Southern Cross Overseas Agencies, Inc., a New Jersey Corporation Transport International Pool Inc., a Pennsylvania Corporation v. Wah Kwong Shipping Group Ltd., a Foreign Corporation
Docket: 98-5185
Court: Court of Appeals for the Third Circuit; June 25, 1999; Federal Appellate Court
The case involves Southern Cross Overseas Agencies, Inc. and Transport International Pool Inc. (plaintiffs) appealing a dismissal of their complaint against Wah Kwong Shipping Group Ltd. (defendant) by the U.S. District Court for New Jersey. The plaintiffs allege they were defrauded by the Hong Kong corporation, which is part of a complex history of prior litigation, including an Australian liquidation and a New Jersey bankruptcy. The appeal addresses two main issues, one concerning the jurisdictional status of Hong Kong corporations. The Third Circuit Court disagrees with the Second Circuit's classification of Hong Kong corporations as "stateless" and thus outside federal alienage diversity jurisdiction. Instead, it endorses the U.S. State Department's view that Hong Kong corporations, while not "citizens" of the UK, are considered "subjects" of the UK for jurisdictional purposes. Consequently, the court affirms that it has subject matter jurisdiction over the case.
The court addressed two main issues: the statute of limitations regarding the plaintiffs' fraud claims and the question of subject matter jurisdiction. The plaintiffs filed their complaint in December 1996, but the District Court granted the defendant's motion to dismiss under Rule 12(b)(6), citing New Jersey's six-year statute of limitations for fraud. The fraudulent acts in question occurred in the mid-1980s, and the court found that the limitations period had expired. The plaintiffs argued they were unaware of facts leading to a potential cause of action until 1992. However, the court determined that it could take judicial notice of an earlier New Jersey bankruptcy opinion, which indicated that the creditors, including the plaintiffs, should have been aware of the facts necessitating inquiry into the alleged fraud. Consequently, the District Court's conclusion that the complaint was barred by the statute of limitations was affirmed.
The second issue involved subject matter jurisdiction, particularly regarding Wah Kwong, a Hong Kong corporation, which claimed it lacked alienage diversity jurisdiction under 28 U.S.C. § 1332(a)(2). The court emphasized the need to determine jurisdiction before addressing other issues, citing the Supreme Court's directive in Steel Co. v. Citizens for a Better Environment. Wah Kwong contended it was neither a citizen nor subject of a foreign state, thus falling outside the jurisdictional parameters. The District Court had found jurisdiction based on the idea of providing a neutral forum, but this reasoning was inconsistent with the Second Circuit's ruling in Matimak, which clarified that Hong Kong was not considered a foreign state for these purposes and that its corporations were not deemed citizens or subjects of the United Kingdom.
The definition of "foreign state" is not explicitly provided in the Constitution or 28 U.S.C. § 1332(a)(2), but it is generally accepted to refer to entities recognized by the U.S. executive branch. Hong Kong lacks formal recognition as an independent sovereign by the U.S. executive, which was affirmed in the Matimak case. Despite being a significant trading partner and having a special relationship with the U.S. established by the United States-Hong Kong Policy Act of 1992, this relationship does not equate to recognition of foreign statehood. The Matimak court emphasized the importance of recognition to avoid potential diplomatic conflicts arising from perceived biases in state courts against foreign nationals.
The court also addressed the definition of "citizens or subjects," affirming that a foreign state has the right to determine its own citizens per its laws, as established in previous cases. It concluded that Hong Kong corporations are not "citizens or subjects" of the United Kingdom, noting that the British Nationality Act 1981 applies only to natural persons and not to corporations, and the British Companies Act 1948 does not grant British nationality privileges to Hong Kong corporations. Consequently, the court determined that Hong Kong corporations are recognized under Hong Kong law only, thus rejecting the argument that they fall under British sovereignty.
Judge Altimari dissented, asserting that a "stateless corporation" is contradictory and highlighting the significance of Hong Kong-U.S. relations, alongside the State Department's stance favoring alienage jurisdiction for Hong Kong corporations. He proposed that diversity jurisdiction over a Hong Kong corporation could be established on three bases: 1) as a citizen or subject of a "de facto" autonomous state, 2) as a citizen or subject of the United Kingdom due to the strong connection between Hong Kong and the UK, or 3) as a citizen or subject of a "political subdivision" of the UK.
Most courts recognize that the issue of "statelessness" was not anticipated by the Framers of the Constitution, who assumed that non-U.S. citizens were subject to foreign government authority. Historical context shows that "citizens, subjects, and foreigners" were often referred to interchangeably, reflecting an inclusive intent that allowed all aliens to engage in federal court actions. Legal commentary from Story indicates that any individual who is not a U.S. citizen is deemed an alien entitled to sue in U.S. courts. Although foreign government structures were not seen as technicalities, the Framers did not consider them significant for federal jurisdiction. The dissent critiques the Matimak ruling for inadequately addressing the relevance of "statelessness," akin to how modern interpretations have adapted principles like the Fourth Amendment to contemporary contexts.
The excerpt emphasizes the significance of Hong Kong's status in relation to U.S. foreign relations, particularly given its historical ties as a British Dependent Territory and its current status as a special administrative region of China. The treatment of Hong Kong corporations is posited to influence diplomatic relations with both the United Kingdom and China. The State Department asserts that Hong Kong nationals and corporations were subjects of British sovereignty, maintaining that while Hong Kong operates autonomously, it is ultimately under UK jurisdiction. This is reflected in international agreements and legal structures that recognize Hong Kong corporations as subjects of UK sovereignty, which should be considered in alienage diversity jurisdiction.
Contrarily, the Matimak ruling challenged the State Department's position, asserting that Hong Kong corporations do not qualify as UK citizens per British law, leading to the conclusion that they cannot be classified as subjects. The text argues that in the context of U.S. federal courts, the terms "citizen" and "subject" are functionally equivalent, signifying a relationship with a sovereign that permits federal jurisdiction. The distinction between the terms arises from differing governmental structures, with monarchies having subjects and republics having citizens, but both terms serve to define the relationship to a sovereign power necessary for establishing alienage jurisdiction.
British law does not definitively establish a singular sovereign relationship, recognizing both "citizens" and "subjects." The British Nationality Act of 1948 designates citizens of Hong Kong and other British colonies as subjects of the Crown, while Hong Kong corporations are not explicitly covered by this statute. The State Department maintains that Hong Kong's laws required Crown approval at the relevant time, leading to the reasonable conclusion that these corporations were under UK sovereignty. If a foreign sovereign were required to choose between being recognized as "citizens" or "subjects," it would constitute a significant foreign policy decision, which the State Department opposes.
The role of the executive branch in foreign policy, particularly in defining "foreign state" under 28 U.S.C. § 1332, is significant. The Supreme Court case Banco Nacional de Cuba v. Sabbatino underscores the importance of considering the executive's position regarding foreign relations. In this case, the Court allowed a hostile foreign government to litigate in U.S. courts, emphasizing that the U.S. government had not sought to deny that government's status to sue.
The State Department's position is given considerable weight, particularly in unclear interpretations affecting foreign policy. It asserts that, at the time of the lawsuit, Hong Kong corporations were closely connected to the UK and thus should be treated as subjects of the UK. While it is established that Hong Kong corporations were not UK citizens during the lawsuit, it is plausible they were UK subjects. The State Department concludes, in line with agreements between Hong Kong and the UK, that these corporations were subjects of the UK for diversity purposes, aligning with the factual and legal context of alienage jurisdiction. Consequently, the court affirms its jurisdiction under 28 U.S.C. § 1332(a)(2). Additionally, the document notes that the case has a complex history, which will be clarified by outlining the parties involved and the plaintiffs' claims.
Southern Cross and TIP, the plaintiffs, are involved in a legal dispute with Wah Kwong Shipping Group, Ltd., the defendant. Southern Cross, a booking agent for marine cargo, is a New Jersey corporation partially owned by Norwegian national Trygve Vangsnes. TIP, a Pennsylvania corporation, rents equipment for marine cargo transport. Wah Kwong, a Hong Kong corporation, is the parent company of several subsidiaries, with Frank and George Chao as key executives.
Karlander (Australia) Pty. Ltd., an Australian company that operated an ocean liner service, previously chartered vessels from companies in which Wah Kwong’s subsidiary, Maritime Shipping, Investments, Ltd. (MSI), held shares. After going into arrears in 1983, Karlander was restructured into KKL Kangaroo Lines, also led by Vangsnes. Southern Cross and TIP provided services to KKL, which owed them money when it ceased operations in 1986.
The plaintiffs' claims arise from a series of agreements between Wah Kwong and KKL, including a $6 million loan that the plaintiffs argue was a façade for a partnership between Wah Kwong and Vangsnes rather than a genuine loan. They contend that various convoluted agreements were used to disguise Wah Kwong's true equity interest in KKL, asserting that Wah Kwong was entitled to KKL's profits exceeding $100,000 and that the loan amount was quickly returned to Wah Kwong via intermediaries.
The agreements involved a restructuring process where Karlander’s outstanding charterhire obligations were assumed by KKL. Wah Kwong sought financial advice and was advised to inject $6 million to assist KKL. This culminated in the "Heads of Agreement," signed by all parties under English law. Southern Cross claims that Vangsnes did not have the authority to sign on its behalf, as asserted by its CEO's affidavit.
Karlander was indebted to Wah Kwong, and its successor, KKL, needed financial support to settle these debts. The Heads of Agreement stipulated that MSI would provide a $6 million interest-free deposit through a finance company wholly owned by KKL, which would then lend the funds to Karlander for charterhire payments. As collateral, KKL granted MSI an option to purchase half of its stock, with KKL's main asset being its arbitration rights against Weyerhauser.
The agreement allowed MSI to appoint two board members to KKL, appoint a financial consultant, and approve KKL's auditors, while also permitting MSI to appoint members to the boards of related holding companies. However, the Heads of Agreement would only become effective upon the execution of additional documents. A side letter indicated that repayment of the deposit would be by mutual agreement rather than on demand. The Supplemental Agreement ensured KKL's debts would not exceed $10.6 million, allowing MSI to demand repayment if this was untrue, and established a committee, including an MSI nominee, to oversee KKL's cash flow.
On February 6, 1984, a $6 million payment was made to KKL's subsidiary, which subsequently passed it to VSM for charterhire payments, effectively returning the funds to Wah Kwong. However, on February 22, 1984, a notice of default indicated KKL's debts exceeded $10.6 million. A subsequent agreement assigned KKL's ship-operation earnings to VSM for MSI's obligations, although Wah Kwong claimed this was never implemented.
In April 1984, the finance committee from the Supplemental Agreement was replaced by Wah Kwong's appointed members reviewing KKL's expenses. By August 1984, it was agreed that KKL checks would require signatures from both Wah Kwong and KKL representatives. Plaintiffs allege that Wah Kwong took steps to control KKL’s expenditures and prioritized payments to its subsidiaries, leading to KKL's liquidation. When KKL ceased operations in January 1986, it still recorded a $6 million debt to Wah Kwong along with other arrears owed to the plaintiffs.
KKL entered liquidation in January 1986 due to insufficient funds to pay creditors, leading to the appointment of a liquidator by Australian courts who halted KKL's operations. The liquidator prioritized repayment of $6 million to Wah Kwong, which was part of a confidential settlement dated May 14, 1986, acknowledging Wah Kwong's claim of $20 million in overdue charterhire and its status as a creditor rather than a partner. Plaintiffs allege that Wah Kwong presented "show" documents to the liquidator to establish its creditor status and convinced the liquidator not to sue Wah Kwong in exchange for financing certain related litigation. Southern Cross and TIP were also creditors in the liquidation.
In 1994, the liquidator sought court approval to close the Australian proceedings, citing KKL's winding down. Vangsnes and TIP attempted to intervene, claiming Wah Kwong misrepresented itself as a creditor. Justice Bryson dismissed this claim, citing a lack of evidence for fraud and concerns regarding the statute of limitations, thus upholding the liquidator's 1986 decision. In 1996, Vangsnes requested access to the liquidator's documents, which was denied based on Bryson's earlier ruling.
In early 1986, KKL's U.S. creditors initiated legal actions in New Jersey, seeking maritime attachments and filing an involuntary Chapter 7 bankruptcy petition against KKL, resulting in the consolidation of cases in the U.S. District Court for New Jersey, where Southern Cross and TIP were named parties due to asset attachments. The Australian liquidator sought to enjoin U.S. creditors from pursuing KKL's U.S. assets, aiming to remit them for administration in Australia. This request was consolidated with other proceedings, leading to a temporary order preventing U.S. creditors from accessing KKL's assets. However, in February 1988, the liquidator's motion to dismiss the Chapter 7 petition and manage all assets in Australia was denied by Judge Politan, who determined that U.S. creditors' rights were unlikely to be adequately protected in the ongoing Australian liquidation, resulting in the appointment of a Chapter 7 trustee to manage KKL's U.S. assets.
KKL executed a "Heads of Agreement" on November 26, 1983, to assume the business of Karlander and agreed to pay its creditors. In exchange, Karlander transferred its rights in the Weyerhauser arbitration to KKL. KKL received a $6 million loan from a Wah Kwong subsidiary and assigned its arbitration rights to Wah Kwong, with repayment terms being unclear and subject to mutual agreement depending on outstanding debts. Their relationship was characterized as a joint venture, with Wah Kwong's individuals considered partners in KKL's earnings. KKL assigned its earnings to Wah Kwong and agreed on joint signatures for checks.
In January 1986, KKL faced financial difficulties after Wah Kwong announced KKL owed $10 million, leading to blocked payments to creditors and KKL's eventual cessation of business. Both KKL and Wah Kwong entered receivership shortly after. On May 14, 1986, a Deed was established involving the Liquidator, KKL, Karlander, and Wah Kwong subsidiaries concerning the Weyerhauser arbitration proceeds, with stipulations for distributing the first $6 million to Wah Kwong as repayment for the loan.
A second Deed on the same date stated that shipowners claimed damages due to KKL's breach of charter terms, though KKL contested this by alleging Wah Kwong's misconduct. Both Deeds were approved by Australian courts. However, it was found that U.S. creditors were not notified prior to court ratification of these agreements, resulting in significant procedural protections being overlooked, which is viewed as a serious issue.
Wah Kwong's loan to KKL was structured to be payable either on demand or through mutual agreement. Wah Kwong's president was a member of KKL's Board of Directors, and a Wah Kwong representative was required to co-sign checks before they could be issued. Wah Kwong allegedly overdrew KKL's funds, impairing KKL's ability to meet its obligations, which contributed to an involuntary petition against KKL. The document indicates serious allegations of insider dealings.
It asserts that allowing the case to proceed under Australian law would violate U.S. laws and public policy, potentially prejudicing creditor claims due to interactions between Wah Kwong and the Liquidator. On April 5, 1988, a settlement was reached between the U.S. bankruptcy trustee and MSI, which included a release of KKL's claims against Wah Kwong and its subsidiaries, and an agreement for MSI to fund KKL's arbitration claim against Weyerhauser Company, identified as KKL's main asset. This settlement was court-approved.
In 1989, GLO, a shipping agent and KKL creditor, initiated a lawsuit against Wah Kwong in Illinois, claiming Wah Kwong was liable for KKL's debts due to a partnership or alter-ego relationship. Wah Kwong maintained it was merely a creditor, challenging the court's personal jurisdiction. GLO argued that a partnership existed due to Wah Kwong's entitlement to KKL's profits and its control over KKL. The Seventh Circuit upheld the lower court's finding that English law applied, placing the burden on GLO to prove the partnership.
The court examined Wah Kwong's $6 million payment to KKL, which Wah Kwong characterized as a loan. GLO contended it was an equity investment, but the court ruled it was indeed a loan, establishing a creditor-debtor relationship rather than an equity arrangement. The repayment terms, although contingent on mutual agreement, allowed Wah Kwong to demand repayment under certain conditions, which were met, and the court noted that under English law, transactions could be classified as loans even with such repayment terms. Furthermore, the court determined that Wah Kwong did not have a right to KKL’s profits, consistent with a creditor's position.
The court found a close corporate relationship between KKL and Wah Kwong, suggesting it was structured to allow Wah Kwong to collect debts from KKL, a position endorsed by Price Waterhouse to safeguard Wah Kwong's interests as a major creditor. Consequently, the court determined that there was no personal jurisdiction over Wah Kwong, requiring a partnership or alter-ego relationship with KKL for jurisdiction in Illinois courts. The plaintiffs argued that the Seventh Circuit misinterpreted the agreements and relied on obsolete provisions, incorrectly establishing a debtor-creditor relationship. They presented evidence from depositions indicating Wah Kwong's fraudulent actions, including admissions by its principals of overdrawn payments from KKL, despite KKL's financial stability.
On December 6, 1996, Southern Cross and TIP filed a federal complaint in New Jersey against Wah Kwong for a fraudulent breach of contract, claiming $7.2 million in damages owed for services when KKL was liquidated. They alleged Wah Kwong's control over KKL led to its bankruptcy, followed by Wah Kwong distancing itself to appear as a preferred creditor. The plaintiffs asserted that Wah Kwong was aware of its partnership obligations and misrepresented this to various legal entities, enabling it to settle in a manner that left KKL's estate unable to pay creditors.
Judge Thompson dismissed Wah Kwong's motion under Rule 12(b)(6), citing the expiration of the statute of limitations, which under New Jersey law is six years for fraud claims. The district court noted that the alleged misrepresentations occurred before January 1986, when the Australian liquidator mandated repayment of a $6 million loan, marking the accrual of the plaintiffs' cause of action.
The plaintiff must recognize both an injury and a causal link to an actor, but does not need to identify the conduct as tortious. In cases of fraud concealed from the plaintiff, the statute of limitations begins upon discovering the fraud or facts that should reasonably prompt inquiry. The District Court determined that the plaintiffs were aware of the alleged misrepresentations when they were made and found no reason to toll the statute of limitations. It was noted that Wah Kwong's status as a creditor was established in a 1986 settlement, making its position publicly known. Furthermore, Vansgnes was involved in the Australian liquidation process and was aware of Wah Kwong's claims to the liquidator.
The plaintiffs contended that the District Court did not appropriately draw all reasonable inferences in their favor as required during a motion to dismiss. They argued that factual disputes often arise regarding when a plaintiff discovered or should have discovered their cause of action, placing a heavy burden on defendants to prove claims are time-barred. The plaintiffs asserted they were unaware of Wah Kwong's misrepresentation until they obtained relevant documents in 1992. They emphasized that Australian courts had previously restricted access to KKL's corporate information, which delayed their awareness of the misrepresentation.
The argument was made that merely asserting oneself as a creditor, without additional context, does not inherently raise suspicion. The District Court's view that Wah Kwong's alleged misrepresentation was "open and notorious" was contested, with the plaintiffs claiming that knowledge of other facts was necessary to ascertain the truth of Wah Kwong's position. Thus, the limitations period should not have begun until the plaintiffs had information that would reasonably prompt them to question Wah Kwong's representation. Additionally, the District Court erroneously attributed Vansgnes's knowledge to Southern Cross and TIP.
TIP is not shown to be related to Vansgnes based on pleadings or court decisions. Although Vansgnes's significant ownership in Southern Cross might lead to attributing his knowledge to the company, this cannot be determined in a 12(b)(6) motion, which does not resolve factual issues. Southern Cross contends that Vansgnes lacked authority to act on its behalf and asserts he was never an officer, employee, agent, director, or shareholder, supported by an affidavit. Additionally, the complaint does not indicate Vansgnes's involvement in confidential 1986 proceedings, and there is no evidence he participated in settlement negotiations with the Australian liquidator. If his 1986 knowledge were critical, it would necessitate a reversal, as these issues are unsuitable for judgment on pleadings. The exploration extends to the 1988 Interpool decision, where the court notes it can consider public records, including judicial opinions, during a motion to dismiss. Judicial notice can be taken of another court's opinion for its existence, not for the truth of its contents. The opinion in Interpool is relevant and referenced in the plaintiffs' complaint to illustrate Wah Kwong's alleged fraudulent actions, allowing for examination of whether it contradicts the claims made in the complaint.
The court has the authority to review authentic documents that underpin a plaintiff's claim. The inquiry is conducted in two steps: first, it is established that a reasonable creditor involved in a bankruptcy claim should have examined published opinions relevant to that proceeding, thereby being deemed aware of their contents, which initiates the statute of limitations. Second, Judge Politan's opinion in the Interpool case indicated that Wah Kwong’s status as a mere creditor was questionable, suggesting that plaintiffs, as creditors, should have been aware of potential misrepresentations by Wah Kwong well over six years before filing their complaint, thus barring the suit under the statute of limitations.
Plaintiffs contended they were not active participants in the Interpool litigation but merely filed claims in bankruptcy after being notified by the U.S. bankruptcy trustee. The Interpool case involved consolidated creditors' claims against KKL alongside a separate § 304 proceeding regarding U.S. bankruptcy jurisdiction amidst an Australian liquidation. Although Southern Cross was named in the Interpool case, it argued limited involvement in the § 304 proceedings related to Wah Kwong's misconduct. The District Court rejected this distinction, asserting that Southern Cross was represented by counsel in the litigation and that it neglected its duty of due diligence regarding Wah Kwong's arguments presented in the § 304 proceedings. The court emphasized that a reasonable creditor should have investigated the necessity of a U.S. bankruptcy proceeding given the ongoing Australian liquidation, and Southern Cross's claim of being insulated from the § 304 proceedings was deemed untenable. The obligations of TIP as a reasonable creditor remain less clear.
The record of the Interpool proceedings is incomplete, but evidence indicates that in 1990, the Australian liquidator was unable to serve TIP due to its relocation and an expired forwarding order. Despite this, TIP was aware of the U.S. bankruptcy proceeding initiated by Judge Politan's opinion, as it filed a claim in that case. Participation in these proceedings suggests that TIP had actual notice of the situation, contrary to merely receiving "notice in the air." A reasonable creditor would have read Judge Politan's opinion, which provided sufficient information to trigger the statute of limitations on fraud claims. Specifically, the opinion indicated that Wah Kwong was KKL's partner, challenging Wah Kwong's assertion of being merely a creditor.
Judge Politan characterized the relationship between Wah Kwong and KKL as a joint venture, suggesting a partnership relevant to the plaintiffs' claims. The opinion raised concerns about the legitimacy of Wah Kwong's actions and the fairness of the Australian settlement, leading to the appointment of a U.S. bankruptcy trustee for KKL's assets. The plaintiffs' complaint indicates they were aware of Wah Kwong's position as a creditor, as both parties were competing creditors in the bankruptcy case.
Ultimately, the plaintiffs should have been aware of the true facts surrounding their claims following Judge Politan's opinion and their participation in the bankruptcy proceedings. This awareness meant the statute of limitations on their fraud claims began to run before their December 6, 1996, complaint was filed. Therefore, the District Court's judgment will be affirmed.
Honorable Harry Wellford serves as a Circuit Judge for the Sixth Circuit. The key asset in the Australian liquidation and U.S. bankruptcy proceedings arises from a California arbitration. Diversity jurisdiction is assessed at the time the complaint is filed, with Hong Kong classified as a British Dependent Territory until its sovereignty transferred to China in 1997. The U.S. has a vested interest in Hong Kong's stability due to its economic ties. Despite the U.S. executive branch's formal derecognition of Taiwan, Taiwanese citizens can still pursue claims under alienage jurisdiction. Southern Cross filed for Chapter 11 in 1986, confirmed in 1994, but its current existence is ambiguous. The court cites precedent indicating that examining prior transcripts transforms a motion to dismiss into one for summary judgment, yet it maintains that judicially noticing the existence of published opinions is appropriate for resolving motions. The distinction between recognizing existence and the truth of facts in prior proceedings is emphasized. Although the complaint does not explicitly state that TIP filed a claim in the U.S. bankruptcy, it does allege that plaintiffs, as unsecured creditors, were harmed by Wah Kwong's actions, suggesting they may have filed claims. The plaintiffs claim to have filed in their brief, which aids interpretation of the complaint. The court concludes that the statute of limitations has expired for both plaintiffs, rendering further arguments from Wah Kwong unnecessary.
