Second Circuit Oral Argument Preview: U.S. v. Turkiye Halk Bankasi A.S.

Writing in partial dissent to the Supreme Court’s 2023 decision in Halkbank, Justice Neil Gorsuch observed that the Court sidestepped the hard questions and “shunt[ed] the case back to the Second Circuit to figure it out.” Gorsuch wrote that the decision “leaves litigants and our lower court colleagues with an unenviable task.” Ten months after the Court decided Halkbank, that unenviable task is now at hand.

The case gives the Second Circuit a first crack at scoping what post-Halkbank criminal foreign sovereign immunity doctrine might look like. 

Background

The Supreme Court’s decision in Halkbank held that the 1976 Foreign Sovereign Immunities Act (FSIA) applies only to civil and not criminal cases. But the Court remanded to the U.S. Court of Appeals for the Second Circuit to determine whether Halkbank may still be immune from prosecution under non-statutory common law—a kind of immunity defined pursuant to a judge-made doctrine. (Before the FSIA, foreign sovereign immunity operated as a common law doctrine that state and federal judges evolved over time.)  It’s not a simple issue. As Justice Gorsuch cautioned, “[m]any thorny questions lie down the ‘common law’ path and the Court fails to supply guidance on how to resolve any of them.” 

On Feb. 28, the Second Circuit will hear oral argument on remand in Halkbank, taking a first crack at those “thorny questions.” Tomorrow’s oral argument is the latest installment in protracted pre-trial litigation over Halkbank’s sovereign immunity defense to criminal charges in the Southern District of New York. 

Halkbank’s troubles began in October 2019. The U.S. Attorney for the Southern District of New York indicted Halkbank on six counts in connection with an alleged scheme to “violate and to evade prohibitions against Iran’s access to the U.S. financial system, restrictions on the use of proceeds of Iranian oil and gas sales, and restrictions on the supply of gold to the Government of Iran and to Iranian entities and persons.” Halkbank is a bank, but it isn’t just any bank—the Turkish government owns the majority of Halkbank’s shares. It was on that basis that Halkbank responded by moving to dismiss the indictment under the FSIA, which covers “instrumentalit[ies]” of foreign states.

The district court rejected the claim. Judge Richard M. Berman reasoned that the FSIA does not grant immunity in criminal cases and that, even if it did, Halkbank would not get FSIA protection because Halkbank “clearly” falls within the FSIA’s commercial activities exception.

The Second Circuit affirmed on interlocutory appeal. But the Second Circuit declined to reach the question of whether the FSIA covers criminal prosecutions—in its view, Halkbank lost under an FSIA provision that denies immunity protection for certain “commercial activities,” anyway, so the court didn’t need to decide the contested question about the FSIA’s scope.  

At the Supreme Court, Halkbank lost once more. Like the district court, the Court held that the FSIA does not extend to criminal proceedings. But Justice Brett Kavanaugh left the door open for Halkbank to prevail on other grounds. The parties made a variety of arguments before the Court about the scope of common law immunity (as opposed to statutory immunity) and its application to Halkbank, and the Court remanded the common law questions back to the Second Circuit. 

The Justice Department’s main argument on remand is that the U.S. government has determined Halkbank does not merit immunity protection and that the court should defer to that position. In response, Halkbank makes three general arguments. First, it argues that the court should not defer to the executive branch’s view that Halkbank does not merit foreign sovereign immunity. Second, it argues that in criminal cases, foreign sovereign corporations receive common law immunity protection. And third, it argues that even if there was no blanket rule that foreign sovereign corporations are covered by common law immunity in criminal cases, Halkbank would still receive immunity protection. The Justice Department disputes all three arguments. 

Executive Branch Deference

As a threshold matter, the parties have different views of the role of the executive branch. Both sides agree that the Second Circuit and other courts have deferred to the executive branch in determining whether a sovereign defendant should receive immunity in civil cases. And they agree that the Supreme Court has several times discussed the issue of executive branch deference in common law foreign sovereign immunity cases. But that’s basically where the agreement ends. 

Halkbank first challenges executive branch deference by distinguishing accepted practice in criminal cases from that in civil cases. Prior to the district court’s decision, Halkbank argues, “No court has previously deferred to the Executive on sovereign immunity in a criminal case.” In fact, it says, case law supports its claim of immunity from criminal prosecution. Halkbank cites a 1952 U.S. District Court for the District of Columbia decision pointing to sovereign immunity to quash a grand jury subpoena against an oil company under effective control of the British government. It also travels abroad to observe that “[t]he only known adjudication of a sovereign instrumentality’s criminal immunity from prosecution” ended with a 2004 French court dismissing a criminal indictment on sovereign immunity grounds.

Halkbank links this history to separation of powers concerns. In federal cases, it argues, the executive branch decides when to bring a criminal case, so deferring to the executive branch’s denial of federal criminal immunity “would mean that there would be no such thing as sovereign immunity in a criminal case.” Halkbank surfaces the judge-jury-executioner metaphor, arguing that this would “grant[] the Executive the powers of the Legislative and Judicial Branches and mak[e] Halkbank’s prosecutor into its judge and jury on a key jurisdictional safeguard.” 

The government pushes back on Halkbank’s reading of the 1952 subpoena decision and offers a different account of history. In the subpoena case, the government argues, the court just treated the State Department’s failure to formally suggest a denial of immunity as evidence that the executive branch had no position on whether the defendant was immune. According to the government, this meant the court never addressed the government’s argument that “by pursuing [the case] the Executive had already provided its position” on the immunity issue. It has a simple counter to Halkbank’s historical point: The Second Circuit resolved this question three years ago in this very litigation. The Second Circuit “correctly found” that “at common law . . . the decision to bring criminal charges would have necessarily manifested the Executive Branch’s view that no sovereign immunity existed” and thus would merit deference.  

Next, Halkbank argues that the executive branch should only receive deference as an on-switch to grant immunity and not as an off-switch to deny it. It links this claim to the “purposes of deference.” In its account, courts defer to the executive branch in order to minimize friction between the government and foreign powers.  But Halkbank argues that this logic doesn’t hold where deferring to the government means letting a prosecution against a foreign sovereign go forward—this creates friction, rather than minimizes it. 

The government responds that “the one-way street Halkbank proposes has no basis in law.” In its view, the “purposes of deference” cut in its favor: It’s very embarrassing for the government if the court favors “Halkbank’s self-interested determination of its own immunity” over the executive branch’s view. 

Relatedly, Halkbank concedes that the Supreme Court’s 1945 decision in Republic of Mexico v. Hoffman did suggest that deference to a denial of immunity is appropriate, but urges the Second Circuit to read Hoffman’s holding narrowly to apply only in the rare circumstance in which a court argues that the Court limited that principle to unique circumstances not present in this case. 

The government also disputes Halkbank’s interpretation of Hoffman, citing a 1964 Second Circuit decision which read Hoffman to mean “at least that the courts should deny immunity where the State Department has indicated, either directly or indirectly, that immunity need not be accorded.” The government points to an Eleventh Circuit decision green-lighting the prosecution of the former Panamanian dictator Manuel Noreiga, which reasoned that “by pursuing . . . this prosecution, the Executive Branch has manifested its clear sentiment that Noriega should be denied head-of-state immunity.” 

For its part, Halkbank in a reply brief distinguishes the Noriega case from its own because Panama never sought immunity for Noriega and because “[h]ead-of-state immunity also implicates the Executive’s Article II recognition power, which is not at issue in this case.” 

The quibble over the scope of Hoffman is one of many disagreements about the Supreme Court’s record in handling deference questions. 

Both parties claim that history is on their side. The government’s recitation of that history begins with the Supreme Court’s 1812 decision in Schooner Exchange, which held that a federal district court had no jurisdiction over a foreign sovereign-owned vessel seized in Philadelphia. The government points to dictum from Schooner that, it argues, articulates a limit to the background principle of foreign sovereign immunity: The executive branch has a “right to demand redress” from foreign sovereigns. And in the government’s account, “[i]n the two centuries since Schooner Exchange, the Supreme Court has continued to defer to Executive Branch determinations of when foreign sovereign immunity applies or does not apply.” It invokes Hoffman and a string of 21st century cases which, in its view, show that “the Supreme Court has frequently cited Schooner Exchange for the principle of deference to Executive Branch immunity determinations.” Halkbank takes different lessons from history. First, it argues that the government misinterprets the separation of powers implications of Schooner. In its view, only Congress—not the executive branch— can defeat the presumption in favor of foreign sovereign immunity. As to the government’s survey of 21st-century case law, Halbank dismisses many of the government’s supports as dictum—“neither binding nor correct.” 

Halkbank’s story of the Supreme Court’s deference jurisprudence starts a century later. The bank quotes Justice Gorsuch’s partial concurrence in Halkbank, which observes that “the strong deference cases didn’t appear until the 20th century.” Halkbank’s key case is Berizzi Brothers Co. v. SS Pesaro from 1926, where the Court granted sovereign immunity to a foreign vessel over a suggestion of non-immunity from the State Department. Although Berizzi Brothers faced significant subsequent criticism (a point the government makes), Halbank instead reads that critique more narrowly. It argues that Hoffman, a key critical case, didn’t have an issue with the non-deference in Berizzi but rather with Berizzi’s move to “improperly extend[] immunity” in a novel circumstance. And in any case, it argues, the Court’s dislike for Berizzi has never been “focused on Berizzi’s refusal to defer.”

Another major split between the parties’ views on deference reflects a sharp disagreement on the role of customary international law. Foreign sovereign immunity has its roots, at least in part, in customary international law. There’s a separate question—discussed in the section below—of whether customary international law principles cover Halkbank here. But the government raises a first-order question of whether customary international law even bears on this case at all. The government argues here that “[t]he limited role of customary international law is displaced when the Executive has made a controlling determination as to the application of foreign sovereign immunity.” It backs this up by pointing to “the Executive’s primacy in the field of foreign relations.” 

Halkbank responds that “[t]o say that any action by the Executive displaces customary international law would work a profound change to the separation of powers.” It cites the Supreme Court’s 1814 decision in Brown v. United States, which it argues stands for the proposition that “whether to reject international law is a ‘consideration of the legislature, not of the executive or judiciary.’” Halkbank also surfaces a 1793 writing from Alexander Hamilton arguing that the executive’s Article II obligation to “Take Care that the laws be faithfully executed” extends to the “laws of Nations.” Writing in the Transnational Litigation blog, Professor William Dodge similarly criticized the government's brief for “[m]arginializing international law.”

Restrictive Immunity and Criminal Cases

Another major point of dispute between the parties relates to what happens If the Second Circuit sides with Halkbank and declines to defer to the executive branch’s view. In other words, if the court will not defer to the government’s view on deference, how will it decide whether or not Halkbank is immune under common law foreign sovereign immunity? The parties are at an impasse on how to handle one key development in U.S. doctrine on this issue: the notion of restrictive immunity. 

The so-called restrictive theory of sovereign immunity was formally articulated in 1952 in a formal letter from the State Department to the Justice Department: Under a restrictive immunity regime, a state’s public acts receive immunity, but a state’s commercial acts do not. 

Halkbank argues the shift to restrictive immunity “never applied in criminal cases.” It quotes an international law treatise to argue that the restrictive immunity shift “left untouched the position of absolute immunity in criminal proceedings.” It also invokes a comparative lens: “without exception, every nation that has codified the restrictive theory has limited its application to civil cases, whether expressly or by implication.” By extension, it argues, it must be that foreign sovereign entities have absolute immunity in a criminal context. The government responds that Halkbank “lacks support for its sweeping assertion” about the inapplicability of the restrictive theory to criminal cases.

Halkbank’s Status Under the Restrictive Theory

If the government’s argument prevails—that is, restrictive immunity applies to criminal cases—the Second Circuit will still have to determine whether Halkbank gets immunity anyway, under the restrictive regime. Both sides agree that some instrumentalities of foreign sovereigns receive immunity, but they are at loggerheads on whether Halkbank is one of them.

Halkbank has two general arguments here. First, it argues that this prosecution targets “public acts undertaken as part of [Halkbank’s] sovereign obligations.” Second, Halkbank argues that the restrictive theory only applies to activities that occur outside of a foreign sovereign’s territory. The government disputes both arguments.

Halkbank—a state-owned commercial bank—explains that the Second Circuit does not use a “strict governmental/commercial” distinction under the enforcement regime. Halkbank identifies a Second Circuit case, Victory Transport Inc. v. Comisaria General, which instead spelled out five “categories” of acts that fall into the “public” bucket and receive immunity, two of which are relevant here: “internal administrative acts . . . [and] acts concerning diplomatic activity.”

It argues that Halkbank’s actions were not private commercial, but were in fact “a uniquely sovereign function—the intermediation of the proceeds of sales of oil and gas from Iran to Turkiye—that served numerous public and political purposes, most notably providing needed energy to Turkiye in light of the Republic’s relationship with the United States and the United States’ relationship with Iran.” It also pulls language from the indictment describing how this alleged scheme benefited the Turkish government by helping it “balance external payments.”

And Halkbank says that the indictment targets two kinds of acts that both fit within the restrictive theory. First, it focuses on “internal administrative acts” like serving as the “sole repository of proceeds from the sale of Iranian oil” on behalf of Turkey. Second, it argues that it was engaged in “diplomatic activity.” The indictment alleges that Halkbank misrepresented Turkey’s sanctions compliance; Halkbank argues that these allegations actually constitute “discussions between agents of the U.S. government and employees of a Turkish state-owned bank about the sovereigns’ bilateral relations,” which are effectively diplomatic in nature.

The government pushes back on three fronts. 

First, it argues that Halkbank misses the point in focusing on the “purpose” of its acts rather than the acts themselves. Quoting the Second Circuit’s opinion in the first go-round of the Halkbank case, the government argues that “regardless of why it committed the acts in the Indictment, the acts in the Indictment were commercial activities that ‘literally anyone can do.’” 

Second, in the alternative, the government argues that Halkbank’s conduct doesn’t fit into the Victory Transport framework. Victory Transport concerned a contract with a Spanish government agency to hire a vessel to ship wheat. The government observes that “even if the purpose [of the contract] was to help feed the people of Spain,” the Second Circuit held the conduct to be commercial because it was “conducted through private channels of trade” and the agency “acted much like any private purchaser of wheat.” That same distinction applies here—the alleged sanctions evasion was “conducted through private banking channels, and Halkbank acted much like any private bank in carrying out those transactions.”

And third, the government draws a distinction between corporations owned by foreign governments, on the one hand, and other forms of property owned by foreign governments, on the other. The government argues Halkbank’s cases involve property in the latter category—a ship and a railroad not organized as a corporation. The key distinction, in the government’s account, is that corporations are “juridical entities distinct and independent from their sovereign.” 

Halkbank’s second general argument is that the common law exception for commercial activities never applied to commercial activities conducted inside a foreign sovereign’s own territory. In support, it cites two cases and Section 69 of the Second Restatement of Foreign Relations Law. The full Second Restatement provision says that common law sovereign immunity “does not apply to a proceeding arising out of commercial activity outside its territory.” The implied upshot of Halkbank’s argument is that the inverse is also true.  

Halkbank links this territorial limit “with American law’s reluctance to ‘impose the sovereign will of the United States onto conduct occurring within the territorial jurisdiction of another sovereign,” as expressed in the Supreme Court’s extraterritoriality jurisprudence. 

The government broadly disputes Halbank’s territorial argument on the facts and the law. It responds that “Halkbank does not—and could not reasonably—argue that the presumption against extraterritoriality has any bearing on the charges here.” It emphasizes that the indictment alleges, and the Second Circuit found in its initial Halkbank decision, that Halkbank “engaged in acts performed in the United States in connection with its commercial activity, and acted outside the United States in connection with commercial activity that caused a direct effect in the United States.” 

Oral argument could signal the beginning of the end of the Halkbank saga, or recenter the focus on the underlying sanctions charges. Either way, the Second Circuit has a lot to sort through. Which branch decides immunity questions? How does the restrictive theory apply? What to do with Berizzi Brothers?  Lots and lots of “thorny questions.”