378 F.

3d 213

Gary B. FILLER, trustee of the TRA Rights Trust and

Lawrence Perlman, trustee of the TRA Rights Trust, PlaintiffsAppellees,
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 PlaintiffsAppellees 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.
4

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
7

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.
8

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
10

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
11

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:

12

For purposes of this chapter

13

(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).

14

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

15

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

16

(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

17

(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.

18

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.

19

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:

20

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

21

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

22

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

23

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

24

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

25

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.

26

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 foreign state or political
subdivision thereof." 28 U.S.C. 1603(b). The Banks contend that they do,
arguing that once we determine that the KDIC is an organ of the government of
South Korea, they automatically become agencies or instrumentalities of the
state because the majority of their stock is owned by the KDIC. See In re Air
Crash Disaster Near Roselawn, 96 F.3d 932, 939-41 (7th Cir.1996) (accepting
this tiering theory of sovereign immunity). But see Gates v. Victor Fine Foods,
54 F.3d 1457, 1461-63 (9th Cir.1995) (rejecting the same). In other words, the
Banks argue that since the KDIC is an organ and therefore an agency or
instrumentality of a foreign state, it is also a "foreign state" by virtue of

1603(a)'s definition of a foreign state as "includ[ing]" its agencies or

instrumentalities. And because the KDIC owns the majority of their shares, the
two Banks contend that they are agencies or instrumentalities of a foreign state
by virtue of 1603(b)'s ownership prong. Put another way, the Banks argue the
transitive: (1) foreign state means agency or instrumentality; (2) agency or
instrumentality means organ or majority-owned corporation; (3) therefore
foreign state means organ or majority-owned corporation; and (4) therefore,
majority-owned corporations of an organ are majority-owned corporations of a
foreign state.
27

We note that Chohung and Hanvit claim to be majority-owned corporations of

a foreign state for purposes of FSIA analysis even though Chohung is a secondtier subsidiary and Hanvit is a third-tier subsidiary. Accepting their analysis
would permit an infinite number of subsidiaries to enjoy sovereign immunity.
Each subsidiary becomes an agency or instrumentality, and therefore the
"foreign state," for purposes of assessing its majority ownership of the next
subsidiary in line.

28

The District Court initially accepted the Banks' argument, holding that such
tiering was allowed and that Chohung and Hanvit were entitled to foreign
sovereign immunity by virtue of KDIC's ownership interest in them. Filler I,
247 F.Supp.2d at 429.4 The Supreme Court then addressed tiering under the
FSIA in Dole Food, affirming the Ninth Circuit and noting that "[t]he Court of
Appeals resolved the question of the FSIA's applicability by holding that a
subsidiary of an instrumentality is not itself entitled to instrumentality status. Its
holding was correct." 538 U.S. at 473, 123 S.Ct. 1655. Because the companies
claiming immunity were "separated from the [foreign state] by one or more
intermediate tiers," the Court found that these companies "were not
instrumentalities of [the foreign state] under the FSIA at any time." Id. at 47374, 123 S.Ct. 1655. The Court relied on the elementary principle of corporate
law that corporations are distinct from their shareholders to conclude that "only
direct ownership of a majority of shares by the foreign state satisfied the
statutory requirement" of majority ownership. Id. at 474, 123 S.Ct. 1655. In
light of this ruling, the District Judge, acting on a motion for reconsideration
under Fed.R.Civ.P. 54(b), revised and vacated the earlier dismissal of plaintiffs'
claims, holding that the Banks were not entitled to sovereign immunity. Filler
v. Hanvit Bank, No. 01 Civ. 9510, 2003 WL 21729978, 2003 U.S. Dist. LEXIS
12836 (S.D.N.Y. July 25, 2003); Baker v. Hanvit Bank, No. 02 Civ. 8251, 2003
WL 21729962, 2003 U.S. Dist. LEXIS 12837 (S.D.N.Y. July 24, 2003).

29

While Dole Food rejected the contention that 1603(b)(2)'s "majority

ownership" clause allowed for the tiering of corporate subsidiaries, such that

each could avail itself of sovereign immunity under the FSIA, 538 U.S. at 473,
123 S.Ct. 1655, the Banks advance a somewhat different argument in this case
namely, that an "organ" under the first half of 1603(b)(2) that is an
"agency or instrumentality" is also, by definition, a "foreign state" under
1603(a), and that its subsidiary is therefore directly owned by a foreign state
and entitled to sovereign immunity. Accepting the Banks' proposed distinction
would, however, eviscerate Dole Food. Rather than claiming a subsidiary is
entitled to immunity because of successive majority ownership up the chain of
control, defendants would simply claim that at each level, majority ownership
grants agency or instrumentality status, designation as a foreign state, and,
therefore, sovereign immunity. Such a result would be incompatible with the
purpose of the FSIA, which is to grant governmental, not private corporate
immunity, and, in any event, would reflect infidelity to the Supreme Court's
reasoning in Dole Food. The fact that Chohung is a second-tier subsidiary
while Hanvit is a third-tier subsidiary only makes the problem more apparent
because it requires an additional finding that Woori is an agency or
instrumentality and therefore a foreign state, thus conferring immunity on
Hanvit. Such a result is incompatible with Dole Food. The Supreme Court
made it unmistakably clear that "a subsidiary of an instrumentality is not itself
entitled to instrumentality status," 538 U.S. at 473, 123 S.Ct. 1655, and that
"only direct ownership of a majority of shares by the foreign state satisfies the
statutory requirement." Id. at 474, 123 S.Ct. 1655 (emphasis added).
30

The Banks' argument fails for a number of other reasons as well. First, the
statutory language of 1603(a) makes clear that a "foreign state ... includes a
political subdivision of a foreign state or an agency or instrumentality of a
foreign state...." 28 U.S.C. 1603(a) (emphasis added). This statement is not
equivalent to saying that a foreign state is or is defined as an agency or
instrumentality. Gates, 54 F.3d at 1462. While these latter terms would suggest
equivalency between the foreign state and the agencies and instumentalities, the
use of the term "includes" implies that agencies and instrumentalities, as well as
political subdivisions, are subsumed within the "foreign state." Thus, a proper
understanding of the term "includes" does not support the notion of recursive
tiering. Once an entity is determined to be an agency or instrumentality, it is
deemed part of the foreign state but it does not become the foreign state and,
therefore, cannot confer agency or instrumentality status on corporate entities
further down the chain of ownership.

31

Further, as the Ninth Circuit recognized, if Congress intended "foreign state" to

mean "agency or instrumentality" as appellants urge, it must also have meant
for "foreign state" to mean "political subdivision" by the terms of 1603(a). Id.
However, this latter proposition clearly cannot be the case as the rest of the

statute repeatedly distinguishes between foreign states and political

subdivisions. For example, 1603(b)(2) states that an entity must be "an organ
of a foreign state or political subdivision thereof," in order to be accorded
instrumentality status. Id. (noting this contradiction in more detail). If we were
to accept the Banks' argument, we would render the reference to political
subdivisions in these provisions redundant, a result that is to be avoided in
statutory construction. Babbitt v. Sweet Home Chapter of Cmtys. for a Great
Or., 515 U.S. 687, 698, 115 S.Ct. 2407, 132 L.Ed.2d 597 (1995) (applying
cannon of interpretation disfavoring readings of statutes that render statutory
language surplusage).
32

Additionally, our interpretation is consistent with the restrictive theory of

sovereign immunity codified in the FSIA. Republic of Austria v. Altmann, ___
U.S. ___, ___, 124 S.Ct. 2240, 2249, 159 L.Ed.2d 1 (2004); Verlinden B.V. v.
Cent. Bank of Nig., 461 U.S. 480, 486-89, 103 S.Ct. 1962, 76 L.Ed.2d 81
(1983). The restrictive theory provides that "a state is immune from the
jurisdiction of foreign courts as to its sovereign or public acts (jure imperii), but
not as to those that are private or commercial in character (jure gestionis )."
Nelson, 507 U.S. at 359-60, 113 S.Ct. 1471. Finally, we note that while the
KDIC serves a public function in ensuring the stability of the South Korean
banking system, the same cannot be said of the defendant Banks, which have
conceded that they have reverted or are in the process of reverting back to
private ownership. Thus, denial of sovereign immunity to Chohung and Hanvit
would not undermine a public function of the government of Korea and
basically impacts the private commercial interests of the Banks.

III. CONCLUSION
33

For these reasons, we affirm the District Court's denial of defendant-appellants'

motions to dismiss on the ground of sovereign immunity.

Notes:
1

There are two cases on appeal:Baker v. Hanvit Bank, No. 03-7863(L), and
Filler v. Hanvit Bank, No. 03-7861(L). Because they present the same legal
issue, we resolve them together in this opinion.

The remaining 20% was owned by financial institutions, securities firms,

private corporations, and individual shareholders

Sections 1605 and 1607 of Title 28 provide some exceptions to the general rule

of sovereign immunity for example, when the foreign state waives

immunity, when the suit arises out of commercial activity carried out in the
United States or commercial activity causing a direct effect in the United states,
when the suit addresses a violation of property rights in contravention of
international law, and when the suit consists of counterclaims made against a
foreign state that initiates litigation. 28 U.S.C. 1605, 1607. While the
plaintiffs-appellees did raise the commercial activity exception below, that
argument is not implicated on appeal
4

While our Circuit has never ruled on the question,Filler, 247 F.Supp.2d at 428,
the Ninth and Seventh Circuit have come to starkly different conclusions on the
application of tiering to sovereign immunity analysis. In Gates, 54 F.3d 1457,
the court held that although one defendant was an "organ" (and thus an agency
or instrumentality) of Canada, the organ's majority ownership of a subsidiary
did not similarly make that subsidiary an instrumentality. Id. at 1462-63. In
contrast stood the Seventh Circuit, which in Roselawn, 96 F.3d 932, held that
"tiering" was allowed for FSIA purposes, rejecting the Ninth Circuit's
reasoning in favor of a broad interpretation of foreign state, and ruling that an
instrumentality was, by definition, a foreign state, thus turning its subsidiaries
all tiers of them into instrumentalities subject to the protection of the
FSIA. Id. at 940-41.