JP Morgan Chase Bank v. Traffic Stream (BVI) Infrastructure Ltd. (06/10/2002)

By: Katherine Bontrager, Medill News Service

Questions presented

Whether corporations organized under the laws of United Kingdom Overseas Territories are ""citizens or subjects of a foreign state"" for purposes of alienage diversity jurisdiction under 28 U.S.C. 1332(a)(2).

Brief

There is much special about the British Virgin Islands. Its head of state is the Queen of England and its currency is the U.S. dollar. It is located in the Caribbean, just east of Puerto Rico, an American territory, and is the westernmost and northernmost of the British Leeward Islands. Its people celebrate such holidays as Territory Day, St. Ursula's Day and Prince Charles' Birthday.

It is known for its beaches, its tourism, and as one of the world's leading jurisdictions for International Business Companies, with an estimated 250,000 active IBCs, or about 45 per cent of the world market.

It is first and foremost a British territory or colony, and has been since 1672. And its people and corporations are ""stateless,"" according to a peculiarity of American law.

This became apparent to the Chase Manhattan Bank in New York after it loaned $199 million to Traffic Stream Infrastructure Ltd. in 1998 to enable the British Virgin Islands-based company to engage in the construction and operation of toll-road projects in China.

Traffic Stream was to make semi-annual interest payments starting in November of the same year, according to the agreement. It was noted that the contract was to ""be governed by and construed in accordance with"" New York law, and Traffic Stream agreed to submit to the jurisdiction of the courts in New York.

The first set of interest payments was made in November in accordance with the agreement, but soon after, Traffic Stream failed to make further payments.

Chase Manhattan filed suit against Traffic Stream in federal court in New York for breach of contract, among other claims.

Traffic Stream used the impossibility defense, claiming it was impossible for the company to repay its debt to the bank.

The court rejected Traffic Streams impossibility defense on grounds that it was unavailable under New York law, and ruled in favor of the bank.

Traffic Stream used the impossibility defense, claiming it was impossible for them to repay their debt to the bank.

The court rejected Traffic Streams impossibility defense on grounds that it was unavailable under New York law and ruled in the favor of the bank in the amount of nearly $100 million.

In the 2nd Circuit Court of Appeals, Traffic Stream challenged whether it could be sued in federal court at all. Federal courts have limited jurisdiction, Traffic Stream argued, and that jurisdiction, known as ""alienage jurisdiction,"" extends to corporations that are incorporated in states or in foreign states. That would the case, it argued, if it were incorporated in Britain, which is a foreign state, or in the British Virgin Islands, if the islands were part of Britain. But it is neither, Traffic Stream claimed. It is a territory of Britain, much like Hong Kong was, and Bermuda still is. Therefore, the company argued, it is stateless and cant be sued in Americas federal courts.

This argument gave the 2nd Circuit panel pause. More than pause. A unanimous panel saw no way out of the dilemma, reversed, and instructed the district court to dismiss the case against Traffic Stream.

In so holding, the 2nd Circuit looked to two of its recent precedents. The first, in 1997, involved a corporation incorporated in Hong Kong. The court held in that case that because Hong Kong was at that time a British Dependent Territory, not an ""independent, sovereign political entity,"" the Hong Kong corporation was technically ""stateless."" The court noted that ""a stateless person -- the proverbial man without a country -- cannot sue a United States citizen under alienage jurisdiction.""

The panel also cited a 2000 case in which the defendants were corporations and an individual with Bermuda citizenship. There too, the 2nd Circuit held that the suit could not be brought in federal court on the basis of alienage jurisdiction because Bermuda, as a British territory, wasnt a state.

There are other territories whose citizens and corporations would also be affected by the courts opinion. The ""British Overseas Territories"" alone include Anguilla, Bermuda, British India Ocean Territory, the British Virgin Islands, the Cayman Islands, the Falkland Islands, Gibraltar, Montserrat, the Pitcairn, Saint Helena and dependencies, South Georgia and the South Sandwich Islands, and the Turks and Caicos Islands.

Chase Manhattan Bank sought review by the U.S. Supreme Court. The U.S. Solicitor General filed an amicus brief on behalf of the United States, urging the Court to take the case. In noting that the U.S. ""has a substantial interest in the correct interpretation of the alienage diversity statute because that grant of jurisdiction facilitates international commerce and because misapplication of that statute can have significant foreign policy ramifications,"" the Solicitor General argued that the 2nd Circuits opinion has led to ""repeated and well-founded objections from an important ally and trading partner, the United Kingdom, that that court has improperly denied citizens and subjects of the United Kingdom access to an important federal forum for resolving international commercial disputes.""

The Solicitor General also advised the Court that the 2nd Circuits opinion ""has generated a square conflict among the courts of appeals,"" with the 3rd, 4th and 7th circuits ruling that residents and companies incorporated in territories are citizens or subjects of the United Kingdom for purposes of the alienage diversity statute.

And finally, the Solicitor General argued that the case ""additionally warrants review because it is wrong."" As a historical matter, the amicus brief stated, the drafters of the Constitution chose the words citizens or subjects to refer to the broad category of those under the authority of a foreign power, and expressly recognized the United Kingdom's continuing sovereignty and dominion over its overseas territories, including the Virgin Islands.

On Jan. 4, 2002, the U.S. Supreme Court granted certiorari in the case, and allowed the United Kingdom of Great Britain and Northern Ireland to file amicus briefs.