Filler v. Hanvit Bank

• Decision Date: 06 August 2004
• Docket Number: Docket No. 03-7893(CON).,Docket No. 03-7861(L).,Docket No. 03-7871(CON).,Docket No. 03-7863(L).
• Citation: 378 F.3d 213
• Parties: Gary B. FILLER, trustee of the TRA Rights Trust and Lawrence Perlman, trustee of the TRA Rights Trust, Plaintiffs-Appellees, v. HANVIT BANK and Chohung Bank, Defendants-Appellants, Shinhan Bank, Defendant. Janet Baker, James Baker, JKBaker, LLC, and JMBaker, LLC, Plaintiffs-Appellees, v. Hanvit Bank and Chohung Bank, Defendants-Appellants, Shinhan Bank, Defendant.
• Court: U.S. Court of Appeals — Second Circuit

378 F.3d 213

Gary B. FILLER, trustee of the TRA Rights Trust and Lawrence Perlman, trustee of the TRA Rights Trust, Plaintiffs-Appellees, v. HANVIT BANK and Chohung Bank, Defendants-Appellants, Shinhan Bank, Defendant.

Janet Baker, James Baker, JKBaker, LLC, and JMBaker, LLC, Plaintiffs-Appellees, v. Hanvit Bank and Chohung Bank, Defendants-Appellants, Shinhan Bank, Defendant.

Docket No. 03-7861(L).

Docket No. 03-7871(CON).

Docket No. 03-7863(L).

Docket No. 03-7893(CON).

United States Court of Appeals, Second Circuit.

Argued: April 2, 2004.

Decided: August 6, 2004.

Appeal from the United States District Court for the Southern District of New York, Miriam Goldman Cedarbaum, J.

Gregory P. Joseph, Gregory P. Joseph Law Offices, LLC, New York, NY, for

Plaintiffs-Appellees Gary B. Filler and Lawrence Perlman.

Karen C. Dyer, Boies Schiller & Flexner, LLP, Orlando, FL, for Plaintiffs-Appellees Janet Baker, James Baker, JKBaker LLC, and JMBaker LLC.

Daniel L. Brockett, (Mark C. Dosker, Rebecca W. Haverstick, on the brief), Squire, Sanders & Dempsey, LLP, New York, NY, for Defendant-Appellant Chohung Bank.

Steven M. Bierman, (Alan M. Unger, Daniel A. McLaughlin, Mark E. Walli, Catherine B. Winter, Allen C. Kim, on the brief), Sidley Austin Brown & Wood, LLP, New York, NY, for Defendant-Appellant Hanvit Bank.

Before: JACOBS, STRAUB, B.D. PARKER, Circuit Judges.

B.D. PARKER, JR., Circuit Judge:

Defendants-appellants Hanvit Bank and Chohung Bank (the "Banks") appeal from interlocutory orders of the United States District Court for the Southern District of New York (Cedarbaum, J.) concluding that the Banks were not "foreign states" entitled to immunity under the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. §§ 1602 et seq. The orders vacated previous ones granting immunity under the FSIA with respect to claims brought against them by Gary Filler and Lawrence Perlman (the "Filler plaintiffs") and Janet and James Baker (the "Baker plaintiffs"). The vacatur occurred as a consequence of an intervening Supreme Court decision, Dole Food Co. v. Patrickson, 538 U.S. 468, 477, 123 S.Ct. 1655, 155 L.Ed.2d 643 (2003), which held that a foreign state must itself own a majority of a corporation's shares if the corporation is to be deemed an instrumentality of the state under the FSIA.¹ We affirm.

I. BACKGROUND

The Filler plaintiffs are trustees of the TRA Rights Trust, which is the successor-in-interest of Seagate Technology, Inc. ("Seagate") and holds all claims arising out of Seagate's acquisition in June 2000 of $170 million in stock of Lernhout & Hauspie Speech Products, N.V. ("L & H"), a Belgian software company. The Baker plaintiffs owned more than $300 million of L & H stock, which they obtained in June 2000 in a stock swap for their principal interest in Dragon Systems, Inc. A few months later, L & H was implicated in a multibillion dollar fraud permeating their worldwide operations. The fraud, which was perpetrated by senior management of L & H along with outside auditors and others in the United States and Korea, involved reporting hundreds of millions of dollars of nonexistent revenue from contracts with related parties or fictitious customers. After the fraud was exposed, more than one-third of the revenue reported by L & H for the 1998-2000 period was reversed, including the entirety of the $160 million of revenue reported by the firm's Korean operations in 1999 and 2000. This fraud has been the subject of an SEC as well as a criminal investigation and multiple arrests by Belgian authorities. Public exposure of the fraud caused a loss of 95% of L & H's market capitalization — about $9 billion — including the value of the stock held by the appellees.

Chohung Bank and Hanvit Bank are both commercial banks organized under the laws of Korea with headquarters in Seoul. Both banks were private entities prior to January 1999 when, because of severe financial problems, they received substantial capital infusions from the Korean Deposit Insurance Corporation (KDIC). The KDIC is a Korean governmental institution created by the Korea's Depositor Protection Act and a presidential decree. Under its enabling statute, the KDIC exists as a "special legal entity" for the purpose of operating a deposit insurance system. The KDIC is run by the Korean Ministry of Finance and the Economy of the Republic of Korea. At the time of the filing of these actions the KDIC directly owned 80% of the shares of Chohung Bank² and 100% of the shares of Woori Finance Holdings Co., Ltd., which in turn owned 100% of the shares of Hanvit Bank. Since the filing of the actions, the KDIC has sold Chohung Bank to a private entity, and Hanvit Bank is expected to emerge as a private entity in the near future. In their complaints, the Baker and Filler plaintiffs allege that Chohung and Hanvit (along with Shinhan Bank, a party not appealing here) were involved in the fraud perpetrated by L & H, and that the two banks actively made material misrepresentations to their independent auditors about the source and amounts of L & H's revenue.

The Filler plaintiffs' action was filed against Chohung and Hanvit in October 2001 while the Baker plaintiffs' complaint was filed against the two banks a year later. In February 2003, the District Court dismissed the Filler plaintiffs' claims against Chohung and Hanvit on the grounds that the Banks enjoyed sovereign immunity under the FSIA, and in March dismissed the Baker plaintiffs' claims against the Banks on the same ground. Following the Supreme Court's decision in Dole Food in April 2003, the plaintiffs in both cases successfully moved for reconsideration. The District Court vacated its previous orders dismissing the claims against Hanvit and Chohung, finding that Dole Food precluded sovereign immunity where, as here, government ownership of the defendant corporations is indirect. The Banks appeal, and we affirm.

II. DISCUSSION

A. Standard of Review

We have appellate jurisdiction under the collateral order doctrine, which allows an immediate appeal from an order denying immunity under the FSIA. Transatlantic Shiffahrtskontor GmbH v. Shanghai Foreign Trade Corp., 204 F.3d 384, 387 (2d Cir.2000); Drexel Burnham Lambert Group Inc. v. Comm. of Receivers for Galadari, 12 F.3d 317, 324 (2d Cir.1993). We review a district court's legal determinations regarding its subject matter jurisdiction, such as whether sovereign immunity exists, de novo while reviewing its factual findings for clear error. Abrams v. Societe Nationale des Chemins de Fer Francais, 332 F.3d 173, 176 (2d Cir.2003).

B. Sovereign Immunity

The FSIA is "the sole basis for obtaining jurisdiction over a foreign state in the courts of this country." Saudi Arabia v. Nelson, 507 U.S. 349, 355, 113 S.Ct. 1471, 123 L.Ed.2d 47 (1993) (quotation marks and citation omitted); Robinson v. Gov't of Malaysia, 269 F.3d 133, 138-39 (2d Cir.2001). The FSIA provides that: "[s]ubject to existing international agreements to which the United States is a party at the time of enactment of this Act a foreign state shall be immune from the jurisdiction of the courts of the United States and of the States except as provided in sections 1605 to 1607 of this chapter."³ 28 U.S.C. § 1604. The Act further provides:

For purposes of this chapter —

(a) A "foreign state", except as used in section 1608 of this title, includes a political subdivision of a foreign state or an agency or instrumentality of a foreign state as defined in subsection (b).

(b) An "agency or instrumentality of a foreign state" means any entity —

(1) which is a separate legal person, corporate or otherwise, and

(2) which is an organ of a foreign state or political subdivision thereof, or a majority of whose shares or other ownership interest is owned by a foreign state or political subdivision thereof, and

(3) which is neither a citizen of a State of the United States as defined in section 1332(c) and (d) of this title nor created under the laws of any third country.

28 U.S.C. § 1603. There is no dispute that both Chohung and Hanvit satisfy the first and third criteria of § 1603(b)'s test for "agency or instrumentality" status — they are both separate legal entities and are neither citizens of a state of the United States nor created under the laws of a third country.

Further, there is no dispute that the KDIC is an organ of a foreign state — South Korea — under § 1603(b)(2). Filler v. Hanvit Bank, 247 F.Supp.2d 425, 428 (S.D.N.Y.2003) (Filler I). Although there is no specific test for "organ" status under the FSIA, various factors are relevant:

(1) whether the foreign state created the entity for a national purpose;

(2) whether the foreign state actively supervises the entity;

(3) whether the foreign state requires the hiring of public employees and pays their salaries;

(4) whether the entity holds exclusive rights to some right in the [foreign] country; and

(5) how the entity is treated under foreign state law.

Kelly v. Syria Shell Petroleum Dev. B.V., 213 F.3d 841, 846-47 (5th Cir.2000) (quotation marks and citation omitted) (alteration in original); see Corporacion Mexicana de Servicios Maritimos, S.A., 89 F.3d 650, 655 (9th Cir.1996). The District Court correctly concluded that the KDIC is an organ of a foreign state because the KDIC was formed by statute (the Korea Depositors Protection Act) and presidential decree, it performs functions traditionally performed by the government (protecting depositors and promoting financial stability), has its directors are appointed by the Ministry of Finance and Economy; its president appointed by the President of the Republic of Korea; and many of its operations overseen by the Ministry of Finance and Economy. Filler I, 247 F.Supp.2d at 428.

The only question is whether the Banks satisfy the second criteria for agency or instrumentality status — namely whether they are "organ[s] of a foreign state" or have a majority of their shares owned by "a...