Jackson v. People's Republic of China, 84-7744

• Citation: 794 F.2d 1490
• Decision Date: 25 July 1986
• Docket Number: No. 84-7744,84-7744
• Parties: Russell JACKSON, et al.; individually and on behalf of all other holders of five percent Hukuang Railways Bearer Bonds issued by the Imperial Chinese Government in 1911, similarly situated, Plaintiffs-Appellants, v. The PEOPLE'S REPUBLIC OF CHINA, a foreign government, Defendant-Appellee.
• Court: United States Courts of Appeals. United States Court of Appeals (11th Circuit)

Page 1490

794 F.2d 1490

5 Fed.R.Serv.3d 711

Russell JACKSON, et al.; individually and on behalf of all other holders of five percent Hukuang Railways Bearer Bonds issued by the Imperial Chinese Government in 1911, similarly situated, Plaintiffs-Appellants, v. The PEOPLE'S REPUBLIC OF CHINA, a foreign government Defendant-Appellee.

No. 84-7744.

United States Court of Appeals Eleventh Circuit.

July 25, 1986.

Rehearing and Rehearing En Banc Denied Sept. 3, 1986.

W. Eugene Rutledge, Birmingham, Ala., for plaintiffs-appellants.

Michael F. Hertz, Dept. of Justice, Commercial Litigation Branch, Civ. Div., Washington, D.C., Frank W. Donaldson, U.S. Atty., Birmingham, Ala., Herbert J. Lewis, III, Birmingham, Ala., for Amicus Curiae.

Eugene Theroux, Baker & McKenzie, Washington, D.C., for defendant-appellee.

Appeal from the United States District Court for the Northern District of Alabama.

Before GODBOLD, Chief Judge, JOHNSON, Circuit Judge, and TUTTLE, Senior Circuit Judge.

GODBOLD, Chief Judge:

We must decide whether in this case the courts of the United States have subject matter jurisdiction over the People's Republic of China. This requires us to examine whether the Foreign Sovereign Immunities Act of 1976 (FSIA), 28 U.S.C. Sec. 1330, 1391 and 1602, et seq., which confers subject matter jurisdiction over foreign sovereigns (with various exceptions), is to be applied retroactively with respect to actions by the governments of China relating to bonds issued by the government of China in 1911.

Before reaching the central issue, we must decide whether the district court erred in setting aside a default judgment entered against the PRC.

The People's Republic (PRC) also raises as a preliminary issue whether, under principles of international law, despite the domestic law of the United States, the courts of the United States have no jurisdiction over any claims against the PRC as a sovereign nation.

The district court entered three determinations. Jackson v. People's Republic of China, 550 F.Supp. 869 (N.D.Ala.1982) (finding jurisdiction and entering default judgment); unpublished order, 2/27/84 (setting aside default judgment); 596 F.Supp. 386 (N.D.Ala.1984) (finding no jurisdiction and dismissing the case).

We hold that the district court did not err in setting aside the default judgment against the PRC. And, reaching the central issue, we hold that the district court was correct in holding that it lacked subject matter jurisdiction because the FSIA did not apply retroactively to confer subject matter jurisdiction in this case.

I. The facts and the proceedings in the district court

In 1911 the Imperial Government of China issued bearer bonds to assist in financing the building of a section of the Hukuang Railway that runs between Guangzhou (Canton) and Beijing (Peking). The loan was for 6,000,000 pounds sterling, negotiated and participated in by a consortium of British, German, French and American banks. The loan agreement authorized the issuance of bonds for sale in the United States and bonds were sold to purchasers in this country.

Soon after the bonds were issued the Revolution of 1911 ensued, and the Republic of China supplanted the Imperial Chinese government. The Republic of China made interest payments on the Hukuang bonds until the mid-1930's when it began to have financial and other difficulties.

Plaintiffs introduced expert testimony in the district court attempting to show that the bonds were renegotiated in 1937 by an agreement between the Chinese Nationalist government and an American bondholders' committee representing the lenders, providing for an interim interest rate reduction and for amortization to begin again in 1949 and to be completed in 39 years from 1937, which would be 1976. Statements filed by the PRC say that renegotiation was discussed but no agreement reached. Plaintiffs say that the obligations under the bonds were "reaffirmed" by the Nationalist government just before its departure for Taiwan in 1948. The district court found that the renegotiation was never agreed upon, 550 F.Supp. at 852; 596 F.Supp. at 388 n. 2, and that the bonds matured in 1951, the original maturity date. Plaintiffs assert that these findings are plainly erroneous.

This class suit was filed November 13, 1979. Jurisdiction was alleged under the FSIA. Service of process was carried out under 28 U.S.C. Sec. 1608(a)(4). PRC responded with a diplomatic note to the Department of State asserting that it enjoyed absolute sovereign immunity. In October 1981 the district court certified a class consisting of all persons who, as of October 22, 1981, were holders of the bonds. On October 28, 1981 the district court held that service of process was proper and, PRC not having appeared, ordered a default. PRC was served with a copy of the class certification order and the notice of default but returned them to the State Department, reasserting absolute immunity.

At plaintiffs' request an evidentiary hearing was conducted. On September 2, 1982, the court held that it had subject matter jurisdiction and that plaintiffs were entitled to all unpaid principal and interest on the bonds, and it entered a judgment of $41,000,000-plus. 550 F.Supp. 869. The PRC sent a diplomatic note to the district court in January, 1983, stating that the rulings of the district court violated "basic norms of international law," and should the court proceed with the default judgment against China and attach China's properties in the United States, the Chinese government reserved its right to take "corresponding measures."

In mid-1983 the plaintiffs began efforts to execute on their judgment. In July or August 1983 the PRC appeared in the case for the first time, filing motions to vacate the judgment under Rule 60(b)(1), (4) and (6) and to dismiss the case. The United States, through the Departments of State and Justice, filed two statements of interest, supported by numerous documents, backing the PRC's motions.

The district court granted the motion to vacate and conducted an evidentiary hearing on the motion to dismiss and determined it would be treated as a motion for summary judgment. Plaintiffs presented expert testimony. PRC did not appear; the United States was present but did not participate. The district court entered an order dismissing the case on the ground that the FSIA did not have retroactive effect so as to confer subject matter jurisdiction over transactions that predated 1952. 596 F.Supp. 386.

In this court the PRC filed a brief but instructed its counsel not to appear for oral argument. The United States filed a statement of interest and was permitted to argue.

II. Changing concepts of sovereign immunity under U.S. law

For more than a century and a half, since The Schooner Exchange v. McFaddon, 11 U.S. (7 Cranch) 116, 137 (1812), the United States usually granted foreign sovereigns complete immunity from suit in the courts of this country. Under our law foreign sovereign immunity is a matter of grace and comity on the part of the United States and is not a restriction imposed by the Constitution itself. Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480, 103 S.Ct. 1962, 76 L.Ed.2d 81 (1983). Accordingly, until 1952, our courts consistently deferred to the decisions of the executive branch on whether to take jurisdiction of actions against foreign sovereigns and their instrumentalities. Ordinarily the State Department would request immunity in all actions against friendly foreign sovereigns. Id. at 486, 103 S.Ct. at 1967. However, in the decade before 1952 the Supreme Court's doctrinal foundation for sovereign immunity began to shift from formal principles of international law to avoiding embarrassment to those responsible for the conduct of our foreign affairs. Victory Transport, Inc. v. Comisaria General de Abastecimientos y Transportes, 336 F.2d 354, 357 (2d Cir.1964), cert. denied 381 U.S. 934, 85 S.Ct. 1763, 14 L.Ed.2d 698 (1965); Ex Parte Peru, 318 U.S. 578, 63 S.Ct. 793, 87 L.Ed. 1014 (1943); Republic of Mexico v. Hoffman, 324 U.S. 30, 65 S.Ct. 530, 89 L.Ed. 729 (1945).

In 1952 the State Department issued the "Tate Letter," ¹ which announced formal adoption by it of the "restrictive" theory of foreign sovereign immunity. Under this theory immunity is confined to suits involving the public acts of a foreign sovereign and does not extend to cases arising out of strictly commercial acts of a foreign state. After the Tate Letter the executive, acting through the State Department, usually would make "suggestions" on whether sovereign immunity should be recognized by a court, and courts generally abided these suggestions. This proved troublesome, because foreign nations at times placed diplomatic pressure on the State Department, and political considerations led to suggestions of immunity where it was not available under the restrictive theory. Verlinden, 461 U.S. at 487, 103 S.Ct. at 1968. Moreover, foreign nations did not always make requests to the State Department, and responsibility fell to the courts to determine whether sovereign immunity existed. With two different branches involved the governing standards were neither clear nor uniform. Id. at 488, 103 S.Ct. at 1968.

In 1976 Congress passed the FSIA, effective in January 1977.

By reason of its authority over foreign commerce and foreign relations, Congress has the undisputed power to decide, as a matter of federal law, whether and under what circumstances foreign nations should be amenable to suit in the United States.

Id. at 493, 103 S.Ct. at 1971. It was adopted to free the government from case by case diplomatic pressures, to clarify the governing standards, and to assure that decisions are made on purely legal grounds and under procedures that insure due process. Id. at 488, 103 S.Ct. at 1968. In 28 U.S.C. Sec. 1330 the Act confers jurisdiction of any in personam nonjury civil action against a foreign state with respect to which the...