Opinion ID: 659863
Heading Depth: 3
Heading Rank: 1

Heading: Commercial Activity of USA Holding

Text: 42 In analyzing the commercial activity exception with respect to USA Holding, the district court first found that USA Holding engaged in commercial activity as defined in the FSIA by virtue of its ownership interest in USA One B.V. and USA Two B.V., which were incorporated in the Netherlands to invest in U.S. real estate. Federal Ins. Co., No. 92-4177, 1993 WL 21327, at  5. Second, the district court concluded that this commercial activity was sufficient to constitute commercial activity carried on in the United States, 28 U.S.C. Sec. 1605(a)(2), within the meaning of the first clause of the FSIA commercial activity exception. Federal Ins. Co., No. 92-4177, 1993 WL 21327, at  5. As noted by the district court, see id., and discussed by the Supreme Court in Nelson, see --- U.S. at ----, 113 S.Ct. at 1477, such commercial activity is defined by the statute as commercial activity carried on by [the foreign] state and having substantial contact with the United States. 28 U.S.C. Sec. 1603(e). 43 The district court found that USA Holding engaged in commercial activity by forming two wholly owned subsidiaries--USA One B.V. and USA Two B.V. Federal Ins. Co., No. 92-4177, 1993 WL 21327, at  5. The district court then concluded that this ownership interest resulted in transactions having a substantial connection with the United States through the further formation of the subsidiary partnership USA One Associates, which was established in Pennsylvania to purchase and own U.S. real estate. Id. In essence, the district court held that USA Holding had waived its entitlement to sovereign immunity under the FSIA by virtue of its status as a parent to USA One B.V. and USA Two B.V., which in turn formed USA One Associates to acquire a significant ownership interest in the partnership that owns One Meridian Plaza, a United States real estate venture. Id. 44 The district court erred by interpreting the first clause of the commercial activity exception in an overbroad manner so as to allow for subject matter jurisdiction based on any commercial activities undertaken by the Dutch parent corporations with a connection to the United States. We adopt a two-part test when determining whether a foreign state's commercial activities are sufficient to deprive it of sovereign immunity under the FSIA commercial activity exception. Under this test, the initial inquiry is whether there is a sufficient jurisdictional connection or nexus between the commercial activity and the United States. The second inquiry is whether there exists a substantive connection or nexus between the commercial activity and the subject matter of the cause of action. 45 In order for the district court to have jurisdiction under the first clause of the commercial activity exception, the foreign state (USA Holding) must have carried on commercial activity directly in the United States, or it must have carried on commercial activity with a substantial connection to the United States. As a factual finding, the district court concluded only that the commercial activity undertaken by USA Holding was the formation of two wholly owned Dutch subsidiaries (USA One B.V. and USA Two B.V.), id., which certainly was not activity undertaken directly in the United States. Nevertheless, the district court attributed the commercial activities undertaken by USA One B.V., USA Two B.V., and USA One Associates in the United States, with respect to managing and operating One Meridian Plaza, to their parent corporation USA Holding, thereby finding that USA Holding engaged in commercial activity with a substantial connection to the United States. Such an inference by the district court violates the important principle that the acts of separate corporations established by foreign governments should not be attributed to related foreign entities unless doing so would work fraud or injustice. First Nat'l City Bank v. Banco Para El Comercio Exterior de Cuba, 462 U.S. 611, 624-29, 103 S.Ct. 2591, 2598-601, 77 L.Ed.2d 46 (1983) (Bancec ). 46 In Bancec, the Supreme Court held that government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such. Id. at 626-27, 103 S.Ct. at 2600. Although this principle initially was articulated in a case involving a determination of substantive liability, not a specific application of the FSIA commercial activity exception, courts of appeals consistently have relied on this presumption when making an FSIA jurisdictional determination through the application of 28 U.S.C. Sec. 1605(a)(2). E.g., Walter Fuller Aircraft Sales, Inc. v. Republic of the Philippines, 965 F.2d 1375, 1382 (5th Cir.1992) (The broader principles upon which Bancec was based ... are undoubtedly relevant whenever a plaintiff seeks to disregard a foreign government instrumentality....); Arriba Ltd. v. Petroleos Mexicanos, 962 F.2d 528, 533 (5th Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 413, 121 L.Ed.2d 337 (1992); Foremost-McKesson, Inc. v. Islamic Republic of Iran, 905 F.2d 438, 446-47 (D.C.Cir.1990); Hercaire Int'l, Inc. v. Argentina, 821 F.2d 559, 564-65 (11th Cir.1987). As noted by the Foremost-McKesson court, the Restatement directs that  '[w]hen a state instrumentality is not immune ..., for instance because the claim arises out of a commercial activity, the claim is ordinarily to be brought only against the instrumentality.'  905 F.2d at 446 (quoting 1 Restatement (Third) of the Foreign Relations Law of the United States Sec. 452 cmt. c (1987) (emphasis added in Foremost-McKesson )). 47 In the present case, the instrumentalities that engaged in commercial activities in the United States were USA One B.V., USA Two B.V., and USA One Associates, not USA Holding. The district court erred by ignoring the separate juridical status of the various entities and finding USA Holding responsible for the activities engaged in by its related subsidiaries. We recognize that there are two major exceptions to the Bancec rule, namely, the independent corporate status of government-owned entities should be disregarded (1) where a corporate entity is so extensively controlled by its owner that a relationship of principal and agent is created; or (2) where to give effect to the separate instrumentalities  'would work fraud or injustice.'  462 U.S. at 629, 103 S.Ct. at 2601 (quoting Taylor v. Standard Gas & Elec. Co., 306 U.S. 307, 322, 59 S.Ct. 543, 550, 83 L.Ed. 669 (1939)). See also Hercaire, 821 F.2d at 565; de Letelier v. Republic of Chile, 748 F.2d 790, 794 (2d Cir.1984), cert. denied, 471 U.S. 1125, 105 S.Ct. 2656, 86 L.Ed.2d 273 (1985). However, the district court never articulated factual findings or a legal justification sufficient for this court to uphold disregarding the independent juridical status of USA One B.V., USA Two B.V., and USA One Associates. Thus, the district court erred when it attributed the commercial activities of USA One Associates, the Pennsylvania partnership, and USA One B.V. and USA Two B.V., the Netherlands corporations, undertaken in the United States, to their parent USA Holding. 48 In short, the single act of creating two Dutch corporations, which later formed a U.S. partnership to acquire a significant ownership interest in One Meridian Plaza, was insufficient commercial activity for the district court to conclude it had subject matter jurisdiction over USA Holding. 14 We hold that a district court cannot exercise jurisdiction over a foreign state under the first clause of the FSIA commercial activity exception unless it finds a sufficient jurisdictional connection or nexus between the commercial activity engaged in by that particular foreign entity and the United States. 49 We also hold that the district court erred in not undertaking an analysis to determine whether a substantive connection or nexus exists between the commercial activity that USA Holding engaged in and the cause of action alleged. Such an undertaking is made necessary by the language of the statute, which allows for an exception to sovereign immunity only when the action is based upon a commercial activity carried on in the United States. 28 U.S.C. Sec. 1605(a)(2) (emphasis added). Although we have had few occasions to interpret the language of the FSIA commercial activity exception, we have held that the claims alleged in the complaint must be based upon commercial activities undertaken by the foreign state as contained in the record. See Sugarman v. Aeromexico, Inc., 626 F.2d 270, 272 (3d Cir.1980). We reiterate that holding today and announce that the district court must undertake an analysis and determine that the cause of action has a substantive connection to the commercial activities engaged in by the foreign state before it exercises jurisdiction under the commercial activity exception to the FSIA. 50 In adhering to this interpretation of the statute, we follow several other courts of appeals which require the actual legal claims being pursued to have arisen materially from the commercial activity undertaken by the foreign state. E.g., Stena Rederi, 923 F.2d at 387 (In order to satisfy the commercial activities exception to sovereign immunity, the commercial activity that provides the jurisdictional nexus with the United States must also be the activity on which the lawsuit is based.); Compania Mexicana de Aviacion, S.A. v. United States Dist. Court for the Cent. Dist. of Cal., 859 F.2d 1354, 1360 (9th Cir.1988); Gould, Inc. v. Pechiney Ugine Kuhlmann, 853 F.2d 445, 452 (6th Cir.1988); Barkanic v. General Admin. of Civil Aviation of the Peoples Republic of China, 822 F.2d 11, 13 (2d Cir.), cert. denied, 484 U.S. 964, 108 S.Ct. 453, 98 L.Ed.2d 393 (1987); Gilson v. Republic of Ireland, 682 F.2d 1022, 1027 n. 22 (D.C.Cir.1982) (Section 1605's 'based upon' standard is satisfied if plaintiff can show a direct causal connection between [the foreign entity's commercial activity in the United States] and the [acts] giving rise to his claims....). Several district courts in this circuit also have adopted this interpretation of the statutory language. See Tote v. Iberia Int'l Airlines, 649 F.Supp. 41, 42-43 (E.D.Pa.1986); National Expositions, Inc. v. DuBois, 605 F.Supp. 1206, 1209 & n. 7 (W.D.Pa.1985). 51 The Supreme Court recently agreed with this interpretation of the based upon language of the commercial activity exception in Saudi Arabia v. Nelson, --- U.S. ----, 113 S.Ct. 1471 (1993). In Nelson, a U.S. citizen sued the Kingdom of Saudi Arabia and its state-run hospital for tortious injuries resulting from his employment at the hospital. Id. at ---- - ----, 113 S.Ct. at 1474-76. Nelson was recruited and offered employment through an independent corporation doing business in the United States on behalf of Saudi Arabia. Id. While the district court dismissed the complaint for lack of subject matter jurisdiction under the FSIA, the U.S. Court of Appeals for the Eleventh Circuit reversed, finding that Nelson's recruitment and hiring were commercial activities undertaken by Saudi Arabia. Id. at ----, 113 S.Ct. at 1476. The appellate court also concluded that Nelson's tort claims were based upon these activities within the meaning of the FSIA commercial activity exception. 52 The Supreme Court reversed, finding that Nelson's cause of action was not based upon a commercial activity within the meaning the statute. Id. at ----, 113 S.Ct. at 1481. The Court interpreted the term based upon to require the plaintiff's lawsuit to involve a claim that materially results from conduct that constitutes the defendant's commercial activity in the United States. Id. at ----, 113 S.Ct. at 1477. While the Court conceded that the recruitment and hiring activities led to the conduct that eventually injured [Nelson], they are not the basis for [the] suit. Id. at ----, 113 S.Ct. at 1478. In order to be a basis for the suit, the activities must involve elements of a claim that, if proven, would entitle the plaintiff to relief under his theory of the case. Id. at ----, 113 S.Ct. at 1477. Nelson's suit involved claims of tortious conduct, not a breach of the contract the parties entered into as a result of Saudi Arabia's commercial activities of recruiting and hiring in the United States. Id. at ----, 113 S.Ct. at 1478. The Supreme Court also concluded that tortious conduct itself fails to qualify as 'commercial activity' within the meaning of the Act. Id. 53 The Nelson case is instructive because it makes clear that the commercial activity undertaken by the defendant must be directly connected to the cause of action alleged by the plaintiff. In short, the cause of action must arise directly from the defendant's commercial activities in the United States in order for the first clause of the commercial activity exception to apply. Turning to the facts before us, many claims are alleged against the owner/manager defendants in these consolidated cases. These claims are primarily tort claims--allegations phrased in terms of negligence, gross negligence, recklessness, nuisance, and strict liability that the defendants breached various duties and standards of care with respect to maintaining electrical and fire detection systems, inspecting the building, and failing to warn plaintiffs, among many others. These claims are not based upon USA Holding's sole commercial activity of forming two Dutch subsidiary corporations that eventually invested in One Meridian Plaza through a U.S. subsidiary. 15 The plaintiffs would not need to prove that USA Holding formed two wholly-owned Dutch subsidiaries to invest in U.S. real estate in order to prevail on their tort claims. Thus, the plaintiffs' claims are not based upon USA Holdings' commercial activity--such activity is irrelevant to the tort claims because it does not form any basis or foundation of the claims. See id. at ----, 113 S.Ct. at 1477 (quoting Black's Law Dictionary 151 (6th ed. 1990)). 54 The various plaintiffs argue that the district court's decision should be affirmed by attempting to cast the determination as one that can be disturbed only if it was clearly erroneous. In support of this position, the plaintiffs argue that the district court's conclusions that the Dutch defendants engaged in commercial activity that had a substantial connection with the United States were factual findings amply supported by the record. This argument misconceives the underlying issue, i.e., whether the district court used the correct legal standard when determining if the commercial activity exception applies. The district court committed an error of law, over which we have plenary review, when determining that the commercial activity exception did apply. 55 In addition, the various plaintiffs argue that the Nelson case is distinguishable because the claim involved tortious conduct undertaken by the sovereignty itself, rather than a claim resulting from its corporate governmental instrumentality engaging in investment activities. They argue that Nelson is relevant only to the extent it defines and discusses commercial activity for purposes of the commercial activity exception. This argument fails because Nelson explicitly involved an interpretation of the based upon language as used by Congress in the statute. Id. at ---- - ----, 113 S.Ct. at 1477-78. This section of the opinion is central to the Court's holding and provides a directive concerning the statute that we are compelled to follow.