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MATIMAK TRADING
COMPANY LIMITED, Plaintiff, vs. ALBERT KHALILY d/b/a UNITEX MILLS INC. and
D.A.Y. KIDS SPORTSWEAR INC., Defendants. 95 Civ. 6541 (KMW) UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF NEW YORK 936 F. Supp. 151;
1996 U.S. Dist. LEXIS 12006 August 19, 1996,
Decided August 21, 1996, FILED SUBSEQUENT HISTORY:
Affirmed
by: Matimak Trding Co. v. Khalily,
118 F.3d 76, No.
1251, Docket 96-9117, June 27, 1997. Holding abrogated by: JPMorgan Chase Bank v. Traffic
Stream (BVI) Infrastructure Ltd, 536 U.S. 88 (2002) DISPOSITION: [**1] Default judgment against D.A.Y. Kids
vacated and case dismissed in its entirety without prejudice to refiling in
state court. COUNSEL: For MATIMAK TRADING COMPANY LIMITED, plaintiff: Marshall
T. Potashner, Wilson, Elser, Moskowitz, Edelman & Dicker, New York, NY. For ALBERT KHALILY dba Unitex Mills Inc., D.A.Y. KIDS SPORTSWEAR
INC., defendants: Alfred F. Koller, New York, NY. For ALBERT KHALILY dba Unitex Mills Inc., D.A.Y. KIDS SPORTSWEAR
INC., counter-claimants: Alfred F. Koller, New York, NY. For MATIMAK TRADING COMPANY LIMITED, counter-defendant: Marshall
T. Potashner, Wilson, Elser, Moskowitz, Edelman & Dicker, New York, NY. JUDGES: Kimba M. Wood, United States District Judge OPINIONBY: Kimba M. Wood OPINION: [*152] OPINION AND ORDER WOOD, D.J. In an order dated June 10, 1996, I invited the parties to make
brief submissions concerning the issue of subject matter jurisdiction. I have
since received a letter brief from plaintiff Matimak Trading Company
(“Matimak”), a corporation duly organized under the laws of
Hong Kong, with its principal place of business in Wanchai, Hong Kong. For the
reasons set forth below, I vacate the default judgment against defendant D.A.Y.
Kids Sportswear Inc. [**2] (“D.A.Y. Kids”) and dismiss the case in
its entirety without prejudice to refiling in state court. In my June 10, 1996 order, I raised, sua sponte, the issue of whether
this court lacks subject matter jurisdiction because Hong Kong is not
recognized by the United States as a foreign state. According to 28 U.S.C.
§ 1332, which implements Article III of the United States
Constitution, judicial power for diversity purposes only extends to cases
“between . . . citizens of a State and citizens or subjects of a
foreign state . . . .” 28 U.S.C. § 1332. Matimak argues, primarily based on policy considerations, that I
should recognize Hong Kong as a de facto foreign state for diversity purposes
under 28 U.S.C. § 1332. These policy arguments are unavailing
because it is not the role of the judiciary to recognize foreign states, but
rather that is a function of the executive branch. See Iran Handicraft &
Carpet Export Center v. Marjan Int’l Corp., 655 F. Supp. 1275,
1277 (S.D.N.Y. 1987), aff’d without op., 868 F.2d 1267 (2d
Cir. 1988). A court may not hear cases by citizens and corporations of a
foreign entity unless the foreign state has been recognized by our government.
[**3] Land
Oberoesterreich v. Gude, 109 F.2d 635, 637 (2d Cir.), cert. denied, 311 U.S. 670,
85 L. Ed. 431, 61 S. Ct. 30 (1940). Matimak refers to a letter from the State Department in which
Assistant Legal Adviser Jim Hergen (“Hergen”) urges this
court to recognize Hong Kong as a de facto foreign state for diversity
purposes. Pl. Let. Br., Ex. A. Although there are strong commercial ties between
Hong Kong and the United States, the establishment of such ties does not
constitute recognition of Hong Kong as a de facto foreign state by our
government. In a previous letter from the State Department, also written by
Hergen, submitted to this court in the case of Dunsky Limited v.
Judy-Phillipine, Inc., 95 Civ. 2035 (KMW), dated April 4, 1995, Hergen confirmed that
the United States does not recognize Hong Kong as a sovereign state. In Murarka v. Bachrack Bros., 215 F.2d 547 (2d Cir. 1954), the Second
Circuit recognized India as a de facto foreign state for diversity purposes,
because at the time the complaint was filed in that case, India was
substantially a foreign state. Matimak argues on the basis of Murarka that I should
recognize Hong Kong as a de facto foreign state for diversity [**4] purposes. This
argument is unavailing given that the circumstances of India at the time of the
Murarka decision and present-day Hong Kong are distinguishable. At the
time the complaint was filed in the Murarka case, only four days
before the Indian Independence Act took effect, an Interim Indian Government
had already been established in anticipation of the political separation of
India from Great Britain. The United States had already taken steps to recognize
India as an independent nation with the reception of India’s first
ambassador and the accreditation of the first United States Ambassador to
India. Murarka, 215 F.2d at 551-52. Because the official recognition of India as
a foreign state was imminent, the court wrote 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.” Murarka, 215 F.2d at 552. On July 1, 1997, Hong Kong will revert to Chinese sovereignty. It
is possible that after that reversion, Hong Kong companies will be considered
to be citizens of China for the purposes of diversity jurisdiction and thus
will be allowed to file suits in federal [**5] courts based on diversity-jurisdiction.
However, [*153] unlike in the case of India at the time of the Murarka
decision, the United States has not yet taken substantial steps to recognize
Hong Kong as a fully incorporated part of China. Moreover, the complaint in
this case was not filed a mere four days before the change in government, as in
Murarka, but rather more than one year and a half before the reversion to
Chinese sovereignty. The remaining cases cited by Matimak are either unpersuasive or
irrelevant. Although the Second Circuit wrote in Netherlands Shipmortgage
Corp. v. Madias, 717 F.2d 731, 735 (2d Cir. 1983) that there is “no
question that diversity exists” in a case involving a Bermudian
corporation, n1 there is no evidence in the record that subject matter
jurisdiction in that case was ever raised at the district or appellate level. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - -
- - - - - - - n1 Hong Kong, Bermuda and the Cayman Islands are all British
Dependant Territories. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - -
- - - - - - - Matimak also relies heavily on Wilson v. Humphreys (Cayman)
Ltd.,
916 [**6] F.2d 1239, 1242
(7th Cir. 1990), cert. denied, 499 U.S. 947, 113 L. Ed. 2d 468, 111 S. Ct.
1415 (1991), in which the Seventh Circuit found that diversity jurisdiction
existed between a Tennessee corporation and a company incorporated in the
Cayman Islands. Wilson v. Humphreys (Cayman) Ltd., 916 F.2d 1239, 1242
(7th Cir. 1990), cert. denied, 499 U.S. 947, 113 L. Ed. 2d 468, 111 S. Ct.
1415 (1991). However, I find that the reasoning behind that decision
unpersuasive, because it is based primarily on policy arguments that are
unavailing given the fact that the judicial branch has no power to recognize
foreign states. The decision is not based on any legal reasoning that would
allow this court to circumvent the requirement under 28 U.S.C.
§ 1332 that a case has to be between citizens of a State and
citizens or subjects of a foreign state for diversity purposes. n2 - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - -
- - - - - - - n2 The Wilson court relied on a Southern District of New York
case, Tetra Finance (HK), Ltd. v. Shaheen, 584 F. Supp. 847, (S.D.N.Y. 1984).
Although the Tetra court noted in dictum that it would recognize Hong Kong as a
foreign state for purposes of diversity jurisdiction, it dismissed the case for
lack of jurisdiction on other grounds. Tetra Finance v. Shaheen, 584 F. Supp. 847,
(S.D.N.Y. 1984). The Tetra court’s reasoning in favor of allowing a
Hong Kong company to be a party in a diversity action is also based on policy
and the fact that district courts in the past have heard cases involving Hong
Kong corporations, enforced Hong Kong judgments and applied Hong Kong law. Tetra, 584 F. Supp. at 848.
I also find this reasoning unpersuasive. Although courts have entertained
actions involving Hong Kong corporations and law, none of these courts
expressly considered the issue of whether Hong Kong should be recognized as a
de facto foreign sovereign for purposes of diversity jurisdiction. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - -
- - - - - - - [**7] Finally, many of the other cases cited by Matimak involved
countries in circumstances different from those of Hong Kong, such as Iran, the
Channel Islands, Palestine and Cuba. I conclude that those decisions are
inapplicable to the question presented here. For the reasons set forth above, I vacate the default judgment
against D.A.Y. Kids and dismiss this case in its entirety without prejudice to
refiling in state court. So Ordered. Dated: New York, New York August 19, 1996 Kimba M. Wood United States District Judge |