Rong v. Liaoning Province Government

• Decision Date: 07 July 2006
• Docket Number: No. 05-7030.,05-7030.
• Citation: 452 F.3d 883
• Parties: Yang RONG, et al., Appellants v. LIAONING PROVINCE GOVERNMENT, a subdivision of the People's Republic of China, a foreign state, Appellee.
• Court: U.S. Court of Appeals — District of Columbia Circuit

452 F.3d 883

Yang RONG, et al., Appellants v. LIAONING PROVINCE GOVERNMENT, a subdivision of the People's Republic of China, a foreign state, Appellee.

No. 05-7030.

United States Court of Appeals, District of Columbia Circuit.

Argued December 5, 2005.

Decided July 7, 2006.

Appeal from the United States District Court for the District of Columbia (No. 03cv01687).

Bert W. Rein argued the cause for the appellants. Charles O. Verrill, Jr., John A. Hodges, Thomas W. Queen and M. Evan Corcoran were on brief.

Craig A. Hoover argued the cause for the appellee. Jonathan S. Franklin, Christopher T. Handman and Jessica L. Ellsworth were on brief.

Before: HENDERSON, ROGERS and TATEL, Circuit Judges.

Opinion for the court filed by Circuit Judge HENDERSON.

Concurring opinion filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge.

Appellants Yang Rong, Rhea Yeung and the Broadsino Finance Company, a limited company controlled by Yang Rong and incorporated in Hong Kong, appeal the district court's dismissal of their complaint brought under the Foreign Sovereign Immunities Act (FSIA or Act), 28 U.S.C. §§ 1602 et seq., against Liaoning Province (Province), a subdivision of China, for lack of subject matter jurisdiction. On appeal Yang Rong,¹ a Chinese national and permanent resident of the United States, and his fellow appellants argue that the district court erroneously found that the Province's challenged act was insulated from suit by sovereign immunity. He claims jurisdiction exists under the "commercial activity" exception set out in section 1605(a)(2) of FSIA, which provides that an action does lie against a foreign state if it is based "upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States." Id. § 1605(a)(2). We conclude that the "commercial activity" exception is inapplicable to the Province's act and that instead its action was quintessentially sovereign. Accordingly, we affirm the district court's dismissal of the complaint.

I.

In 1991 Rong and the municipality of Shen Yang, a city in the Liaoning Province in northeast China, entered into a joint venture for automobile production.² The principal partners in the venture, called Shen Yang Jin Bei Passenger Vehicle Manufacturing Company, Ltd. (Shen Yang Automotive), were the Broadsino Finance Company (Broadsino), a Hong Kong-incorporated company wholly owned by Yang Rong, and Jin Bei Automotive Shareholding Company, Ltd. (Jin Bei Shareholding), a corporation owned by the Shen Yang municipal government. At the venture's inception Jin Bei Shareholding owned 60 per cent of Shen Yang Automotive, Broadsino owned 25 per cent and another partner, Hainen Huayin International Trust Investment Company (Hainen), owned 15 per cent. Broadsino subsequently acquired Hainen's shares to effect a 60/40 ownership split in Shen Yang Automotive, that is, Jin Bei Shareholding had 60 per cent ownership and Broadsino had 40 per cent ownership. Compl. ¶ 19, reprinted in Joint Appendix (JA) 12.

To expand the venture through access to American capital the partners sought to list Shen Yang Automotive on the New York Stock Exchange (N.Y.SE). Yang Rong, who served as Shen Yang Automotive's chief executive and manager, incorporated Brilliance Holdings Limited (Brilliance Holdings) in Bermuda as the financing vehicle to obtain a listing on the NYSE and transferred his 40 per cent ownership interest to Brilliance Holdings. Jin Bei Shareholding also transferred 11 per cent of its interest in Shen Yang Automotive to Brilliance Holdings, thereby giving the Bermuda-based company a 51 per cent interest in Shen Yang Automotive. In return for transferring 11 per cent of its interest, Jin Bei Shareholding received 21.57 per cent of Brilliance Holdings stock, thereby reducing Rong's interest in Brilliance Holdings to the remaining 78.43 per cent of its stock. Compl. ¶ 20, JA 12. In registering the stock with the Securities and Exchange Commission (SEC), preparing the initial public offering in the United States and listing the stock on the NYSE, senior Chinese government officials informed Rong that a Chinese entity rather than a Hong Kong private company should be the majority shareholder of the listed company inasmuch as the U.S. registration and listing would be the first for a China-based company in 50 years. Rong understood that the Chinese authorities would be satisfied if the majority interest in the listed company was held in the name of a Chinese non-governmental organization (NGO). 1st Am. Compl. ¶ 3, JA 24. Consequently in May 1992, Broadsino, the People's Bank of China and other Chinese governmental entities created the Chinese Financial Educational Development Foundation (Foundation), an NGO. Shang Ming, the deputy governor of the People's Bank of China (Ming), served as the Foundation's chairman while Rong served as vice chairman.

In September 1992, Broadsino transferred its Brilliance Holdings stock to the Foundation. Eventually, Rong and Ming agreed "that the Foundation would hold the shares in trust for Broadsino, in effect acting as the nominee for Broadsino," and that Rong was to have sole authority to manage, control and administer the Foundation's equity interest in Brilliance Holdings. 1st Am. Compl. ¶ 28, JA 32-33. The transferred Brilliance Holdings shares were held in the Foundation's name. As a result of this arrangement, as well as the sale of 28.75 per cent of Brilliance Holdings shares in October 2002, the Foundation held 55.88 per cent of the Brilliance Holdings shares and Jin Bei Shareholding held 15.37 per cent. 1st Am. Compl. ¶ 30, JA 34. At Rong's direction, Broadsino paid the costs to register and list the Brilliance Holdings stock and paid various administrative fees to the Foundation. He also managed and directed Brilliance Holdings' primary holding, Shen Yang Automotive, arranging with Toyota and General Motors to manufacture automobiles for those companies. All of Shen Yang Automotive's manufacturing facilities were located in Liaoning Province.

Meanwhile, in early 2002 the Province formed a "Working Committee," headed by the Assistant to the Governor of the Province. In March 2002 the Working Committee declared that all equity interests held in the name of the Foundation, including Rong's interest in Brilliance Holdings, were state assets and demanded that he transfer them to the Province. Compl. ¶ 28-29, JA 14-15. After Rong refused, the Working Committee informed Rong and the Brilliance Holdings board of directors that the Foundation no longer recognized Broadsino's beneficial interest in Brilliance Holdings. At the direction of the Province, the Brilliance Holdings board dismissed Rong as President, CEO and Director and placed Working Committee members in those positions and other management positions. In October 2002 the newly installed Brilliance Holdings board ceased paying Rong a salary, dismissed him as a director the next month and terminated his contract. The Province also formed Huachen Automotive Group Holdings Company Limited (Huachen) and appointed Province officials as officers of the new company. Approximately two months later Huachen purchased the Brilliance Holdings shares nominally held by the Foundation in trust for Broadsino for $18 million, about six percent of market price. Huachen and the Brilliance Holdings board also made a tender offer for the remaining Brilliance Holdings shares, including those traded on the NYSE, resulting in the suspension of trading of Brilliance Holdings shares on the NYSE from December 18 to December 19, 2002. Compl. ¶ 35, JA 17.

As the Working Committee was executing the takeover, Rong, acting for Broadsino, sought relief in various courts.³ Broadsino initiated proceedings against the Foundation in the Beijing Municipal High Court seeking a determination of its interest in the assets nominally held by the Foundation, including the Brilliance Holdings stock the Foundation held in trust, but was rebuffed. 1st Am. Compl ¶ 38, JA 38. Rong also filed a complaint against the Province in the District of Columbia district court, challenging the Province's "implementation of the scheme to take Plaintiffs' shares, other equity interests, and other property and then to maintain control thereof for its own commercial benefit" under FSIA. 1st Am. Compl. ¶ 14, JA 27. The Province moved to dismiss for lack of subject matter jurisdiction, asserting that neither FSIA's commercial activity exception, 28 U.S.C. § 1605(a)(2), nor its expropriation exception, id. § 1605(a)(3), applied.⁴ JA 50. The district court agreed, holding that the Province's acquisition of the Brilliance Holdings shares was a sovereign act and the Province was therefore immune from suit. It dismissed the action under Rule 12(b)(1) of the Federal Rules of Civil Procedure. Yang Rong et al. v. Liaoning Provincial Gov't, 362 F.Supp.2d 83, 103 (D.D.C.2005). This appeal followed, in which Rong challenges the district court's rejection of the commercial activity exception.⁵

II.

We review de novo a district court order dismissing an action brought under FSIA on the ground of sovereign immunity. Gulf Res. Am., Inc. v. Republic of the Congo, 370 F.3d 65, 70 (D.C.Cir. 2004). FSIA is "the sole basis for obtaining jurisdiction over a foreign state in our courts." Peterson v. Royal Kingdom of Saudi Arabia, 332 F.Supp.2d 189, 195 (D.D.C.2004) (quoting Argentine Republic v. Amerada Hess Shipping Corp., 488 U.S. 428, 434, 109 S.Ct. 683, 102 L.Ed.2d 818 (1989)); see also Foremost-McKesson, Inc. v. Islamic Republic of Iran, 905 F.2d 438, 443 (D.C.Cir.1990). A foreign state is immune from suit in the United States unless its challenged action comes within one of the exceptions enumerated in the Act. See 28 U.S.C. § 1604. "If the defendant challenges only the legal sufficiency of the plaintiff's jurisdictional allegations,...