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Pons v. People's Republic of China

October 29, 2009

GLORIA BOLANOS PONS AND AITOR RODRIGUEZ SORIA, PLAINTIFFS,
v.
THE PEOPLE'S REPUBLIC OF CHINA DEFENDANT.



MEMORANDUM OPINION AND ORDER

Plaintiffs Gloria Bolanos Pons and Aitor Rodriguez Soria bring an action against defendant People's Republic of China ("PRC") seeking to recover on defaulted bonds issued by the PRC's predecessor government in 1913 and to enjoin the PRC from paying any of its other creditors unless plaintiffs are paid a pro rata share. The PRC moves to dismiss plaintiffs' complaint on the grounds that: (1) it is entitled to sovereign immunity and none of the exceptions enumerated in the Foreign Sovereign Immunities Act of 1976 ("FSIA") are applicable; (2) the statute of limitations has expired; (3) equitable relief is inappropriate; and (4) the action is barred by the comprehensive settlement of existing claims of United States nationals against the PRC under the International Claims Settlement Act*fn1 and a 1979 treaty between the two nations.*fn2 For the reasons that follow, the Court concludes that it lacks subject matter jurisdiction over plaintiffs' complaint because the PRC is entitled to sovereign immunity and none of the FSIA exceptions apply. Specifically, plaintiffs have failed to show that the default had a "direct effect in the U.S." sufficient for purposes of the FSIA commercial activity exception. Further, the Court concludes that even if it had jurisdiction over plaintiffs' claims, they would be barred by the applicable statute of limitations. Because these issues are dispositive, the Court does not address whether plaintiffs' claims are also barred by the International Claims Settlement Act or the 1979 treaty.

BACKGROUND

The facts of this case are similar to those of its predecessor, Morris v. People's Republic of China, 478 F. Supp. 2d 562 (S.D.N.Y. 2007) and familiarity with that case is assumed. A brief exposition follows. In 1913 under the Chinese Government Reorganization Loan Agreement ("Loan Agreement"), an international consortium of banks loaned the Republic of China £ 25,000,000 and in turn issued bonds for the value of that loan, secured by revenues from the Salt Administration of China. (Loan Agreement, Arts. IV, VI). Importantly, American banks were excluded from the loan agreement after President Woodrow Wilson refused to support American participation, on the grounds that the loan imposed on China's sovereignty. As a result, the bonds were not payable in the United States or in U.S. dollars. Rather, payment was available only in each of five other countries in their respective currencies. Purchasers, however, were not excluded from re-selling the bonds on secondary markets such as those in the United States, and it is through such secondary sales that plaintiffs' predecessors are said to have come into possession of some of the bonds.*fn3

Following a revolution in 1949, the newly formed PRC ceased making interest payments on the bonds, and on their maturation in 1960 failed to pay the principal. Plaintiffs claim that unidentified U.S. bondholders received interest payments in the U.S. prior to default, and state that they themselves held the bonds in the U.S. at the time of default on the principal in 1960. In 1968 the Foreign Claims Settlement Commission heard claims by U.S. nationals for losses resulting from the PRC takeover, including those from American citizens holding the salt bonds, although those claims were ultimately rejected. In a 1979 treaty the U.S. and the PRC normalized diplomatic relations and agreed to a comprehensive settlement of all property claims of U.S. nationals against the PRC "arising from any nationalization, expropriation, intervention, and other taking . . . on or after October 1, 1949, and prior to [the agreement date]." (Agreement Between the Government of the United States of American and the Government of the People's Republic of China Concerning the Settlement of Claims, May 11, 1979, 30 U.S.T. 1957). Finally, in 1983 following a United States district court decision rendering a default judgment against the PRC for certain defaulted bonds not including the 1913 bonds, see Jackson v. PRC, 550 F. Supp. 869 (N.D. Ala. 1982), the PRC sent a diplomatic notice to the United States disclaiming obligations to repay any debts incurred by defunct Chinese governments. After all this, plaintiffs now bring suit in United States federal court to enforce the obligations of the 1913 bonds against the PRC.

The Court disposed of similar claims based on the 1913 salt bonds in Morris, granting the PRC's motion to dismiss because the plaintiff there "suffered no 'direct effect in the United States' sufficient to establish jurisdiction under the commercial activity exception of the FSIA," Morris, 478 F. Supp. 2d at 571, and finding in the alternative that the statute of limitations had expired. Id at 573. Plaintiffs in the instant action assert that they escape the holdings of Morris because their situations differ in three relevant respects.*fn4 First, these bonds were purportedly purchased by plaintiffs' predecessors on secondary markets in the United States and held here at the time of default. (Pls.' Ltr. May 9, 2007; Am. Compl. ¶ 6). They assert that there has therefore been a direct effect in the United States sufficient to overcome the FSIA jurisdictional barrier. Second, plaintiffs contend that interest payments were made to bondholders within the U.S., and that the voluntary tendering of interest payments here converts a subsequent default on principal into an act with direct effect in the U.S. (Am. Compl. ¶ 13). The Court remains unpersuaded. Finally, plaintiffs assert that because they request equitable relief, their claims are not barred by the statute of limitations. The Court again concludes that if it had jurisdiction, it would find these claims barred by the statute of limitations.

STANDARD OF REVIEW

Defendant moves to dismiss the complaint under Rule 12(b)(1) on the grounds that the Court lacks subject matter jurisdiction to hear the case because the PRC is immune from this lawsuit as a sovereign nation. In the context of a Rule 12(b)(1) challenge to jurisdiction under the FSIA, the Court must look to the substance of the allegations to determine whether one of the exceptions to the FSIA's general grant of immunity applies. See Robinson v. Gov't of Malaysia, 269 F.3d 133, 140 (2d Cir. 2001). Notwithstanding plaintiffs' averments otherwise, "[t]he plaintiff has the burden of going forward with showing that, under exceptions to the FSIA, immunity should not be granted, although the ultimate burden of persuasion remains with the alleged foreign sovereign." Cargill Int'l S.A. v. M/T Pavel Dybenko, 991 F.2d 1012, 1016 (2d Cir. 1993) (citations omitted). The Court should look outside the pleadings to submissions by the parties when there are disputed factual issues. See Filetech S.A. v. Fr. Telecom S.A., 157 F.3d 922, 932 (2d Cir. 1998); Antares Aircraft, L.P. v. Federal Republic of Nigeria, 948 F.2d 90, 96 (2d Cir. 1991) (on a motion "challenging the district court's subject matter jurisdiction, the court may resolve disputed jurisdictional fact issues by reference to evidence outside the pleadings, such as affidavits").

Defendant also moves to dismiss the complaint as time-barred under the applicable statute of limitations. "Where the dates in a complaint show that an action is barred by a statute of limitations, a defendant may raise the affirmative defense in a pre-answer motion to dismiss[, which] is properly treated as a Rule 12(b)(6) motion to dismiss." Ghartey v. St. John's Queens Hosp., 869 F.2d 160, 162 (2d Cir. 1989). "[S]uch a motion should not be granted unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Ortiz v. Cornetta, 867 F.2d 146, 148 (2d Cir. 1989) (citations and internal quotation marks omitted). The Court "must accept as true the factual allegations in the complaint, and draw all reasonable inferences in favor of the plaintiff." Bolt Elec., Inc. v. City of New York, 53 F.3d 465, 469 (2d Cir. 1995) (citations omitted). The Court may look only at the complaint and "any documents that are either incorporated into the complaint by reference or attached to the complaint as exhibits." Blue Tree Hotels Inv. (Can.), Ltd. v. Starwood Hotels & Resorts Worldwide, Inc., 369 F.3d 212, 217 (2d Cir. 2004) (citing Taylor v. Vt. Dep't of Educ., 313 F.3d 768, 776 (2d Cir. 2002)).

DISCUSSION

A. Foreign Sovereign Immunity

Historically, foreign governments were protected from the jurisdiction of U.S. courts by the common law doctrine of absolute sovereign immunity. As the intensity of international trade expanded, so too did the need to subject foreign sovereigns to the jurisdiction of the courts. Eventually, the Congress passed the FSIA, which codified sovereign immunity for foreign governments, and also carved out limited exceptions to that immunity. 28 U.S.C. § 1602 et seq.; e.g. Virtual Countries, Inc. v. Rep. Of South Africa, 300 F.3d 230, 236 (2d Cir. 2002). The Act provides that "a foreign state shall be immune from [subject matter] jurisdiction . . . except as provided in sections 1605 to 1607" of the FSIA. 28 U.S.C. § 1604. "The FSIA thus provides the sole basis for obtaining [subject matter] jurisdiction over a foreign sovereign in the United States." Republic of Argentina v. Weltover, Inc., 504 U.S. 607, 611, 112 S.Ct. 2160, 2164, 119 L.Ed. 2d 394 (1992) (internal quotation marks omitted). Plaintiffs do not dispute that the PRC qualifies as a foreign state for purposes of the FSIA, so this court has subject matter jurisdiction only if one of the statutory exceptions applies.

Plaintiffs invoke the "commercial activity" exception of the FSIA. This exception provides:

A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case . . . in which the action is based

[1] upon a commercial activity carried on in the United States by the foreign state; or [2] upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or [3] upon an act outside the territory of the United States in connection with a commercial activity of the ...


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