Litigation Comment: The FSIA’s Misrepresentation Exclusion

In a recent decision, the United States District Court for the Southern District of New York held that a claim for fraudulent conveyance met the requirements of the FSIA’s tort exception, 28 U.S.C. section 1605(a)(5).  See Peterson v. Islamic Republic of Iran, 10 CIV. 4518 KBF, 2013 WL 5538652, at *3 (S.D.N.Y. Oct. 8, 2013).  The ruling highlights the need for courts to consider the tort exception’s misrepresentation exclusion, 28 U.S.C. section 1605(a)(5)(B), with respect to any alleged claim arguably arising out of misrepresentation or deceit.

There is not much FSIA case law relating to the misrepresentation exclusion.  However, there is a great deal of authority under the Federal Tort Claims Act’s misrepresentation exclusion, 28 U.S.C. section 2680(h).  Since the FSIA’s misrepresentation exclusion was based upon section 2680(h), De Sanchez v. Banco Central de Nicaragua, 770 F.2d 1385, 1398 (5th Cir. 1985), defense counsel in FSIA cases must be familiar with the relevant FTCA precedent.

Although the case law cannot be adequately summarized here, there are several key issues to keep in mind:

•          The exclusion for actions based on misrepresentation or deceit “is broadly construed.”  Maryland Cas. Co. v. United States, No. C 05-02558 JSW, 2006 WL 563046, at *9 (N.D. Cal. Mar. 6, 2006).

•          The misrepresentation exclusion “encompasses claims arising out of negligent, as well as willful, misrepresentation.”  Janowsky v. United States, 913 F.2d 393, 396 (7th Cir. 1990).

•           The exclusion “bars not only claims of negligence in the misrepresentation, but in the conduct underlying the misrepresentation.”  Dorking Genetics v. United States, 76 F.3d 1261, 1264 (2d Cir. 1996).

•          The exclusion applies irrespective of whether the allegations are based upon affirmative misrepresentations or omissions.  JBP Acquisitions LP v. United States ex rel. FDIC, 224 F.3d 1260, 1266 (11th Cir. 2000).

•           The term “misrepresentation” is “broad enough to reach all types of claims for misrepresentation, whether those claims seek recovery for commercial injury, physical injury, or emotional injury.”  Najbar v. United States, 723 F. Supp. 2d 1132, 1137 (D. Minn. 2010), aff’d, 649 F.3d 868 (8th Cir. 2011).

•          In determining whether a plaintiff’s claims are barred by the misrepresentation exclusion, courts must look to the “gravamen” of the claim.  Deloria v. Veterans Admin., 927 F.2d 1009, 1012-13 (7th Cir. 1991).

“[T]he essence of an action for misrepresentation, whether negligent or intentional, is the communication of misinformation on which the recipient relies.”  Block v. Neal, 460 U.S. 289, 296 (1983).

It is not clear how the plaintiff’s fraudulent conveyance claim in the Peterson case – which is now on appeal – would fare under this analysis, though at least one court has found such claims to run afoul of the FTCA’s misrepresentation exclusion.  Yagman v. Whittlesey, 2:12-CV-08413-SVW-CW, 2012 WL 5831169, at *3 (C.D. Cal. Nov. 2, 2012).  The Peterson case nevertheless serves as a reminder that the misrepresentation exclusion should be fully litigated in FSIA cases, since it is an area with significant promise for foreign sovereign defendants.