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Rong v. Liaoning Provincial Government

March 3, 2005


The opinion of the court was delivered by: Reggie B. Walton United States District Court Judge


The plaintiffs, Yang Rong ("Rong"), Rhea Yeung ("Yeung"), and the Broadsino Finance Company, Ltd. ("Broadsino"), brought this action against Liaoning Provincial Government ("LPG") for conversion, expropriation, the violation of international law and unjust enrichment pursuant to the Commercial Activity and Expropriation Exceptions to the Foreign Sovereign Immunities Act ("FSIA"), 28 U.S.C. §§ 1330, 1605(a)(2)-(3) (2000). Currently before the Court is the Motion of Liaoning Provincial Government to Dismiss First Amended Complaint ("Def.'s Mot.") [D.E. #11] pursuant to Federal Rules of Civil Procedure 12(b)(1), (2) and (6), the plaintiff's opposition thereto and the defendant's reply. For the reasons stated below, the defendant's motion is granted because this Court does not have subject matter jurisdiction.

I. Factual Background

The plaintiffs filed their initial complaint on August 7, 2003, see Complaint dated August 7, 2003, and their amended complaint on February 13, 2004. First Amended Complaint ("Compl."). The following is a recitation of the facts as alleged by the plaintiffs.

In 1991, Rong established Broadsino under the laws of Hong Kong. Compl. ¶ 21. Rong has been the Chairman and Chief Executive Officer of Broadsino since its incorporation and has conducted business through Broadsino, acting as its agent or nominee. Id. Broadsino entered into a joint venture with two Chinese companies to form Shen Yang Automotive ("Shen Yang") for the purpose of manufacturing minibuses and other vehicles in China. Id. Rong possessed a 40 percent interest in Shen Yang and was the chief executive officer of the joint venture. Id. ¶¶ 21-22. In an effort to raise capital to increase Shen Yang's production level, Rong was determined to register Shen Yang's stock in the United States and to secure their listing on the New York Stock Exchange ("NYSE"). Id. ¶ 23. This was a challenging goal for Rong since no company based in China had been listed on the NYSE in over 50 years. Id.

Senior Chinese government officials informed Rong that "since this would be the first U.S. registration and listing of a company based in China in 50 years, a Chinese entity, rather than a Hong Kong private company (Broadsino), should be perceived as the majority shareholder of the listed company." Id. After consulting with his counsel on this point, Rong understood that "to satisfy these views expressed by Chinese authorities, the majority interest in the listed company could be held in the name of a Chinese non-governmental organization and that this arrangement would simplify the registration and list of shares." Id. Consequently, Broadsino, the People's Bank of China, and other Chinese entities sponsored the formation of the Chinese Financial Education Development Foundation (the "Foundation") as a non-governmental organization that would, among other things, "serve as a vehicle whereby assets could be held in accordance with the wishes of patrons or contributors, including Yang Rong." Id. ¶ 24 & Memorandum in Support of Motion of Liaoning Provincial Government to Dismiss First Amended Complaint ("Def.'s Mem.") at 2. Shang Ming ("Ming"), the deputy governor of the People's Bank of China, served as the Foundation's chairman while Rong served as vice chairman. Compl. ¶ 24. According to the plaintiffs, Broadsino and another company controlled by Rong paid the initial expenses of the Foundation. Id.

In June 1992, Rong incorporated another company, Brilliance Holdings ("Brilliance"), as the corporate entity to be used for the purpose of registering stocks on the NYSE. Id. ¶ 25. A month later Brilliance changed its name to Brilliance China Automotive Holdings Limited. Id. Subsequently, in exchange for Brilliance shares, Broadsino invested its equity interest in Shen Yang. Id. ¶ 26. By August 1992, Rong and his nominees were the record owners of 78.43 percent of Brilliance's stocks. Id. ¶ 27. In September 1992, Broadsino transferred its Brilliance stocks to the Foundation. Id. ¶ 28. According to Rong, he believed that the Brilliance stocks, held on behalf of Broadsino, would be transferred to the Foundation in exchange for $12 million dollars, which the Foundation hoped to receive in donations from local banks. Id. However, Ming advised Rong that the Foundation did not receive any of the expected donations from the banks. Id. And because the Foundation could not pay for the Brilliance stocks, "Rong and Ming allegedly agreed that the Foundation would hold the [stocks] in trust for Broadsino, in effect acting as the nominee for Broadsino." Id. In exchange, Broadsino agreed to pay an administration fee and make certain donations to the Foundation to assist with its development. Id. Rong and Ming further agreed that Rong, as Vice Chairman of the Foundation, would have the sole authority to manage, control and administer the equity interest in Brilliance held by the Foundation. Id. Following the public offering of Brilliance's stocks in the United States, its stocks held by Rong as nominee for Broadsino were transferred to the Foundation pursuant to the agreement between Rong and Ming. Id. According to Rong, despite this transfer, Broadsino*fn1 and Rong retained beneficial ownership in the stocks and Rong exercised sole authority over the stocks until he was unlawfully divested of his interest in the stocks in 2002. Id.

In October, 1992, after final approval of the registration statement by the Securities and Exchange Commission ("SEC"), 5 million shares of Brilliance stock were offered for sale. Id. ¶ 30. The stocks offered for sale amounted to 28.75 percent of Brilliance's total equity. Id. The percentage of Brilliance stock owned by the Foundation was 55.88 percent. Id. According to Rong, following the public offering, the Foundation continued to hold the Brilliance stocks on behalf of Broadsino. Id. ¶ 31. At Rong's direction, Broadsino paid the costs of registering and listing the public offer of the Brillance stocks as well as paying the administration fees to the Foundation for administering the trust. Id. ¶¶ 30-31. Broadsino also gave funds to the Foundation. Id. ¶ 31. Moreover, during the period from 1992 to 2002, Brilliance was managed and directed by Rong. Id. ¶ 32. He also directly managed Brilliance's primary holding - Shen Yang - from 1995 to 2002. Id.

In early 2002, the LPG formed a "Working Committee" to assume and exercise control over the Foundation and to acquire from it the Brilliance stocks that it held in trust for Broadsino.

Id. ¶ 35. The LPG appointed Yang Bao Shan, Assistant to the Governor of the LPG, as Deputy*fn2 Chief of the Working Committee. Id. According to the plaintiffs, the Working Committee advised Rong that all equity interests held in the name of the Foundation, including Broadsino's interest in Brilliance, were government assets and demanded that they be transferred to the LPG. Id. The Working Committee then allegedly participated in a series of events to implement the "takeover scheme." Id. ¶ 36. First, the LPG informed Rong and the Board of Directors of Brilliance that the Foundation no longer recognized Broadsino's beneficial interest in Brilliance. Id. Also, at the direction of the LPG, Brilliance's Board of Directors dismissed Rong as Chairman, President, Chief Executive Officer and Director of Brilliance. Id. Rong was then replaced by individuals who were members of the Working Committee. Id. Additionally, at the direction of the LPG, Brilliance unilaterally reduced Rong's salary by two-thirds and then finally ceased paying him any salary by October 2002. Id. The Board of Directors of Brilliance also terminated the service contract between Rong and Brilliance. Id. The LPG subsequently formed Huachen Automotive Group Holdings Company Limited ("Huachen") and appointed members of the LPG as officers of Huachen, who were allegedly given valuable stock options in Brilliance. Id. ¶¶ 36, 37 & Def.'s Mem. at 4. At the direction of the LPG and pursuant to an agreement between the Foundation and Huachen, Brilliance's bonds held by the Foundation in trust for Broadsino were sold to Huachen at a significant discount of their actual value. Id. ¶ 39. Additionally, Huachen granted "call options" for approximately 346,305,630 shares of Brilliance's stocks, which comprised some of Broadsino's stocks held by Brilliance. Id. ¶ 40. Consequently, Broadsino initiated proceedings against the Foundation in Beijing's Municipal High Court seeking a determination of Broadsino's interest in the assets held by the Foundation, including the Brilliance stocks. Id. ¶ 38. However, Broadsino was denied the opportunity to pursue its case against the Foundation in the Chinese courts. Id.*fn3

Eventually, Brilliance and Huachen initiated a tender offer for the remaining Brilliance stocks, including those traded on the NYSE. Id. ¶ 41. In conjunction with the tender offer,*fn4 Brilliance and Huachen requested that marketing of the Brilliance stocks being traded on the NYSE be suspended for one day, specifically on December 18, 2002. Id.

Broadsino also instituted a lawsuit in Bermuda against Brilliance, four Brilliance board members, the Foundation, and Huachen to block the stock transfer from the Foundation to Huachen. Id. ¶ 46. However, the Bermuda court refused to enjoin the transfer and Broadsino appealed that decision. Id. Broadsino claimed that it had transferred Brilliance stock to the Foundation that were to be held in trust for Broadsino but that the stocks had been unlawfully appropriated. Def.'s Mem. at 5. The Bermuda Supreme Court subsequently ruled on December 31, 2003, that "Broadsino "never owned any shares in [Brilliance], Def.'s Mem. at 5 & Ex. 1 (Judgment on Strike Out Application of the Supreme Court of Bermuda) at 9, and therefore concluded that it was "an abuse of the process of the Court to pursue a claim that [Broadsino] transferred any shares in Brilliance to the Foundation." Id.

The defendant has moved to dismiss the complaint pursuant to Rule 12(b)1, (2), & (6) of the Federal Rules of Civil Procedure claiming that this Court does not have subject matter jurisdiction under the Foreign Sovereign Immunities Act. Def.'s Mot. at 1. The defendant also asserts that the complaint is barred by the act of state doctrine and the doctrine of international comity. Id. Additionally, the defendant claims that the complaint is barred by the principles of issue and claim preclusion as a result of the ruling issued by the Bermuda Supreme Court. Id. Finally, the defendant moves to dismiss for lack of personal jurisdiction pursuant to 28 U.S.C. § 1330(b) and because there are insufficient contacts with the District of Columbia to satisfy the Due Process Clause. Id. at 1-2.*fn5

II. Standards of Review

A. Motion to Dismiss Under Rule 12(b)(1)

Under Rule 12(b)(1) of the Federal Rules of Civil Procedure, which governs motions to dismiss for lack of subject matter jurisdiction, "[t]he plaintiff bears the burden of persuasion to establish subject matter jurisdiction by a preponderance of the evidence." Pitney Bowes, Inc. v. United States Postal Serv., 27 F. Supp. 2d 15, 19 (D.D.C. 1998). In reviewing such a motion, this Court must accept as true all the factual allegations contained in the complaint. Leatherman v. Tarrant County Narcotics Intelligence & Coordination Unit, 507 U.S. 163, 164 (1993). Additionally, in deciding a Rule 12(b)(1) motion, it is well established in this Circuit that a court is not limited to the allegations in the complaint, but may also consider material outside of the pleadings in its effort to determine whether the court has jurisdiction in the case. See EEOC v. St. Francis Xavier Parochial Sch., 117 F.3d 621, 624-25 n.3 (D.C. Cir. 1997); Herbert v. Nat'l Acad. of Sci., 974 F.2d 192, 197 (D.C. Cir. 1992); Haase v. Sessions, 835 F.2d 902, 906 (D.C. Cir. 1987); Grand Lodge of Fraternal Order of Police v. Ashcroft, 185 F. Supp. 2d 9, 14 (D.D.C. 2001).

B. Motion to Dismiss Under Rule 12(b)(2)

When personal jurisdiction is challenged pursuant to Federal Rule of Civil Procedure 12(b)(2), the "[p]laintiffs have the burden of proof to establish that the Court has personal jurisdiction.... All factual disputes concerning jurisdiction must be resolved in favor of the plaintiffs,... and plaintiffs need only make a prima facie showing of personal jurisdiction in order to defeat [a] defendant['s] motion." Jacobsen v. Oliver, 201 F. Supp. 2d 93, 104 (D.D.C. 2002). Moreover, the plaintiffs' assertions of fact are "presumed to be true unless directly contradicted by affidavit," DSMC, Inc. v. Convera Corp., 273 F. Supp. 2d 14, 20 (D.D.C. 2002) (citation omitted), or other evidence. As with a Rule 12(b)(1) motion, when reviewing a challenge pursuant to Rule 12(b)(2), the court may consider documents outside the pleadings to assure itself that it has jurisdiction. See Land v. Dollar, 330 U.S. 731, 735 n.4 (1947) ("when a question of the District Court's jurisdiction is ...

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