Gary B. Filler, Trustee of the Tra Rights Trust and Lawrence Perlman, Trustee of the Tra Rights Trust v. Hanvit Bank and Chohung Bank, Shinhan Bank, Janet Baker, James Baker, Jkbaker, Llc, and Jmbaker, LLC v. Hanvit Bank and Chohung Bank, Shinhan BankGary B. Filler, Trustee of the Tra Rights Trust and Lawrence Perlman, Trustee of the Tra Rights Trust v. Hanvit Bank and Chohung Bank, Shinhan Bank, Janet Baker, James Baker, Jkbaker, Llc, and Jmbaker, LLC v. Hanvit Bank and Chohung Bank, Shinhan Bank
Gregory P. Joseph, Gregory P. Joseph Law Offices, LLC, New York, NY, for Plaintiffs-Appellees Gary B. Filler and Lawrence Perlman.
Karen C. Dyer, Boies Schiller & Flexner, LLP, Orlando, FL, for Plaintiffs-Appellees Janet Baker, James Baker, JKBaker LLC, and JMBaker LLC.
Daniel L. Brockett, (Mark C. Dosker, Rebecca W. Haverstick, on the brief), Squire, Sanders & Dempsey, LLP, New York, NY, for Defendant-Appellant Chohung Bank.
Steven M. Bierman, (Alan M. Unger, Daniel A. McLaughlin, Mark E. Walli, Catherine B. Winter, Allen C. Kim, on the brief), Sidley Austin Brown & Wood, LLP, New York, NY, for Defendant-Appellant Hanvit Bank.
B.D. PARKER, JR., Circuit Judge:
Defendants-appellants Hanvit Bank and Chohung Bank (the “Banks“) appeal from interlocutory orders of the United States District Court for the Southern District of New York (Cedarbaum, J.) concluding that the Banks were not “foreign states” entitled to immunity under the Foreign Sovereign Immunities Act (“FSIA“),
The Filler plaintiffs are trustees of the TRA Rights Trust, which is the successor-in-interest of Seagate Technology, Inc. (“Seagate“) and holds all claims arising out of Seagate‘s acquisition in June 2000 of $170 million in stock of Lernhout & Hauspie Speech Products, N.V. (“L & H“), a Belgian software company. The Baker plaintiffs owned more than $300 million of L & H stock, which they obtained in June 2000 in a stock swap for their principal interest in Dragon Systems, Inc. A few months later, L & H was implicated in a multibillion dollar fraud permeating their worldwide operations. The fraud, which was perpetrated by senior management of L & H along with outside auditors and others in the United States and Korea, involved reporting hundreds of millions of dollars of nonexistent revenue from contracts with related parties or fictitious customers. After the fraud was exposed, more than one-third of the revenue reported by L & H for the 1998-2000 period was reversed, including the entirety of the $160 million of revenue reported by the firm‘s Korean operations in 1999 and 2000. This fraud has been the subject of an SEC as well as a criminal investigation and multiple arrests by Belgian authorities. Public exposure of the fraud caused a loss of 95% of L & H‘s market capitalization — about $9 billion — including the value of the stock held by the appellees.
Chohung Bank and Hanvit Bank are both commercial banks organized under the laws of Korea with headquarters in Seoul. Both banks were private entities prior to January 1999 when, because of severe financial problems, they received substantial capital infusions from the Korean Deposit Insurance Corporation (KDIC). The KDIC is a Korean governmental institution created by the Korea‘s Depositor Protection Act and a presidential decree. Under its enabling statute, the KDIC exists as a “special legal entity” for the purpose of operating a deposit insurance system. The KDIC is run by the Korean Ministry of Finance and the Economy of the Republic of Korea. At the time of the filing of these actions the KDIC directly owned 80% of the shares of Chohung Bank2 and 100% of the shares of Woori Finance Holdings Co., Ltd., which in turn owned 100% of the shares of Hanvit Bank. Since the filing of the actions, the KDIC has sold Chohung Bank to a private entity, and Hanvit Bank is expected to emerge as a private entity in the near future. In their complaints, the Baker and Filler plaintiffs allege that Chohung and Hanvit (along with Shinhan Bank, a party not appealing here) were involved in the fraud perpetrated by L & H, and that the two banks actively made material misrepresentations to their independent auditors about the source and amounts of L & H‘s revenue.
The Filler plaintiffs’ action was filed against Chohung and Hanvit in October 2001 while the Baker plaintiffs’ complaint was filed against the two banks a year later. In February 2003, the District Court dismissed the Filler plaintiffs’ claims against Chohung and Hanvit on the grounds that the Banks enjoyed sovereign immunity under the FSIA, and in March dismissed the Baker plaintiffs’ claims against the Banks on the same ground. Following the Supreme Court‘s decision in Dole Food in April 2003, the plaintiffs in both cases successfully moved for reconsideration. The District Court vacated its previous orders dismissing the claims against Hanvit and Chohung, finding that Dole Food precluded sovereign immunity where, as here, government ownership of the defendant corporations is indirect. The Banks appeal, and we affirm.
A. Standard of Review
We have appellate jurisdiction under the collateral order doctrine, which allows an immediate appeal from an order denying immunity under the FSIA. Transatlantic Shiffahrtskontor GmbH v. Shanghai Foreign Trade Corp., 204 F.3d 384, 387 (2d Cir. 2000); Drexel Burnham Lambert Group Inc. v. Comm. of Receivers for Galadari, 12 F.3d 317, 324 (2d Cir. 1993). We review a district court‘s legal determinations regarding its subject matter jurisdiction, such as whether sovereign immunity exists, de novo while reviewing its factual findings for clear error. Abrams v. Societe Nationale des Chemins de Fer Francais, 332 F.3d 173, 176 (2d Cir. 2003).
B. Sovereign Immunity
The FSIA is “the sole basis for obtaining jurisdiction over a foreign state in the courts of this country.” Saudi Arabia v. Nelson, 507 U.S. 349, 355, 113 S.Ct. 1471, 123 L.Ed.2d 47 (1993) (quotation marks and citation omitted); Robinson v. Gov‘t of Malaysia, 269 F.3d 133, 138-39 (2d Cir. 2001). The FSIA provides that: “[s]ubject to existing international agreements to which the United States is a party at the time of enactment of this Act a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter.”3
For purposes of this chapter —
(a) A “foreign state“, except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).
(b) An “agency or instrumentality of a foreign state” means any entity —
(1) which is a separate legal person, corporate or otherwise, and
(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof, and
(3) which is neither a citizen of a State of the United States as defined in section 1332(c) and (d) of this title nor created under the laws of any third country.
Further, there is no dispute that the KDIC is an organ of a foreign state — South Korea — under
(1) whether the foreign state created the entity for a national purpose;
(2) whether the foreign state actively supervises the entity;
(3) whether the foreign state requires the hiring of public employees and pays their salaries;
(4) whether the entity holds exclusive rights to some right in the [foreign] country; and
(5) how the entity is treated under foreign state law.
Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 846-47 (5th Cir. 2000) (quotation marks and citation omitted) (alteration in original); see Corporacion Mexicana de Servicios Maritimos, S.A., 89 F.3d 650, 655 (9th Cir. 1996). The District Court correctly concluded that the KDIC is an organ of a foreign state because the KDIC was formed by statute (the Korea Depositors Protection Act) and presidential decree, it performs functions traditionally performed by the government (protecting depositors and promoting financial stability), has its directors are appointed by the Ministry of Finance and Economy; its president appointed by the President of the Republic of Korea; and many of its operations overseen by the Ministry of Finance and Economy. Filler I, 247 F.Supp.2d at 428.
We note that Chohung and Hanvit claim to be majority-owned corporations of a foreign state for purposes of FSIA analysis even though Chohung is a second-tier subsidiary and Hanvit is a third-tier subsidiary. Accepting their analysis would permit an infinite number of subsidiaries to enjoy sovereign immunity. Each subsidiary becomes an agency or instrumentality, and therefore the “foreign state,” for purposes of assessing its majority ownership of the next subsidiary in line.
The District Court initially accepted the Banks’ argument, holding that such tiering was allowed and that Chohung and Hanvit were entitled to foreign sovereign immunity by virtue of KDIC‘s ownership interest in them. Filler I, 247 F.Supp.2d at 429.4 The Supreme Court then addressed tiering under the FSIA in Dole Food, affirming the Ninth Circuit and noting that “[t]he Court of Appeals resolved the question of the FSIA‘s applicability by holding that a subsidiary of an instrumentality is not itself entitled to instrumentality status. Its holding was correct.” 538 U.S. at 473. Because the companies claiming immunity were “separated from the [foreign state] by one or more intermediate tiers,” the Court found that these companies “were not instrumentalities of [the foreign state] under the FSIA at any time.” Id. at 473-74. The Court relied on the elementary principle of corporate law that corporations are distinct from their shareholders to conclude that “only direct ownership of a majority of shares by the foreign state satisfied the statutory requirement” of majority ownership. Id. at 474. In light of this ruling, the District Judge, acting on a motion for reconsideration under
While Dole Food rejected the contention that
Further, as the Ninth Circuit recognized, if Congress intended “foreign state” to mean “agency or instrumentality” as appellants urge, it must also have meant for “foreign state” to mean “political subdivision” by the terms of
Additionally, our interpretation is consistent with the restrictive theory of sovereign immunity codified in the FSIA. Republic of Austria v. Altmann, 124 S.Ct. 2240, 2249, 159 L.Ed.2d 1 (2004); Verlinden B.V. v. Cent. Bank of Nig., 461 U.S. 480, 486-89, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983). The restrictive theory provides that “a state is immune from the jurisdiction of foreign courts as to its sovereign or public acts (jure imperii), but not as to those that are private or commercial in character (jure gestionis).” Nelson, 507 U.S. at 359-60. Finally, we note that while the KDIC serves a public function in ensuring the stability of the South Korean banking system, the same cannot be said of the defendant Banks, which have conceded that they have reverted or are in the process of reverting back to private ownership. Thus, denial of sovereign immunity to Chohung and Hanvit would not undermine a public function of the government of Korea and basically impacts the private commercial interests of the Banks.
III. CONCLUSION
For these reasons, we affirm the District Court‘s denial of defendant-appellants’ motions to dismiss on the ground of sovereign immunity.