washington, D.C.), foreign consular offices (scattered throughout the U.S.), as well as the UN itself and a host of other international organizations, are all entitled to foreign sovereign, diplomatic or similar immunities. In addition, the foreign employees of these entities, which, according to a recent survey, include over 37,000 individuals, also are entitled to varying types of immunities, ranging from full diplomatic immunity to very limited immunity. This monograph provides a road map for the sophisticated, yet somewhat perplexed, mortgage lender regarding the scope of immunity to which each type of individuals or entities is entitled when involved in real estate transactions and how to protect against the associated risks. For further information on these matters, please contact Joel Singer in Sidley Austin Brown & Wood s Washington, D.C. office, 1501 K Street, N.W., Washington, D.C , by telephone (202) , by facsimile (202) , or by , joelsinger@sidley.com. The affiliated firms, Sidley Austin Brown & Wood LLP, a Delaware limited liability partnership, Sidley Austin Brown & Wood, an Illinois general partnership, Sidley Austin Brown & Wood, an English partnership, and Sidley Austin Brown & Wood, a New York general partnership, are referred to collectively as Sidley Austin Brown & Wood.

2 The description below, however, provides only general applicable principles. There are numerous variations under which specific foreign countries or international organizations have more or fewer immunities than the standards summarized below. I. FOREIGN EMBASSIES AND THEIR PERSONNEL A. Foreign Embassies Under the Foreign Sovereign Immunities Act of 1976 ( FSIA ), 28 U.S.C. 1330, 1602 et seq., subject to a number of exceptions, foreign states are immune from the jurisdiction of state and federal courts. Id Similarly, subject to a number of exceptions, the property of a foreign state that is located in the United States is immune from attachment and execution. Id Commercial activity by a foreign state is one of the main exceptions to its immunity from both court jurisdiction, id. 1605(a)(2), as well as from attachments and execution, id Under one of the other FSIA exceptions, foreign states are not immune from court jurisdiction in any case... in which... rights in immovable property situated in the United States are in issue. Id. 1605(a)(4). Likewise, such immovable property may be attached or executed upon court judgment, unless it is used for maintaining a diplomatic or consular mission or the residence of the chief of such mission. Id. 1610(a)(4)(B). This protection is consistent with the treatment of diplomatic missions under the Vienna Convention on Diplomatic Relations of 1961, 23 U.S.T. 3227, T.I.A.S. 7502, 500 U.N.T.S. 95 (the Diplomatic Convention ), which was incorporated into U.S. domestic law through the Diplomatic Relations Act of 1978, codified at 22 U.S.C. 254a-e. Under the Diplomatic Convention, the premises of a foreign diplomatic missions are inviolable and immune from attachment or execution. Id. Article 22. The FSIA provides, however, that a foreign state may waive its immunity from court jurisdiction, id. 1605(a)(1), and from attachment or execution, id. 1610(a)(1). B. Foreign Diplomats The immunities to which diplomats are entitled are defined in the Diplomatic Convention, which distinguishes between the scope of immunity provided to (1) diplomatic agents (a term encompassing the head of the foreign mission and all of its members having a diplomatic rank); (2) members of the mission s administrative and technical staff; and (3) members of the service staff who are employed in the domestic service of the mission. (1) Diplomatic Agents (a) General Immunity from the Civil Jurisdiction of the Courts Under Article 31 of the Diplomatic Convention, foreign diplomatic agents are entitled to full diplomatic immunity from the civil jurisdiction of federal and state courts of the U.S. This immunity applies to both acts performed in conducting official functions as well as to all other acts performed outside the scope of the official duties of the diplomatic agent. Under Article 37(1) of the Diplomatic Convention, members of the family of a diplomatic agent who are not U.S. citizens and who form part of the agent s household enjoy the same privileges and Loan and Mortgage Transactions With Foreign Persons Entitled to Immunity Page 2

3 immunities as the diplomatic agent. Article 31, however, contains three exceptions to this broad immunity, including with regard to: a real action relating to private immovable property situated in the territory of the receiving State, unless he holds it on behalf of the sending State for purposes of the Mission. Id. Article 31.1(a). Accordingly, it has been long settled that a diplomatic agent that purchases or leases immovable property in order for that property to be used as his or her own private residence is not entitled to diplomatic immunity with regard to such property. Fernandez v. Fernandez, 545 A.2d 1036 (Conn. 1988), later proceeding 490 U.S (1989) and cert. den. 493 U.S. 958 (1990). However, while a financial institution can sue a diplomatic agent under this exception in an action in which the real property is itself the disputed object of the litigation, the financial institution cannot sue the diplomatic agent for breach of the underlying loan contract. This is because a breach of contract lawsuit is not excepted under Section 31.1(a) of the Diplomatic Convention. This may limit the choice of remedies available to the financial institution in case of non-payment of loans. For instance, in case of non-payment, the financial institution will have the right to foreclose on the property and transfer title to the property on its name, but it will likely not be able to seek damages for breach of contract. This contract-related immunity may be waived. However, under the Diplomatic Convention, the waiver must be done by the sending state. Article 32(1). Accordingly, a waiver by the diplomatic agent alone will be ineffective. The waiver also must be express. Article 32(2). A separate waiver is required in respect of execution of judgments. Article 32(4). (b) Inviolability of a Diplomat s Private Premises According to Article 30(1) of the Diplomatic Convention, [t]he private residence of a diplomatic agent shall enjoy the same... protection as the premises of the mission. As noted above, diplomatic mission premises are inviolable and agents of the federal, state and local authorities, may not enter them, except with the consent of the head of the mission. Moreover, such premises are immune from attachment or execution. Accordingly, when a plaintiff obtains a court decision ordering that ownership to property be transferred to the plaintiff, the plaintiff cannot evict the diplomat from the property, if that property is actually being used by the diplomat as his or her private residence. This restriction applies even if the property is no longer legally registered in the diplomat s name (after the foreclosure), so long as the diplomat chooses to continue to use the property as his or her private residence. See generally, 767 Third Avenue Assoc. v. Permanent Mission of Zaire to the UN, 988 F.2d 295 (2d Cir. 1993) (noting that, even when diplomatic immunity from the civil jurisdiction of the court does not exist, the mission s premises whose status is equal to a diplomat s private residence is inviolable and protected). The financial institution s risk, therefore, is that, if it needs to foreclose on the property, the diplomat may attempt to prevent eviction by asserting inviolability of the property as the Loan and Mortgage Transactions With Foreign Persons Entitled to Immunity Page 3

4 diplomat s private residence. In order to eliminate this risk, the financial institution must obtain a waiver of this protection. 767 Third Avenue Assoc., at 305. However, that waiver must be obtained from the foreign state, because, as noted above, a waiver of this protection by the diplomat will be ineffective. (2) Members of the Administrative and Technical Staff Unlike diplomatic agents, who are entitled to full immunity, members of a foreign mission s administrative and technical staff are entitled to immunity only in connection with performance of their official duties. Diplomatic Convention, Article 37(2). This type of immunity is often called functional immunity, because it applies only to acts performed in fulfillment of official functions, but not to acts performed otherwise. It is well-established that members of the administrative and technical staff of foreign embassies are not entitled to immunity in connection with purchasing or renting immovable property for their own purposes, including property to be used as a private residence, because such an activity is clearly performed outside the course of their official duties. Significantly, in most other respects, such embassy employees are treated equally to diplomatic agents, including with respect to the inviolability and protection of immovable property used as their private residence. Diplomatic Convention, Article 37(2). (3) Members of Service Staff Since members of service staff of diplomatic missions perform only support tasks, their level of immunity is much lower than that of the two other categories of embassy employees. Similar to the members of the administrative and technical staff, the immunity of the members of service staff covers only official acts. Diplomatic Convention, Article 37(3). Unlike such administrative and technical staff, however, real property of a foreign mission s service staff used as their private residence does not enjoy inviolability and protection. Id. (4) General Limitations to Diplomatic Immunity Members of the administrative and technical staff, as well as members of the service staff, of a mission are not entitled to immunity if they are U.S. citizens or U.S. permanent residents ( green card holders). Diplomatic Convention, Article 37(2), (3). In addition, foreign countries often provide their nationals who travel abroad diplomatic passports and, more confusingly, U.S. authorities often give such persons a diplomatic visa, as a courtesy only, even though such persons are not diplomats employed by the embassy of such foreign country. Those individuals, therefore, are not entitled to immunities. To be entitled to immunities, such persons must be accredited by the State Department. See, e.g., Haley v. State, 88 A.2d 312 (1952) (immunity denied because notice of defendant s employment not communicated to and not accepted by State Department). Loan and Mortgage Transactions With Foreign Persons Entitled to Immunity Page 4

5 II. FOREIGN CONSULAR OFFICES AND THEIR PERSONNEL A. Foreign Consular Offices Consular offices may have different titles. If they perform the full spectrum of consular services, they will normally be called Consulate General or Consulate. If the consular office performs a more limited function, it may be called Trade Office, Economic & Commercial Office, Office of Tourism, Information Center or similar names. Regardless of name, under the FSIA, the premises of foreign consular offices are entitled to the same immunity and protection as those of foreign embassies. Id. 1610(a)(4)(B). The Vienna Convention on Consular Relations of 1967, 21 U.S.T. 77, T.I.A.S. No. 6820, 596 U.N.T.S. 261 (the Consular Convention ), which regulates the operation and status of foreign consular offices, likewise establishes that consular premises are inviolable and protected. Consular Convention, Article 31. Similarly, under the FSIA, where a foreign state has waived its immunity with regard to a consular office, it shall not be immune from the jurisdiction of a federal or state court, id. 1605(a)(1), or from attachment or execution, id. 1610(a)(1). B. Consular Officers Foreign consular personnel are not entitled to full immunity, but only to immunity in respect of acts performed in the exercise of consular functions. Consular Convention, Article 43(1). No distinction exists in this regard between the head of the consular office (normally, the Consul General) and the other consular officers and employees. Specifically excepted from such immunity is a civil action arising out of a contract concluded by a consular officer or a consular employee in which he did not contract expressly or impliedly as an agent of the sending State. Id. Article 43(2)(a). It is well-established that a consular officer who leases or purchases real estate for personal residence or investment purposes will not be immune in a civil action related to such a lease or purchase. Significantly, unlike the private residence of a diplomat, the private residence of a consular officer is not inviolable and, therefore, consular officers are not protected against eviction under this principle either. III. INTERNATIONAL ORGANIZATIONS A. The UN (1) The UN Organization The UN, its property and assets enjoy immunity throughout the world from every form of legal process, unless expressly waived. Convention on the Privileges and Immunities of the UN of 1946 ( UN Immunities Convention ), 21 U.S.T. 1418, Section 2. Under Section 3 of this Convention, the premises of the UN are inviolable. This general provision is confirmed and supplemented by the Headquarters Agreement between the U.S. and the UN of 1947 (the Headquarters Agreement ), 61 Stat. 3416, T.I.A.S. No. 1676, 11 U.N.T.S. 11. The immunities accorded to the UN by the UN Headquarters Agreement and the UN Immunities Convention Loan and Mortgage Transactions With Foreign Persons Entitled to Immunity Page 5

6 were incorporated into U.S. domestic law through the International Organizations Immunities Act, codified at 22 U.S.C. 288 et seq. (2) Foreign Employees of the UN Section 18(a) of the UN Immunities Convention states that [o]fficials of the United Nations shall be immune from legal process in respect of words spoken or written and all acts performed by them in their official capacity. A similar provision appears in the International Organizations Immunities Act. 22 U.S.C.A. 288d(b). Section 20 of the UN Immunities Convention states that only the Secretary-General of the UN (but not any individual UN employee) may waive the immunity of any UN employee. It is well-established that real property transactions (whether a lease or a purchase) in which UN employees are involved, while not acting on behalf of the UN, such as for private residence or investment purposes, do not fall within the group of acts protected by the functional immunity to which such employees are entitled. See, e.g., Agostini v. Antueno, 199 Misc. 191; 99 N.Y.S.2d 245, 248 (1950). Thus, for instance, if the need arises for a financial institution to sue a UN employee in connection with a loan and mortgage transaction, the employee will not be entitled to shield himself from such a lawsuit by claiming UN official immunities. Nor will he be entitled to any other legal protection against eviction from the house, such as under the concept of inviolability of private residence. A small group of high-ranking UN officials, often referred to as the top 40 tier (because only some 40 UN employees belong to it), however, is entitled to a larger scope of immunity. Thus, under Section 19 of the UN Immunities Convention, the UN Secretary General and all Assistant Secretaries General are entitled to full diplomatic immunity as defined in the Diplomatic Convention. (3) Representatives of Foreign Governments to the UN The protection and inviolabilities accorded under the Diplomatic Convention to foreign embassies in Washington, D.C. apply equally to the permanent missions to the UN of member states. See generally, 767 Third Avenue Associates v. Permanent Mission of the Republic of Zaire. Representatives of foreign governments to the UN are similarly entitled to the same protection to which diplomats are entitled. Thus, the UN Headquarters Agreement states in Article V(5) that representatives of the member states shall be entitled in the territory of the United States to the same privileges and immunities... as it accords to diplomatic envoys accredited to it. See also Section 11(g) of the UN Immunities Convention. Accordingly, in determining the scope of immunity of any particular employee of a specific foreign mission to the UN and whether real estate purchased or leased by such an individual for private residence purposes is inviolable, the analysis should follow the principles described in Part I of this monograph and will depend on the personal diplomatic rank of such an individual. Loan and Mortgage Transactions With Foreign Persons Entitled to Immunity Page 6

7 B. Other International Organizations Under the International Organizations Immunities Act, 22 U.S.C. 288 et seq., the U.S. President is authorized to designate, by executive order, additional international organizations, which, once designated, will enjoy the immunities speciated in that act. Id Over the years, more than 75 international organizations have been thus designated, including well-known organizations such as the UN and the World Bank, as well as less known organizations, such as the International Fertilizer Development Center and the International Pacific Halibut Commission. The full list of the designated organizations appears in 22 U.S.C.A. 288, Historical Note. Under this act, designated international organizations, their property and assets, enjoy the same immunity from suit and any form of legal process as is enjoyed by foreign governments, unless waived. Id., 288(a)(b). However, officials employed by designated international organizations enjoy functional immunity only, that is, immunity from suit and legal process relating to acts performed by them in their official capacity and falling within their functions. Such immunity may be waived by the relevant international organization. Id. 288d. An identical type of limited, functional immunity is accorded by the International Organizations Immunities Act to representatives of foreign governments to such designated international organizations, which may also be waived by the sending government. Id. As such, they are entitled to less protection and immunity than representatives of foreign governments to the UN who, as indicated above, are entitled to full diplomatic immunity. It is well-established that, both officials employed by international organizations, as well as representatives of foreign governments to such organizations (other than the UN) are not entitled to any immunity from court jurisdiction or protection from eviction with regard to real estate transactions, if the real estate was purchased or leased for private residence or investment purposes. IV. CONCLUSION A financial institution that provides a mortgage loan to a foreign person or entity entitled to immunity undertakes a legal risk. One of the primary manners by which to reduce such a risk is to obtain a waiver of immunity. For the waiver to be effective, however, it must be drafted properly so as to cover all the relevant immunities and be obtained from the foreign state or international organization rather than from the individual person involved. This publication has been prepared by Sidley Austin Brown & Wood LLP for information purposes only and does not constitute legal advice. This publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. Readers should not act upon this publication without seeking professional counsel.