Matimak Trading Co. v. Khalily

• Decision Date: 27 June 1997
• Docket Number: D,No. 1251,1251
• Citation: 118 F.3d 76
• Court: U.S. Court of Appeals — Second Circuit
• Parties: MATIMAK TRADING CO., Plaintiff-Appellant, v. Albert KHALILY, d/b/a Unitex Mills, Inc., and D.A.Y. Kids Sportswear Inc., Defendants-Appellees. ocket 96-9117.

Page 76

118 F.3d 76

MATIMAK TRADING CO., Plaintiff-Appellant, v. Albert KHALILY, d/b/a Unitex Mills, Inc., and D.A.Y. Kids Sportswear Inc., Defendants-Appellees.

No. 1251, Docket 96-9117.

United States Court of Appeals Second Circuit.

Argued April 22, 1997.

Decided June 27, 1997.

Thomas A. Leghorn, Wilson, Elser, Moskowitz, Edelman & Dicker, New York City, for Plaintiff-Appellant.

M. Christine Carty, Schnader, Harrison Segal & Lewis, New York City, for Defendants-Appellee D.A.Y. Kids Sportswear.

Frank W. Hunger, Mary Jo White, Michael Jay Singer, John P. Schnitker, United States Department of Justice, for the United States Department of Justice as Amicus Curiae.

Before: ALTIMARI, McLAUGHLIN and JACOBS, Circuit Judges.

McLAUGHLIN, Circuit Judge.

Plaintiff appeals from an order entered August 19, 1996 in the United States District Court for the Southern District of New York (Wood, J.) dismissing plaintiff's claims for lack of subject matter jurisdiction. We review de novo the grant of the dismissal motion. See PaineWebber Inc. v. Bybyk, 81 F.3d 1193, 1197 (2d Cir.1996).

The principal issue is whether a Hong Kong corporation is either a "citizen or subject" of a "foreign state" for purposes of alienage jurisdiction. See U.S. Const. art. III, § 2, cl. 1; 28 U.S.C. § 1332(a)(2). More precisely the issue is whether Hong Kong may be regarded as a "foreign state." We hold that it may not and, accordingly, affirm the district court.

BACKGROUND

Plaintiff Matimak Trading Co. Ltd. is a corporation organized under the laws of Hong Kong, with its principal place of business in Hong Kong. It seeks to sue Albert Khalily and D.A.Y. Kids Sportswear Inc., two New York corporations, in the Southern District of New York (Wood, J.) for breach of contract. Matimak invoked the court's diversity jurisdiction under 28 U.S.C. § 1332(a)(2), which provides jurisdiction over any civil action arising between "citizens of a State and citizens or subjects of a foreign state."

In June 1996, the district court sua sponte raised the issue of the court's subject matter jurisdiction. In August 1996, after allowing the parties to brief the issue, the district court dismissed the Complaint for lack of subject matter jurisdiction. The court concluded that Hong Kong is not a "foreign state" under the diversity statute, and, consequently Matimak is not a "citizen or subject" of a "foreign state."

DISCUSSION

This is not the first time we have had to navigate what we have earlier described as a "shoal strewn area of the law." National Petrochemical Co. of Iran v. M/T Stolt Sheaf, 860 F.2d 551, 552 (2d Cir.1988).

Article III of the Constitution extends the federal judicial power to "all Cases ... between a State, or citizens thereof, and foreign States, Citizens or Subjects." U.S. Const. art. III, § 2, cl. 1. The United States Judicial Code tracks the constitutional language by providing diversity jurisdiction over any civil action arising between "citizens of a State and citizens or subjects of a foreign state." 28 U.S.C. § 1332(a)(2). This judicial power is referred to as "alienage jurisdiction." Iran Handicraft and Carpet Export Ctr. v. Marjan Int'l Corp., 655 F.Supp. 1275, 1277 (S.D.N.Y.1987), aff'd, 868 F.2d 1267 (2d Cir.1988).

British sovereignty over Hong Kong ceases on July 1, 1997, when Hong Kong becomes a special administrative region of the People's Republic of China. See 22 U.S.C. § 5701(1)(B) (West Supp.1996). Diversity of citizenship, however, is determined as of the commencement of an action. See Louisville, N.A. & C. Ry. Co. v. Louisville Trust Co., 174 U.S. 552, 566, 19 S.Ct. 817, 822, 43 L.Ed. 1081 (1899); Smith v. Sperling, 354 U.S. 91, 93 n. 1, 77 S.Ct. 1112, 1113 n. 1, 1 L.Ed.2d 1205 (1957); Maryland Cas. Co. v. W.R. Grace and Co., 23 F.3d 617, 622 (2d Cir.1993).

Given these building blocks, we must address three principal questions: (1) whether Hong Kong is a "foreign state," such that Matimak is a "citizen or subject" of a "foreign state"; (2) whether Matimak is a "citizen or subject" of the United Kingdom, by virtue of Hong Kong's relationship with the United Kingdom when it brought suit; and (3) whether any and all non-citizens of the United States may ipso facto invoke alienage jurisdiction against a United States citizen. Although not addressed by the parties, this last question is the focus of the dissent, and thus merits serious consideration.

I. Is Hong Kong a "Foreign State"?

A. Well-Established Principles in this Court

Neither the Constitution nor § 1332(a)(2) defines "foreign state." However, "[i]t has generally been held that a foreign state is one formally recognized by the executive branch of the United States government." 13B C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure § 3604 (1984).

For purposes of diversity jurisdiction, a corporation is a "citizen" or "subject" of the entity under whose sovereignty it is created. See National Steamship Co. v. Tugman, 106 U.S. 118, 121, 1 S.Ct. 58, 59, 27 L.Ed. 87 (1882); Restatement (Second) of the Foreign Relations Law of the United States § 26 (1965).

The Supreme Court has never addressed the issue before us. This Court, however, has applied these general rules in addressing alienage jurisdiction on several occasions.

In Iran Handicraft and Carpet Export Center v. Marjan International Corp., 655 F.Supp. 1275 (S.D.N.Y.), aff'd, 868 F.2d 1267 (2d Cir.1988), an Iranian corporation sued a New York corporation in the Southern District of New York for breach of contract. When the complaint was filed, Iran was undergoing a revolutionary change of government. The issue was whether the court was required to find that the United States formally recognized the new government of Iran to permit the plaintiff to invoke alienage jurisdiction. See id. at 1275-76.

The court noted the general rule that a "foreign state" in § 1332(a)(2) is one "formally recognized by the executive branch." Id. at 1277 (citing Wright, Miller & Cooper, supra, § 3604). The court explained:

Because the Constitution empowers only the President to "receive Ambassadors and other public Ministers," the courts have deferred to the executive branch when determining what entities shall be considered foreign states. The recognition of foreign states and of foreign governments, therefore, is wholly a prerogative of the executive branch. Thus, it is outside the competence of the judiciary to pass judgment upon executive branch decisions regarding recognition.

Id. (citations omitted).

The court surveyed the case law, concluding that "[i]n cases involving parties claiming to be citizens of a foreign state, ... courts have focused on whether the foreign state was recognized by the United States as 'a free and independent sovereign.' " Id. at 1278 (quoting Windert Watch Co. v. Remex Elecs. Ltd., 468 F.Supp. 1242, 1244 (S.D.N.Y.1979)). This description is consistent with the accepted definition of a "state" in international law, which requires that the entity have a " 'defined territory' " and be " 'under the control of its own government.' " National Petrochemical Co. of Iran v. M/T Stolt Sheaf, 860 F.2d 551, 553 (2d Cir.1988) (quoting Restatement (Third) of the Foreign Relations Law of the United States § 201 (1987)). Relying on the State Department's clarification of Iran's diplomatic status, the Iran Handicraft court concluded that "it is beyond doubt that the United States continues to recognize Iran as an independent sovereign nation." 655 F.Supp. at 1280 & n. 4.

The parties here agree that the United States has not formally recognized Hong Kong as a foreign state. Invoking the jurisprudence of this Court and others, however, Matimak contends that Hong Kong has received "de facto" recognition as a foreign state by the United States, and thus its citizens may invoke alienage jurisdiction. Matimak points to the United States' diplomatic and economic ties with Hong Kong as evidence of this recognition.

This Court established the doctrine of de facto recognition in Murarka v. Bachrack Brothers, Inc., 215 F.2d 547 (2d Cir.1954). In that case a partnership doing business in New Delhi, India sued a New York corporation. The court ruled that it had alienage jurisdiction despite the fact that the complaint was filed thirty days before the United States formally recognized India as a foreign state. The court explained:

True, as of July 14, 1947 our Government had not yet given India de jure recognition, but its exchange of ambassadors in February and April 1947 certainly amounted at least to de facto recognition, if not more. To all intents and purposes, these acts constituted a full recognition of the Interim Government of India at a time when India's ties with Great Britain were in the process of withering away, which was followed a month later, when partition took place between India and Pakistan, by the final severance of India's status as a part of the British Empire.... Unless form rather than substance is to govern, we think that in every substantial sense by the time this complaint was filed India had become an independent international entity and was so recognized by the United States.

Id. at 552 (citation omitted).

This analysis might reasonably be regarded as nothing more than an acknowledgment of the United States' imminent formal recognition of a sovereign state. The analogy of Hong Kong to India is inapt. India, which had been a colony of Great Britain, was about to become an independent sovereign nation. Not so for Hong Kong, which is about to be absorbed into China. ¹

Matimak, of course, argues for a more flexible interpretation of the de facto test. At the very least, however, as Iran Handicraft noted, the de facto test depends heavily on whether the Executive Branch regards the entity as an "independent sovereign nation." 655 F.Supp. at 1278. It is beyond cavil that "[w]ho is the sovereign, de jure or de facto, of a territory, is not a judicial, but a political,...