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 Bank
Docket: 03-7861
Court: Court of Appeals for the Second Circuit; August 6, 2004; Federal Appellate Court
Defendants-appellants Hanvit Bank and Chohung Bank challenge interlocutory orders from the U.S. District Court for the Southern District of New York, which ruled that the Banks do not qualify as "foreign states" under the Foreign Sovereign Immunities Act (FSIA). This decision reversed prior orders that had granted the Banks immunity from claims made by plaintiffs Gary Filler and Lawrence Perlman, as well as Janet and James Baker. The reversal was prompted by the Supreme Court’s ruling in Dole Food Co. v. Patrickson, which clarified that a foreign state must own a majority of a corporation's shares for it to be considered an instrumentality of the state under the FSIA.
The Filler plaintiffs, as trustees of the TRA Rights Trust (successor to Seagate Technology, Inc.), hold claims related to Seagate's acquisition of $170 million in stock from Lernhout & Hauspie Speech Products, N.V. (L.H.), a company implicated in a significant fraud scandal. The Baker plaintiffs owned over $300 million in L.H. stock acquired in a stock swap. L.H. was involved in a multibillion-dollar fraud perpetrated by its senior management that falsely reported substantial revenue, leading to a drastic loss of market capitalization after the fraud was unveiled, significantly impacting the plaintiffs' investments.
Both Chohung Bank and Hanvit Bank are commercial banks based in Korea that were private entities until January 1999, when they received substantial government capital support due to financial difficulties. The Korean Deposit Insurance Corporation (KDIC), a governmental body established for depositor protection, provided these infusions. The court affirmed the lower court's decision regarding the Banks' lack of entitlement to immunity under the FSIA.
The KDIC, established under its enabling statute as a "special legal entity," operates a deposit insurance system and is overseen by the Korean Ministry of Finance and the Economy. At the time of the legal actions, the KDIC owned 80% of Chohung Bank and 100% of Woori Finance Holdings Co. Ltd., which fully owned Hanvit Bank. Subsequently, the KDIC sold Chohung Bank, and Hanvit Bank is expected to transition to a private entity soon. The Baker and Filler plaintiffs allege that Chohung and Hanvit, along with Shinhan Bank, engaged in fraudulent activities with L.H. by making significant misrepresentations to their auditors regarding L.H.'s revenue. The Filler plaintiffs filed against Chohung and Hanvit in October 2001, followed by the Baker plaintiffs a year later. The District Court initially dismissed both sets of claims based on the banks' sovereign immunity under the FSIA. However, following the Supreme Court's ruling in Dole Food in April 2003, the plaintiffs successfully sought a reconsideration, leading the District Court to vacate its dismissal orders, as Dole Food indicated that indirect government ownership negates sovereign immunity. The banks subsequently appealed, and the appellate court affirmed the District Court's decision. The discussion includes the standard of review for appeals concerning sovereign immunity under the FSIA, which is the exclusive jurisdictional basis for foreign states in U.S. courts. It clarifies that both Chohung and Hanvit meet the criteria for "agency or instrumentality" status under the FSIA, confirming that they are separate legal entities and not U.S. citizens or entities created under third-country laws, while the KDIC is recognized as an organ of South Korea.
The Foreign Sovereign Immunities Act (FSIA) does not define "organ" status, but several factors are used to assess it, including the entity's creation for national purposes, active supervision by the foreign state, employment requirements, exclusive rights, and treatment under foreign law. The District Court determined that the Korea Deposit Insurance Corporation (KDIC) qualifies as an organ of the South Korean government, given its statutory formation, governmental functions in depositor protection, and oversight by the Ministry of Finance and Economy. The primary issue is whether the Banks are considered "organ[s] of a foreign state" or majority-owned by such entities under FSIA criteria. The Banks argue they qualify as agencies or instrumentalities of the state because KDIC, as an organ, owns a majority of their shares. This argument relies on a tiered interpretation of sovereign immunity, suggesting that if KDIC is an organ, then the Banks, being majority-owned by KDIC, also are. However, this raises concerns about potentially granting sovereign immunity to multiple layers of subsidiaries, which the Supreme Court addressed in Dole Food, ruling that subsidiaries of instrumentalities do not automatically receive instrumentality status.
The Court determined that companies claiming immunity were not considered instrumentalities of a foreign state under the Foreign Sovereign Immunities Act (FSIA) because they were separated by intermediate tiers, supporting the principle that corporations are distinct from their shareholders. Only direct majority ownership by a foreign state meets the statutory requirement for instrumentality status. As a result, the District Judge, upon reconsideration, vacated the earlier dismissal of plaintiffs' claims, ruling that the Banks were not entitled to sovereign immunity.
While the Banks argued that an agency or instrumentality could be classified as a "foreign state," which would allow for immunity for its subsidiaries, this interpretation undermines the Supreme Court's ruling in Dole Food, which emphasized that a subsidiary cannot independently claim instrumentality status. The distinction proposed by the Banks would allow for recursive claims of immunity based on ownership tiers, contradicting the FSIA's intention to confer governmental, not corporate, immunity. Furthermore, the statutory language clarifies that while agencies and instrumentalities are included within the definition of a foreign state, this does not equate them to a foreign state or allow them to bestow that status upon further corporate entities in the ownership hierarchy.
Congress's definition of "foreign state" in § 1603(a) must inherently differentiate between "foreign state" and "political subdivision," as evidenced by the statute's consistent use of distinct terms throughout. Specifically, § 1603(b)(2) requires an entity to be either an "organ of a foreign state" or a "political subdivision" for instrumentality status, thus rejecting the appellants' argument that equates the two. Accepting this argument would render the mention of political subdivisions redundant, violating the principle of statutory construction that avoids surplusage, as established in Babbitt v. Sweet Home Chapter. This interpretation aligns with the restrictive theory of sovereign immunity under the FSIA, which holds that states are immune for sovereign acts but not for private or commercial acts. Although the KDIC performs a public function related to South Korea's banking stability, the defendant Banks have acknowledged their transition back to private ownership, meaning that denying sovereign immunity to them does not undermine any governmental public function and primarily affects their private interests. Consequently, the District Court's denial of the Banks' motions to dismiss based on sovereign immunity is affirmed. Cases under consideration are Baker v. Hanvit Bank and Filler v. Hanvit Bank, which share the same legal issue. Sections 1605 and 1607 of Title 28 detail specific exceptions to sovereign immunity, although the plaintiffs' commercial activity argument was not raised on appeal. The Ninth and Seventh Circuits have differing interpretations regarding the application of tiering in sovereign immunity analysis, with the Ninth Circuit emphasizing a stricter distinction and the Seventh Circuit allowing for broader interpretations.
