Where American investors sued Bank of China for making unauthorized distributions at request of Americans' Chinese agent, Tenth Circuit holds that Bank of China's statutory sovereign immunity does not extend to transfers made to U.S. bank
Orient Mineral Company (OMC) is a Nevada corporation, whose Chairman is Art Wilson. In 1994 Wilson met Yue Xiaoqun, a Chinese citizen working in the U.S. Yue convinced Wilson to invest in Chinese gold mines and was made a director and shareholder in OMC. In 1995, Yue and Wilson formed Wil Bao Mineral Company (WBMC) under Chinese law as a joint venture of OMC and Jiaocun Gold Company, which the city of Jiaocun, China wholly owned.
R. Ellsworth McKee, a U.S. citizen, lent $3 million to OMC for WBMC's benefit. To maintain control of the funds, Preston Jones, an associate of McKee, joined the board of directors. The $3 million investment went to a holding account in the Lingbao sub branch of the Bank of China (Defendant); the Peoples Republic of China wholly owned and operated it. Defendant ran a branch in New York City. OMC issued a letter and resolution, signed by the president of OMC and bearing the corporate seal; they named Preston Jones as the "sole and exclusive agent to approve, direct, or otherwise designate the funds on deposit with the Bank" [Slip op. 5].
At Yue's request the Bank opened accounts for WBMC. Believing that he retained sole authority to authorize expenditures greater than $25,000, Jones authorized the transfer of the funds from the OMC account to WBMC's accounts. On August 22, 1996 the Bank wired $400,000, at Yue's request, to the account of his wife, Saren Gaowa, at Utah's First Zions National Bank.
When they found out about this transfer, OMC and WBMC (Plaintiffs) sued Defendant in Utah district court. Defendant asserted immunity under the Foreign Sovereign Immunities Act of 1976, as amended. The court found it had jurisdiction to the extent that they pertained to the $400,000 transfer to the Utah bank, but ruled for Defendant on the merits of the claims. Plaintiffs appealed the decision to the U.S. Court of Appeals for the Tenth Circuit and Defendant cross appealed. The Court affirms.
Explaining its decision, the Court declared: "[T]he parties also do not dispute that the Bank is engaged in commercial activity. [Cite]. Nevertheless, there must also be a sufficient nexus between the [Defendant]'s commercial activity and the U. S.." [Slip op. 12].
"In this case, although Plaintiffs asserted at least five different theories of recovery against the [Defendant], all of their claims are based on the Bank's alleged breach of a duty, created contractually or otherwise, (1) to preserve the funds [OMC] wired to its temporary account in the [Defendant]'s [WMBC] sub branch, and to disburse those funds only according to Jones' directions; and (2) to require Jones' authorization for any withdrawals from [WBMC's] accounts in an amount greater than $25,000." [Slip op. 13].
"Plaintiffs assert several ways in which the [Defendant] carries on commercial activity in the United States. First, the [Defendant] drafted a letter, dated May 14, 1996, promising to keep safe the funds [OMC] wired to its temporary account in the Bank's Lingbao sub branch until [OMC's] representative, Jones, arrived in China. With this letter, according to Plaintiffs, the [Defendant] established an ongoing business relationship with [OMC]." [Slip op. 14].
"But the evidence established that it was Yue, a director of [OMC] and [WBMC's] manager, who made arrangements with the [Defendant], in China, for [OMC] to wire $3 million into a temporary account in the [Defendant]'s Lingbao sub branch. The Bank provided Yue with such a letter, dated May 14, 1996, written in Chinese and addressed to Yue [One] Eck delivered [the above letter and resolution] in person to the [Defendant]'s Lingbao sub branch when Eck accompanied Jones to China. This series of events can not be construed as the [Defendant]'s carrying on commercial activity in the U. S." [Slip op. 14].
"Plaintiffs next argue that the [Defendant] carries on commercial activity in the U.S. by operating a branch Bank in New York City. We agree. But "the fact that a foreign sovereign is engaged in commercial activity in the United States does not serve as a license for U.S. courts to entertain all claims against it.' [Cites]." [Slip op. 14 15].
"Plaintiffs point to the fact that, when McKee transferred $3 million for [OMC] from an American bank to [OMC's] temporary account in the [Defendant]'s Lingbao sub branch, that wire transfer went through the Bank's New York branch. And when the [Defendant] transferred [WBMC] funds back to the U.S., as Jones requested, those transfers also may have gone through the New York branch. These connections alone, however, are insufficient to establish subject matter jurisdiction under ... the FSIA's commercial activity exception because none of Plaintiffs' claims against the [Defendant] are "based upon' these particular transactions." [Slip op. 15].
"Plaintiffs further argue that the [Defendant]'s transfer of $400,000 of [WBMC] funds to the bank in Utah amounts to the Bank's carrying on commercial activity in the U.S. However, we do not believe this single act constitutes "commercial activity carried on in the U. S.' by the [Defendant] under the first clause of § 1605(a)(2). The Bank acted within China, not the U.S. The consequence of the act was felt in the U.S. when the Utah bank received the funds but the Utah bank was not acting as an agent of the Bank. Rather, it was acting as an independent, arms length entity in an ordinary commercial transaction. So, the Utah bank's act in the U.S. cannot be attributed to the [Defendant]." [Slip op. 15 16].
"Section 1605(a)(2)'s second clause applies when "the action is based . . . upon an act performed in the U.S. in connection with a commercial activity of the foreign state elsewhere.' Under this clause, a "material connection must exist between the act performed in the U.S. and plaintiff's cause of action.' [Cites]. For the same reasons stated above, however, Plaintiffs here have failed to establish that their claims are based upon any action the [Defendant] took in the U.S." [Slip op. 16].
As to whether the Defendant's actions caused a direct effect in the U.S. the Circuit Court stated that, "The [Defendant]'s transfer of $400,000 of [WBMC's] funds from its account in the [Defendant]'s Lingbao sub branch to the Utah bank had a direct effect in the U.S. " the Utah bank received $400,000 on Gaowa's behalf."
"The [Defendant] suggests that the "direct effect' occurring in the U.S. must be "legally significant' in order for an American court to have subject matter jurisdiction ... There are courts that have adopted a "legally significant act' test when applying § 1605(a)(2)'s third clause." [Slip op. 17].
"We reject engrafting this additional requirement ... for many reasons. First, the statute's text does not require it. [Cites]. Second, requiring legally significant acts to occur in the U.S. would render the second and third clauses of § 1605(a)(2) redundant ... [Cites]. Third, the phrase "legally significant act' is vague and ambiguous, adding nothing to the analysis. Thus, we will simply apply the third clause of § 1605(a)(2) as it is written, without judicial adornment."
"In this case, it is clear that the Bank's commercial activity in China produced a "direct effect' in the U.S. " the transfer of $400,000 to a Utah bankthe Bank took affirmative action that caused an effect in the U.S. " money was received in the U.S. And that effect was direct, that is, it followed as "an immediate consequence' of the Bank's permitting Yue to withdraw more than $400,000 from Wil Bao's Chinese bank account without Jones's authorization" [Slip op. 18 19].
Citation: Orient Mineral Co. v. Bank of China, 2007 WL 3088281, No. 05 4037 (10th Cir. 2007).
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