Matimak Trading Co. v. Khalily

United States Court of Appeals for the Second Circuit

Federal Reporter, Third Series, vol. 118, p. 76 (1997)

Circuit Judge McLaughlin:

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.

The principal issue is whether a Hong Kong corporation is either a “citizen or subject” of a “foreign state” for purposes of alienage jurisdiction.[1] 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.

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Map – Hong Kong (1997)
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 United States Code, title 28, § 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[[2]] 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 “shoalstrewn area of the law.” [3]

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.” 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.” [4] This judicial power is referred to as “alienage jurisdiction.” [5]

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.[6] Diversity of citizenship, however, is determined as of the commencement of an action.

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” ; [and] (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….
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, “it has generally been held that a foreign state is one formally recognized by the executive branch of the United States government.” [7]

For purposes of diversity jurisdiction, a corporation is a “citizen” or “subject” of the entity under whose sovereignty it is created.

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.[8] 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.

The court noted the general rule that a “foreign state” in § 1332(a)(2) is one “formally recognized by the executive branch.” 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.

The court surveyed the case law, concluding that “in 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.’” 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.’” [9] 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.”

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.[10] 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.

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.

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.” It is beyond cavil that “who is the sovereign, de jure or de facto, of a territory, is not a judicial, but a political, question, the determination of which by the legislative and executive departments of any government conclusively binds the judges, as well as all other officers, citizens, and subjects of that government.” [11]

The deference to the Executive Branch exhibited in Iran Handicraft and Murarka was similarly crucial in Calderone v. Naviera Vacuba S/A,[12] where we sustained alienage jurisdiction in a suit between a Cuban corporation and an American company. The court explained:

Considerations of both international relations and judicial administration lead us to conclude that the onus is on the Department of State, or some other department of the Executive Branch, to bring to the attention of the courts its decision that permitting nationalized Cuban corporations to sue is contrary to the national interest. Since silence on the question may be highly desirable, it would not be wise for the court unnecessarily to force the Government’s hand. However, in this case we need not merely rely on the maintenance of the status quo, because the Executive Branch has made its wishes known… . The Department of Justice has urged that nationalized Cuban corporations have access to our courts with the protection of the act of state doctrine.

Courts have consistently required such deference for purposes of alienage jurisdiction.[13]

When Matimak brought this suit in August 1995, Hong Kong was a “British Dependent Territory” [14] and was ruled by a governor appointed by the United Kingdom. As such, it maintained some independence in its international economic and diplomatic relationships, but in matters of defense and foreign affairs remained dependent on the United Kingdom.

Hong Kong is the United States’ twelfth-largest trading partner, with direct United States financial investment of almost twelve billion dollars. Hong Kong’s relationship with the United States was most recently manifested in the United States-Hong Kong Policy Act of 1992,[15] which makes clear that Congress desires United States-Hong Kong relations to continue after July 1, 1997, when Hong Kong becomes a special administrative region of China. The Act states that “Hong Kong plays an important role in today’s regional and world economy. This role is reflected in strong economic, cultural, and other ties with the United States that give the United States a strong interest in the continued vitality, prosperity, and stability of Hong Kong.”

The Policy Act makes equally clear, however, that the United States did not regard Hong Kong as an independent, sovereign political entity. The Act provides that Hong Kong “will continue to enjoy a high degree of autonomy on all matters other than defense and foreign affairs,” and emphasizes that only “with respect to economic and trade matters” shall the United States “continue to treat Hong Kong as a territory which is fully autonomous from the United Kingdom.” The Act points to the need to safeguard human rights during the “transition in the exercise of sovereignty over Hong Kong.”

The United States has embraced the same position on this appeal. Having originally stated that “Hong Kong should … be treated in the courts of the United States as a de facto ‘foreign state’” for purposes of alienage jurisdiction. In its amicus brief, the Justice Department notes that “the State Department no longer urges treatment of Hong Kong as a de facto foreign state and withdraws any reliance on this contention.”

* * *

The State Department’s stance on appeal confirms what is already clear from the United States’ dealings with Hong Kong, as evidenced in the Policy Act: it did not regard Hong Kong as an independent sovereign entity.

For these reasons, it is clear that the United States did not recognize Hong Kong as a sovereign and independent international entity. Accordingly, consistent with this Court’s precedent, Matimak cannot invoke alienage jurisdiction as a “citizen or subject” of Hong Kong.

* * *
II. Is Matimak a “Citizen or Subject” of the United Kingdom?

* * *

We begin with the truism that a foreign state is entitled to define who are its citizens or subjects.

It is another accepted precept that a corporation, for purposes of diversity jurisdiction, is a “citizen” or “subject” of the entity under whose sovereignty it is created.

* * *

The parties quarrel over the significance of the British Nationality Act 1981, which delineates British citizenship in detail. The Act fails to support Matimak’s assertion that a Hong Kong corporation is a citizen of the United Kingdom. The Act applies only to natural persons, not corporations. The more relevant provision of British law squarely specifies that “the privileges of British nationality are not conferred on corporations formed under the laws of Hong Kong.” [16]

At any rate, the British Nationality Act clearly distinguishes between citizens of the United Kingdom and citizens of “British Dependent Territories,” who must first undergo a citizenship application procedure and fulfill certain residency requirements in the United Kingdom proper before earning British citizenship.

The Justice Department, as amicus, argues that as a Hong Kong corporation, Matimak is governed by the Hong Kong Companies Ordinance, which is modelled on the British Companies Act 1948. The Justice Department concludes that because the ultimate sovereign authority over the plaintiff is the British Crown, Matimak should be treated as a subject of United Kingdom sovereignty for purposes of § 1332. Hong Kong corporations, however, are no more “subjects” than “citizens.” [17]

The fact that the Hong Kong Companies Ordinance may be “ultimately traceable” to the British Crown is too attenuated a connection. Matimak was incorporated under Hong Kong law, the Companies Ordinance 1984 of Hong Kong, and is entitled to the protections of Hong Kong law only.

Matimak is not a “citizen or subject” of a foreign state. It is thus stateless. And a stateless person–the proverbial man without a country –cannot sue a United States citizen under alienage jurisdiction.

* * *
CONCLUSION

Matimak is not a “citizen or subject of a foreign state,” under United States Code, title 28, § 1332(a)(2), and there is no other basis for jurisdiction over Matimak’s suit. The district court properly dismissed Matimak’s suit for lack of subject matter jurisdiction. Accordingly, the order of the district court is affirmed.

[1] See U.S. Constitution, Art. III, § 2, clause 1; United States Code, title 28, § 1332(a)(2).

[[2] On its own.]

[3] National Petrochemical Co. of Iran v. M/T Stolt Sheaf, Federal Reporter, Second Series, vol. 860, p. 551 at p. 552 (2d Circuit Ct. of Appeals 1988).

[4] United States Code, title 28, § 1332(a)(2).

[5] Iran Handicraft and Carpet Export Ctr. v. Marjan Int’l Corp., Federal Supplement, vol. 655, p. 1275 at p. 1277 (District Ct. for S. District of New York 1987), affirmed, Federal Reporter, Second Series, vol. 868, p. 1267 (2d Circuit Ct. of Appeals 1988).

[6] We express no view as to Hong Kong’s current status, following Great Britain’s transfer of sovereignty on July 1, 1997. As noted above, diversity of citizenship is determined as of the commencement of an action. Accordingly, we need not determine the status of Hong Kong, its residents, or its corporations under Chinese rule for purposes of alienage jurisdiction.

[7] C. Wright, A. Miller & E. Cooper, Federal Practice & Procedure, vol. 13B, § 3604 (1984).

[8] Federal Supplement, vol. 655, p. 1275 at p. 1277 (District Ct. for S. District of New York 1987), affirmed, Federal Reporter, Second Series, vol. 868, p. 1267 (2d Circuit Ct. of Appeals 1988).

[9] National Petrochemical Co. of Iran v. M/T Stolt Sheaf, Federal Reporter, Second Series, vol. 860, p. 551 at p. 553 (2d Circuit Ct. of Appeals 1988) (quoting Restatement (Third) of the Foreign Relations Law of the United States § 201 (1987)).

[10] Federal Reporter, Second Series, vol. 215, p. 547 (2d Circuit Ct. of Appeals 1954).

[11] Jones v. United States, United States Reports, vol. 137, p. 202 at p. 212 (Supreme Ct. 1890)….

[12] Federal Reporter, Second Series, vol. 325, p. 76 (2d Circuit Ct. of Appeals 1963), modified on other grounds, id., vol. 328, p. 578 (2d Circuit Ct. of Appeals 1964) (per curiam).

[13] See, e.g., Abu-Zeineh v. Federal Labs., Inc., Docket No. 91-2148, at pp. 3-5 (District Ct. for W. District of Pennsylvania Dec. 7, 1994) (holding that Palestine is not a foreign state for purposes of alienage jurisdiction, as Palestine had not been recognized by the United States as an independent, sovereign nation); Bank of Hawaii v. Balos, Federal Supplement, vol. 701, p. 744 at pp. 746-47 (District Ct. for Hawaii 1988) (holding that the Republic of the Marshall Islands (“RMI” ) is a foreign state for purpose of alienage jurisdiction, relying on the fact that “both the Congress and the President have indicated that the RMI is henceforth to be treated as an independent sovereign” ); St. Germain v. West Bay Leasing, Ltd., Docket No. 81-CV-3945, at pp. 4-5 (District Ct. for E District of New York Sept. 30, 1982) (holding that a Cayman Islands corporation may not invoke alienage jurisdiction, finding that the United States did not recognize the Cayman Islands as an independent sovereign); Chang v. Northwestern Mem’l Hosp., Federal Supplement, vol. 506, p. 975 at p. 978 (District Ct. for N. District of Illinois 1980) (holding that Taiwan is a foreign state for purposes of alienage jurisdiction, relying on a letter from a representative from the State Department confirming that Taiwanese citizens could sue in federal court); Klausner v. Levy, id., vol. 83, p. 599 at p. 600 (District Ct. for E. District of Virginia 1949) (holding that Palestine is not a foreign state for purposes of alienage jurisdiction, as Palestine had not been recognized by the United States as an independent, sovereign nation); Betancourt v. Mutual Reserve Fund Life Ass’n, Federal Reporter, vol. 101, p. 305 at p. 306 (Circuit Ct. S. District of New York 1900) (holding that Cuba is a foreign state for purposes of alienage jurisdiction, noting that the United States had recognized Cuba as “free and independent” ).

[14] British Nationality Act 1981, Schedule 6.

[15] United States Code, title 22, §§ 5701-32 (West Supp. 1996).

[16] Windert Watch Co. v. Remex Elecs. Ltd., Federal Supplement, vol. 468, p. 1242 at p. 1246 (District Ct. for S. District of New York 1979) (citing British Companies Act 1948 § 406).

[17] Wm. Moore et al., Moore’s Federal Practice ¶ 0.75 (3d ed. 1996).

Author: international

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