Southern Cross Overseas Agencies, Inc. v. Wah Kwong Shipping Group Ltd. ( 1999 )

Opinions of the United
1999 Decisions States Court of Appeals
for the Third Circuit
6-25-1999
So Cross Overseas v. Wah Kwong Shipping
Precedential or Non-Precedential:
Docket 98-5185
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Recommended Citation
"So Cross Overseas v. Wah Kwong Shipping" (1999). 1999 Decisions. Paper 167.
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Filed June 25, 1999
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
NO. 98-5185
SOUTHERN CROSS OVERSEAS AGENCIES, INC.,
A New Jersey Corporation;
TRANSPORT INTERNATIONAL POOL INC.,
A Pennsylvania Corporation, Appellants
v.
WAH KWONG SHIPPING GROUP LTD.,
A Foreign Corporation
On Appeal From the United States District Court
For the District of New Jersey
(D.C. Civ. No. 96-cv-05887)
District Judge: Honorable Anne E. Thompson,
Chief Judge
Argued: March 25, 1999
Before: BECKER, Chief Judge, LEWIS and
WELLFORD,* Circuit Judges.
(Filed June 25, 1999)
_________________________________________________________________
*Honorable Harry Wellford, United States Circuit Judge for the United
States Court of Appeals for the Sixth Circuit, sitting by designation.
HYMAN HILLENBRAND, ESQUIRE
(ARGUED)
R. BRETT KELLY, ESQUIRE
De Orchis, Corsa & Hillenbrand
2650 Biscayne Boulevard
Miami, FL 33137
(Organized in New York)
1495 Morris Avenue
Union, New Jersey 07083
LAURA E. SHER, ESQUIRE
Kroll & Tract
One Gateway Center
Newark, NJ 07102-5311
Counsel for Appellants
JEFFREY W. SARLES, ESQUIRE
(ARGUED)
ALAN N. SALPETER, ESQUIRE
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, IL 60603
ROBERT B. KURZWEIL, ESQUIRE
FREDRIC R. COHEN, ESQUIRE
Katz, Ettin, Levine, Kurzweil,
Weber & Scialabba
905 North Kings Highway
Cherry Hill, NJ 08034
Counsel for Appellee
OPINION OF THE COURT
BECKER, Chief Judge.
This suit for sums past due for transportation of cargo
emerges from a setting of contractual relationships and
prior litigation history so complicated and convoluted as to
almost boggle the mind. It will take over thirteen pages of
typescript to describe them. The case had its genesis in a
now-failed Australian corporation's relationship with a still-
extant Hong Kong corporation. The plaintiffs here claim to
2
have been victims of fraud by the Hong Kong corporation.
Aspects of the controversy have previously been litigated in
an Australian liquidation proceeding, a New Jersey
bankruptcy proceeding (consolidated with a California
proceeding),1 and a civil action in the United States District
Court for the Northern District of Illinois. The present
appeal arises from an order of the District Court for the
District of New Jersey dismissing the complaint of plaintiffs
Southern Cross Overseas Agencies, Inc. ("Southern Cross")
and Transport International Pool Inc. ("TIP") against
defendant Wah Kwong Shipping Group Ltd. ("Wah Kwong")
under Fed. R. Civ. Proc. 12(b)(6) on the ground that the
statute of limitations barred the action. It presents two
interesting and important questions, one of which we
resolve in a way that creates a circuit split.
The first issue stems from the defense that the District
Court lacked diversity jurisdiction because the defendant is
a Hong Kong corporation. The Court of Appeals for the
Second Circuit has determined that Hong Kong
corporations, being neither "citizens" nor"subjects" of a
foreign state, were "stateless" and therefore do not fall
within federal alienage diversity jurisdiction under 28
U.S.C. S 1332(a)(2). See Matimak Trading Co. v. Khalily, 118
F.3d 76 (2d Cir. 1997), cert. denied, 118 S. Ct. 883 (1998).
We disagree.
Because the question implicates foreign policy, we
requested that the government offer its views, and we now
endorse the State Department's position that a Hong Kong
corporation, though not a "citizen" of the United Kingdom,
was a "subject" of the United Kingdom for purposes of
diversity jurisdiction. At the time the lawsuit wasfiled,
Hong Kong was a British Dependent Territory. While
governed by laws separate from those governing the United
Kingdom itself, Hong Kong was ultimately subject to British
sovereignty. The British Crown had the power of final
approval of its laws. Furthermore, under the relevant
consular agreements, Hong Kong citizens (including
corporations) were treated as United Kingdom "nationals"
_________________________________________________________________
1. The principal asset in both the Australian liquidation and the U.S.
bankruptcy came from the proceeds of a California arbitration.
3
for purposes of relations between the United Kingdom and
the United States. Therefore, we agree with the District
Court that we possess subject matter jurisdiction.
The second issue implicates the permissible scope of a
court's inquiry on a 12(b)(6) motion. The plaintiffs filed their
complaint in December 1996. The District Court granted
the defendant's 12(b)(6) motion, which was grounded on the
statute of limitations, because the fraudulent acts
complained of occurred in the mid-1980s and the court was
satisfied that New Jersey's six-year statute of limitations for
fraud had long since run. The plaintiffs, however, maintain
that the facts that might have given them knowledge of a
probable cause of action did not come to their attention
until 1992 and that they could not reasonably have been
expected to know them sooner.
Resolution of the issue requires us to examine the
published opinion in the earlier New Jersey bankruptcy
litigation. Although this examination takes us beyond the
face of the complaint, we conclude that we may take
judicial notice of that opinion as a matter of public record
and as a document on which the plaintiffs rely in the
complaint. We further conclude that, as a matter of law, the
opinion provided the bankruptcy creditors in that action
with notice of the facts that should have led them to inquire
into the alleged fraud. Because the plaintiffs were creditors
who filed claims in that action, they should have known of
the opinion. Therefore, we will affirm the District Court's
conclusion that the complaint is barred by the statute of
limitations.
As is already apparent, the factual and procedural
background of this case is incredibly complex. Because the
subject matter jurisdiction issue is a threshold matter that
is distinct from the other issues before us, we address it
first, and then turn to the facts and procedural history.
I. Subject Matter Jurisdiction
Wah Kwong alleges that we lack alienage diversity
jurisdiction in this case because, as a corporation organized
under Hong Kong law, it is "stateless" and does not fall
within 28 U.S.C. S 1332(a)(2). The Supreme Court has
4
recently instructed us not to hypothesize jurisdiction, but
to decide jurisdiction first and then address other issues
only if there is jurisdiction. See Steel Co. v. Citizens for a
Better Environment, 523 U.S. 83 (1998). Thus, we address
this issue before resolving the parties' other arguments.
Section 1332(a)(2) confers original jurisdiction on federal
courts in civil actions in which the matter in controversy
exceeds $75,000 between "citizens of a State and citizens or
subjects of a foreign state." This tracks the language of
Article III of the Constitution, which extends the federal
judicial power to "all Cases . . . between a State, or Citizens
thereof, and foreign States, Citizens or Subjects." Wah
Kwong argues that, as a Hong Kong corporation, it is
neither a citizen nor a subject of a "foreign state."2 The
District Court found that it had jurisdiction, reasoning only
that federal jurisdiction in this case served the interests of
"providing a neutral forum and avoiding the appearance of
injustice or creating grounds for resentment in the relations
of the United States with other nations." Slip Op. at 14.
A. The Second Circuit's View
The District Court's decision is in conflict with the
Second Circuit's decision in Matimak. The District Court
disposed of the jurisdictional issue summarily, and did not
discuss Matimak. In Matimak, Judge McLaughlin, joined by
Judge Jacobs, held that Hong Kong was not a "foreign
state" for purposes of alienage jurisdiction and that Hong
Kong corporations were not "citizens or subjects" of the
United Kingdom. Matimak set forth two important
principles that formed the basis for its decision.
The first concerned the definition of "foreign state":
Neither the Constitution nor S 1332(a)(2) defines
"foreign state." However, "it has generally been held
that a foreign state is one formally recognized by the
executive branch of the United States government."
_________________________________________________________________
2. Diversity is to be determined at the time the complaint is filed. See
Smith v. Sperling, 354 U.S. 91, 93 n.1 (1957). Hong Kong was a British
Dependent Territory at the time the complaint wasfiled, and it so
remained until July 1, 1997, when sovereignty was transferred to the
People's Republic of China.
5
13B C. Wright, A. Miller & E. Cooper, Federal Practice
& Procedure S 3604 (1984).
Matimak, 118 F.3d at 79. It is undisputed that Hong Kong
has not been formally recognized as an independent
sovereign by the executive branch. The Matimak court also
found that Hong Kong was not a "de facto" foreign state,
despite its status as the United States's twelfth-largest
trading partner and the United States-Hong Kong Policy Act
of 1992, 22 U.S.C.A. SS 5701-5732 (West Supp. 1996). That
Act establishes that Congress desires close United States-
Hong Kong relations to continue after Hong Kong's change
from a British Dependent Territory to a special
administrative region of the People's Republic of China.3
While the Act demonstrates that there is a special, close
relationship between the United States and Hong Kong,
that, we agree, is simply not the same as explicit
recognition of foreign statehood.
Recognition matters because the Framers feared that
foreign nations might become incensed if they perceived
that state courts were biased against foreigners; the result
could be or commercial disruption if foreign nations became
incensed at the treatment of their citizens or subjects in
state courts. See Matimak, 118 F.3d at 82-83. Matimak
suggested that, "[w]here the Executive Branch determines
that a foreign entity is not a ``sovereign,' there is no threat
of entanglement with a sovereign stemming from the refusal
of a federal court to treat that entity's citizen in a national
forum." Id. at 83. The court recognized that, if an
unrecognized foreign entity perceived that its citizens had
been subject to bias in a state court, there could be foreign
relations repercussions, but found that it was for the
executive branch to evaluate a foreign entity's autonomy
and resources in order to determine whether the entity
constituted a sovereign state. Thus, the risk of foreign
policy entanglements was not for the court to evaluate. See
id.
_________________________________________________________________
3. The Act provides that "Hong Kong plays an important role in today's
regional and world economy. This role is reflected in strong economic,
cultural, and other ties with the United States that give the United
States a strong interest in the continued vitality, prosperity, and
stability
of Hong Kong." 22 U.S.C. S 5701(4).
6
The second crucial principle in Matimak concerned the
definition of "citizens or subjects," and a corollary relating
to corporations:
We begin with the truism that a foreign state is entitled
to define who are its citizens or subjects. United States
v. Wong Kim Ark, 169 U.S. 649, 668, 18 S. Ct. 456,
464, 42 L. Ed. 890 (1898) ("Nor can it be doubted that
it is the inherent right of every independent nation to
determine for itself, and according to its own
constitution and laws, what classes of persons shall be
entitled to its citizenship."); Ruggiero v. Compania
Peruana de Vapores "Inca Capac Yupanqui", 639 F.2d
872, 875 (2d Cir. 1981); Murarka v. Bachrack Bros.
Inc., 215 F.2d 547, 551-53 (2d Cir. 1954); 13B C.
Wright, A. Miller & E. Cooper, Federal Practice and
Procedure: Jurisdiction 2d SS 3604 & 3611 (1984).
It is another accepted precept that a corporation, for
purposes of diversity jurisdiction, is a "citizen" or
"subject" of the entity under whose sovereignty it is
created.
Id. at 85.
The court concluded that Hong Kong corporations were
not "citizens or subjects" of the United Kingdom because
the United Kingdom did not recognize such corporations as
citizens. The British Nationality Act 1981, which extends
privileges to natural persons in British Dependent
Territories such as Hong Kong, does not apply to
corporations. The British Companies Act 1948 specifies
that corporations formed under the laws of Hong Kong are
not entitled to the privileges of British nationality. See
Matimak, 118 F.3d at 85. Given these laws, the court
concluded that the alternate argument that Hong Kong
corporations were ultimately subject to British sovereignty
must also be rejected, reasoning that "Hong Kong
corporations . . . are no more ``subjects' than ``citizens.' " Id.
at 86. Although Hong Kong's laws might ultimately be
traceable to the British Crown, the Matimak court reasoned
that Hong Kong corporations were in fact incorporated
under the Companies Ordinance 1984 of Hong Kong and
entitled only to the protection of that law. See id.
7
Judge Altimari dissented, arguing that "[a] stateless
corporation is an oxymoron." Id. at 89 (Altimari, J.,
dissenting). He emphasized the practical importance of
Hong Kong-United States relations and the State
Department's expressed view that Hong Kong corporations
should be allowed to take advantage of alienage
jurisdiction. He would have found diversity jurisdiction over
a Hong Kong corporation on any of three grounds: (1) as a
citizen or subject of a "de facto" autonomous state; (2) as a
citizen or subject of the United Kingdom, given the
"inexorabl[e] link[age]" between Hong Kong and the United
Kingdom; or (3) as a citizen or subject of a "political
subdivision" of the United Kingdom. See id. at 91-92
(Altimari, J., dissenting).
B. The Purposes of Alienage Jurisdiction
Most courts have accepted the proposition that the
problem of "statelessness" was unanticipated by the
Framers, because it is a twentieth-century phenomenon.
"[A] basic assumption of the drafters was that anyone who
was not a citizen of the United States must by definition
have been subject to the power of a foreign government or
sovereign." Matimak, 118 F.3d at 87. Thus, the Framers
apparently considered the class of "subjects or citizens of a
foreign state" as identical with the class of"aliens." See
Kevin R. Johnson, Why Alienage Jurisdiction? Historical
Foundations and Modern Justifications for Federal
Jurisdiction over Disputes Involving Noncitizens, 21 Yale J.
Int'l L. 1, 1-20 (1996).
Historical evidence from the Federalist Papers and the
debates over the ratification of the Constitution shows that
the Framers often "refer[red] to citizens, subjects and
foreigners interchangeably." Van der Schelling v. U.S. News
& World Report, Inc., 213 F. Supp. 756, 759 (E.D. Pa.),
aff'd, 324 F.2d 956 (3d Cir. 1963) (per curiam). In fact, the
phrase "citizens or subjects" reflected an expansive intent:
The framers of the Constitution were undoubtedly
keenly aware of the fact that they had lately been
subjects and that in other lands men still remained
subjects of a sovereign and not citizens of a state.. . .
It was only by the inclusion of ``subjects' that all aliens,
8
whether they [owed] allegiance to a sovereign monarch
or were citizens of a democracy, could sue or be sued
in federal courts.
. . . .
. . . . Indeed, Story's doubts appear to have been
abandoned, for in his ``Commentaries on the
Constitution of the United States' (5th Ed., 1891) he
says, at page 499:
``* * * The inquiry may here be made, who are to be
deemed aliens entitled to sue in the courts of the
United States? The general answer is, any person who
is not a citizen of the United States. * * *'
Id. at 761 (emphasis added). Thus, while foreign modes of
government are hardly "technicalities" in any other sense,
the Framers apparently did not consider them relevant to
the exercise of federal jurisdiction. See Johnson, supra;
Bradford Williams, Note, The Aftermath of Matimak Trading
Co. v. Khalily: Is the American Legal System Ready for
Global Interdependence?, 23 N.C. J. Int'l L. & Com. Reg.
201, 224-25 (1997); cf. Wilson v. Humphreys (Cayman) Ltd.,
916 F.2d 1239, 1242 (7th Cir. 1990) (holding that the
"policies supporting alienage jurisdiction" supported
jurisdiction over a Cayman Islands citizen--the Cayman
Islands is also a British Dependent Territory).
Matimak rejected these and similar statements on the
ground that the Framers never contemplated
"statelessness." See Matimak, 118 F.3d at 87. However,
without further analysis, this is an inadequate response.
The Framers never contemplated telephones, and yet we
have applied the Fourth Amendment to cases about
telephones. See Katz v. United States, 389 U.S. 347 (1967)
(overruling an earlier decision that had held that
telephones, not having been within the Framers'
contemplation, would not receive Fourth Amendment
protection). The relevant question is whether the Framers
articulated principles that assist us in this case.
We believe that they did. The history reviewed in Van der
Schelling is relevant because Hong Kong's importance to the
United States evokes the Framers' concerns for smooth
9
foreign relations. As two practitioners note, British
Dependent Territories "are the international equivalent of
Delaware or Nevada for many clients." William Wilson III &
Jonathan K. Cooperman, 2d Circuit Bars Suits by
"Offshore" Corporations, Nat'l L.J., Aug. 25, 1997, at B9.
Because Hong Kong was a dependent territory of the United
Kingdom and is now a special administrative region of the
Peoples' Republic of China, the way we treat its
corporations may affect our relations with those countries,
not to mention our relations with Hong Kong itself. See
Wilson, 916 F.2d at 1243 (exercise of American judicial
authority over a citizen of a British Dependent Territory
implicates our relations with the United Kingdom). The
State Department expressed this concern in its submission
to us.
C. Who is a "Subject" of a Foreign State?
1. The State Department's Position
The State Department's view, communicated to us by the
Justice Department at our request, is that:
[I]n the last analysis, Hong Kong nationals, including
corporations, [were] subjects of United Kingdom
sovereignty. While the United States views Hong Kong
as largely autonomous in most respects, as a matter of
recognition, it deal[t] with Hong Kong through British
authorities, since Hong Kong [was] ultimately subject
to United Kingdom sovereignty. The various
international agreements between Hong Kong and the
United States [were] identified in the State
Department's authoritative "Treaties In Force" under
"United Kingdom" sovereignty. The Consular
Convention between the United States and the United
Kingdom identifie[d] citizens of the United Kingdom's
"colonies" (including corporations) as U.K."nationals"
for purposes of relations between the two countries.
This approach [was] mirrored in the underlying legal
structure under which [a Hong Kong] corporation was
created. The Letters Patent for Hong Kong issued by
the British Crown [made] clear that ultimate
sovereignty and authority, including final approval of
all laws, [was] reserved to the British Crown. Since the
10
ultimate sovereign authority over [a Hong Kong
corporation was] the British Crown, [it] should be
treated as a subject of United Kingdom sovereignty for
purposes of alienage diversity jurisdiction.
Gov't Brief at 6-7.4
2. Citizens and Subjects
Matimak rejected the State Department's argument,
which was identical to the argument presented to us, on
the ground that Hong Kong corporations were not United
Kingdom citizens according to explicit United Kingdom law.
If they were not citizens, Matimak reasoned, they could not
be subjects. We agree with Matimak that, in general, there
is no difference between the way our federal courts deal
with "citizens" and "subjects":
In S 1332(a)(2) the terms "citizen" and"subject" do not
connote a different "degree of attachment or allegiance
to a foreign state." 1 James Wm. Moore et al., Moore's
Federal Practice P 0.75 (3d ed. 1996); United States v.
Wong Kim Ark, 169 U.S. 649, 663-664, 42 L. Ed. 890,
18 S. Ct. 456 (1898) ("The term ``citizen,' as understood
in our law, is precisely analogous to the term ``subject'
in the common law, and the change of phrase has
entirely resulted from the change of government.").
Rather, the terms are meant to encompass persons
living under distinct forms of government: "A monarchy
has subjects; a republic has citizens." Moore, supra,
P 0.75.
Matimak, 118 F.3d at 85.
The two terms are identical in that they both describe a
relationship between an individual and a sovereign power
that suffices to confer alienage jurisdiction on a federal
court. That the terms are identical for this specific purpose,
however, does not mean that a sovereign must have only
"citizens" or only "subjects." See Walter C. Hutchens, Note,
Alienage Jurisdiction and the Problem of Stateless
Corporations, 76 Wash. U. L.Q. 1067, 1081 n.81 (1998).
_________________________________________________________________
4. At the time the brief was written, Hong Kong remained a British
Dependent Territory.
11
British law does not clearly establish that the British Crown
recognizes only one sort of sovereign relationship. Rather,
British law, while silent on the crucial issue here, seems to
recognize both "citizens" and "subjects." The United
Kingdom has by statute made natural persons who are
citizens of Hong Kong or other British colonies subjects of
the Crown. See British Nationality Act 1948, at 1. Hong
Kong corporations are not covered by this statute, but the
State Department's position is that Hong Kong's laws
required Crown approval at the relevant time, and its
conclusion that Hong Kong corporations were thus
ultimately subject to United Kingdom sovereignty seems
eminently reasonable. We are concerned that, were we to
decide that a foreign sovereign must choose between having
"citizens" and "subjects," we would be making a fairly
significant foreign policy decision, and one that the State
Department rejects.
3. The Role of Deference to the Executive Branch
We accord substantial weight to the State Department's
position. In Banco Nacional de Cuba v. Sabbatino, 376 U.S.
398 (1964), the Supreme Court considered the right of an
instrumentality of a hostile foreign government to file suit
in U.S. courts. The United States had severed formal
diplomatic relations with Cuba, but had not derecognized it
as a sovereign. The Court rejected the argument that a
hostile government should not be allowed to litigate in U.S.
courts. Sabbatino looked to the executive's position in
support of its decision:
The view that the existing situation between the United
States and Cuba should not lead to a denial of status
to sue is buttressed by the circumstance that none of
the acts of our Government have been aimed at closing
the courts of this country to Cuba, and more
particularly by the fact that the Government has come
to the support of Cuba's "act of state" claim in this very
litigation.
Id. at 411.5
_________________________________________________________________
5. We also note that Taiwanese citizens have been allowed to sue under
alienage jurisdiction, despite formal derecognition of Taiwan by the
12
We will likewise take heed of the State Department's
position here. We do not believe that executive authority in
foreign policy matters is limited to the definition of "foreign
state" for S 1332 purposes. Executive competence also
extends to the definition of "citizens or subjects," at a
minimum in cases where the proper interpretation is
unclear and the outcome may affect our foreign policy. Just
as the executive is best positioned to make the
determination that recognition of a sovereign is appropriate,
the executive is best situated to conclude that Hong Kong
was, at the time suit was filed, so closely connected to the
United Kingdom that its corporations were United Kingdom
subjects.
4. Conclusion
In summary, it is established that Hong Kong
corporations were not United Kingdom citizens at the time
the lawsuit was filed, but it is quite plausible that they were
United Kingdom subjects. The law of the United Kingdom is
not entirely clear on this point. The State Department,
however, has informed us that, consistent with various
agreements with Hong Kong and the United Kingdom, it
considers Hong Kong corporations to have been subjects of
the United Kingdom for alienage diversity purposes. This, it
represents, best reflects the actual relationship between the
United Kingdom, Hong Kong, and the United States. There
is no indication that the United Kingdom disagrees with
this characterization. For the reasons set forth above, we
agree with the State Department that treating Hong Kong
corporations as United Kingdom subjects comports with the
facts and the law of alienage jurisdiction. We therefore have
jurisdiction of this case under 28 U.S.C. S 1332(a)(2).
II. Facts and Procedural History
As we noted at the outset, this case has a history that is
difficult to follow. We attempt to unravel the tangled
_________________________________________________________________
executive branch. See, e.g., Chang v. Northwestern Mem'l Hosp., 506 F.
Supp. 975 (N.D. Ill. 1980). Formal derecognition had geopolitical causes
and consequences far overwhelming diversity jurisdiction, yet courts
have not found that derecognition indicated a desire on the part of the
executive branch to strip Taiwanese citizens of the benefits of alienage
diversity jurisdiction.
13
narrative by describing the dramatis personae, the essence
of the plaintiffs' claims, and then the tortuous course of
events that brought the parties to this court.
A. Parties
The plaintiffs are Southern Cross and TIP. Southern
Cross, a New Jersey corporation that acted as a booking
agent for corporations that transport ocean marine cargo, is
wholly owned by a corporation that in turn is at least forty
percent owned by Trygve Vangsnes, a Norwegian national.6
TIP is a Pennsylvania corporation that rents equipment to
corporations that transport such cargo. The defendant is
Wah Kwong Shipping Group, Ltd. ("Wah Kwong"), a
corporation organized under Hong Kong law. Wah Kwong is
the parent holding company of a group of subsidiary
companies, including Maritime Shipping & Investments,
Ltd. ("MSI") and Venture Shipping Managers, Ltd. ("VSM").
Hong Kong residents Frank and George Chao were the chief
executives and managers of Wah Kwong and various
subsidiaries.
Other entities are also involved in this case. Karlander
(Australia) Pty. Ltd. ("Karlander") was an Australian
company operating an ocean liner service out of Australia.
Until 1983, Karlander chartered five vessels from
shipowning companies in which MSI owned shares, at
which time Karlander went into arrears. Karlander was
reorganized and the liner service was separately
incorporated as KKL Kangaroo Lines ("KKL"). Vangsnes was
owner and chief executive officer of KKL. Southern Cross
and TIP provided services to KKL, which called on ports in
New Jersey before it ceased doing business in 1986. At that
time, KKL allegedly owed money to Southern Cross and TIP.
B. Pre-litigation Activity
The plaintiffs' claims spring from a series of agreements
between Wah Kwong or its subsidiaries and KKL. The
agreements apparently involved a $6 million loan from Wah
Kwong that enabled KKL to continue in business. However,
_________________________________________________________________
6. Southern Cross apparently filed a Chapter 11 petition in 1986, which
was confirmed by the Bankruptcy Court in 1994. Accordingly, it may
lack present existence, although the parties do not discuss the issue.
14
the plaintiffs argue that the agreements actually
established a partnership relationship between Wah Kwong
and KKL's other principal (Vansgnes).
In particular, the plaintiffs argue that convoluted
agreements, subagreements, collateral agreements--many
of which cancelled prior agreements--addenda, and side
letters were used to construct KKL. Thus, while Wah Kwong
ostensibly made a loan to start KKL, backed by a demand
note and stating an interest rate, the plaintiffs submit that
in fact this "loan" was for show and did not reflect the true
equity relationship between the parties. The plaintiffs allege
that Wah Kwong was entitled to receive and retain KKL's
profits over $100,000 and that the $6 million was the cost
of buying into KKL's business. Moreover, the $6 million
went back to Wah Kwong via intermediaries immediately
after the "loan" was made.
The basic substance of the written agreements was as
follows: Karlander chartered vessels from shipowning
companies in which MSI and VSM had interests. The
payments ("charterhire") accumulated and became overdue.
Karlander's owners decided to restructure the company by
forming KKL to operate Karlander's Australian-U.S. liner
service; KKL undertook Karlander's charters with the
shipowning companies and assumed outstanding
charterhire. At about the same time, Wah Kwong sought
advice from its accountants at Price Waterhouse, who
suggested five ways Wah Kwong might respond to the
restructuring and the unpaid charterhire, including the
injection of $6 million as a loan to KKL. In March 1983,
Wah Kwong and Karlander entered into a "Loan Facility"
under which MSI would provide up to $6 million to
Karlander to pay off overdue charterhire.
On November 26, 1983, Karlander, KKL and Wah Kwong
executed a document called the Heads of Agreement. This
document provided that English law would govern its
interpretation. Vangsnes and Frank Chao signed for all
parties, including various holding companies controlled by
Wah Kwong and others controlled by Vangsnes. Southern
Cross was one of those companies, though Southern
Cross's CEO has submitted an affidavit that Vangsnes was
15
never authorized to sign documents on behalf of Southern
Cross.
Noting that Karlander was indebted to Wah Kwong and
839that Karlander's successor, KKL, required financial
assistance to pay off Karlander's creditors, the Heads of
Agreement provided that MSI would make a $6 million
interest-free deposit, repayable on demand, with afinance
company established as a wholly-owned subsidiary of KKL.
The finance company then would advance the deposit to
KKL, which would advance the money to Karlander to pay
off the outstanding charterhire. As security for the $6
million deposit, KKL granted MSI an option to acquire half
of KKL's stock. (KKL's main asset at that point was its
rights in an arbitration proceeding between Karlander and
the Weyerhauser company.)
The Heads of Agreement also authorized MSI to appoint
two members of KKL's board of directors, at least one of
whom was required for a quorum; to appoint a financial
consultant to KKL; and to approve KKL's auditors. The
agreement additionally allowed MSI to appoint two
members of the boards of directors of the holding
companies, including Southern Cross.
The Heads of Agreement stated that it would not become
effective until additional documents were executed. One
such document, a side letter signed the same day as the
Heads of Agreement, noted that repayment of the $6 million
deposit "is by mutual agreement instead of on demand."
Another document, the Supplemental Agreement,
warranted that KKL's total outstanding debts were not more
than $10.6 million, and stated that if that representation
were false, MSI would be entitled to demand repayment of
the $6 million. The Supplemental Agreement also
established a two-person committee, including one MSI
nominee, to monitor KKL's cash flow and recommend
guidelines for payments to creditors.
In accordance with the Heads of Agreement and the
related agreements, on February 6, 1984, VSM drew a $6
million check on MSI's account payable to KKL's
subsidiary. The subsidiary endorsed the check to KKL,
which endorsed it to VSM as the shipowners' agent in
16
payment of outstanding charterhire. Thus, the loan
proceeds returned to Wah Kwong-controlled companies. On
February 22, 1984, George Chao sent Vangsnes a notice of
default indicating that KKL's total outstanding debts in fact
exceeded $10.6 million. On March 2, 1984, the parties
executed a document providing for the assignment of KKL's
and Karlander's ship-operation earnings to VSM as
"security for the various obligations" to MSI and VSM. The
agreement provided that KKL's earnings would be paid to
VSM-designated bank accounts, though such earnings first
would be applied to charterhire due to shipowners. Wah
Kwong represents that the Assignment of Earnings was
never implemented.
In April 1984, the parties agreed that the finance
committee provided for in the Supplemental Agreement
would be replaced by an arrangement in which the Wah
Kwong-nominated members of the KKL board would
examine KKL's various expenditures. In August 1984,
Vangsnes agreed that all KKL checks would be signed
jointly by Wah Kwong and KKL representatives. The
plaintiffs assert that Wah Kwong took further steps to
ensure its control of KKL's expenses, including entering
into agreements with two principal booking agents in the
U.S., Great Lakes Overseas, Inc. ("GLO") in the midwest
and Southern Cross in New Jersey, to arrange for booking
services and provide customers to KKL. Wah Kwong also
sent two employees to New Jersey and stationed them on
Southern Cross's premises to ensure that only properly
approved expenses would be paid in the U.S.; these
employees remained in New Jersey for almost two years.
The plaintiffs argue that Wah Kwong's representatives
essentially raided KKL, paying sums owed to Wah Kwong
subsidiaries ahead of the priority actually allowed to them
under the various agreements. It was this activity,
according to the plaintiffs, that led to KKL's liquidation. At
the time KKL stopped doing business in January 1986, it
still carried the $6 million to Wah Kwong on its books as a
debt, along with other accumulated arrearages, including
debts to the plaintiffs.
C. The Australian Liquidation and Litigation
KKL went into liquidation in January 1986 in New South
Wales when it lacked funds to pay its creditors. A liquidator
17
appointed by the Australian courts assumed control and
discontinued KKL's operations. The liquidator agreed to
repay $6 million to Wah Kwong as a priority creditor. This
agreement was incorporated in a confidential settlement
with various Wah Kwong companies dated May 14, 1986,
which indicated that Wah Kwong was owed $20 million in
past-due charterhire and that Wah Kwong was a creditor
and not a partner. The plaintiffs allege that Wah Kwong
submitted "show" documents to the liquidator to prove its
creditor status and persuaded the liquidator to forgo suing
Wah Kwong in exchange for Wah Kwong's agreement to
finance certain collateral litigation. Southern Cross and TIP
were KKL creditors in this liquidation.
In 1994, the liquidator petitioned Justice Bryson of the
Supreme Court of New South Wales for direction to close
the proceedings in Australia, because KKL had been wound
down. Vangsnes and TIP filed an application for leave to
intervene and argued that Wah Kwong had misrepresented
itself as a creditor. Justice Bryson rejected this argument,
finding no evidence of fraud and expressing concerns about
the statute of limitations, and refused to reopen the
liquidator's 1986 decision. In 1996, Vangsnes filed an
application to inspect correspondence and other documents
in the possession of the liquidator relating to the KKL
liquidation. An Australian master rejected the application in
light of Justice Bryson's decision.
D. The New Jersey Bankruptcy Proceeding (The Interpool
Litigation)
In early 1986, certain of KKL's U.S. creditors filed
complaints in the U.S. District Court for the District of New
Jersey seeking writs of maritime attachment against KKL's
freights. Three KKL creditors filed a Chapter 7 involuntary
bankruptcy petition against KKL in the U.S. District Court
for the Central District of California. All cases were
consolidated and transferred to the U.S. District Court for
the District of New Jersey. See Interpool, Ltd. v. Certain
Freights of M/V Venture Star, 102 B.R. 373 (D.N.J. 1988),
appeal dismissed, 878 F.2d 111 (3d Cir. 1989). Southern
Cross was a named party in the consolidated action,
because its assets were attached by KKL's other creditors,
and TIP was a KKL creditor.
18
In February 1986, the Australian liquidator brought an
11 U.S.C. S 304(a) proceeding ancillary to a foreign
proceeding in New Jersey Bankruptcy Court, seeking to
enjoin the U.S. creditors from proceeding against KKL's
U.S. assets and to remit those assets to Australia for
administration in the liquidation there. The S 304
proceeding was transferred and consolidated with the other
pending proceedings. The District Court entered an interim
order enjoining the U.S. creditors from proceeding against
KKL's assets and later ordered that KKL's freights should
be distributed among the liquidator and the creditors. In
February 1988, the liquidator moved to dismiss the
pending involuntary Chapter 7 petition and thereby
administer all KKL assets in Australia. On October 14,
1988, Judge Politan denied the motion and held that KKL's
U.S. assets should be administered in a Chapter 7
bankruptcy case. He reasoned that the Australian
liquidation proceedings (1) were already underway and (2)
were being conducted ex parte, which under the
circumstances made it highly unlikely that the rights of
U.S. creditors would be properly respected. He therefore
authorized the appointment of a Chapter 7 trustee.
We quote Judge Politan's opinion at length, because it is
vital to our resolution of this appeal:
On November 26, 1983, KKL executed a "Heads of
Agreement," assuming the business of Karlander. KKL
also agreed to pay off Karlander's creditors. In turn,
Karlander transferred its rights in the Weyerhauser
arbitration to KKL in January 1984. KKL received a
loan of $6 million from a Wah Kwong subsidiary, and
in exchange, KKL assigned its rights in the
Weyerhauser arbitration to Wah Kwong. The repayment
method to Wah Kwong for this loan was unclear.
According to the Heads of Agreement, it was to be on
demand. However, according to a letter dated
November 26, 1983, repayment was to be by mutual
agreement. Again, on January 11, 1984, a letter was
sent to KKL from a Wah Kwong subsidiary, stating that
unless outstanding debts exceeded $10,122,000,
repayment of the loan would be by mutual agreement.
19
The relationship between Wah Kwong and KKL was
described as a joint venture agreement. Wah Kwong
corporate individuals were considered to be partners
for the purpose of "earnings or distribution of earnings"
of KKL. On March 2, 1984, KKL assigned its earnings
to Wah Kwong through another Wah Kwong subsidiary.
In addition, by letter dated March 3, 1984, the parties
agreed to take care to ensure that "day to day liner
service operations will be maintained without any
interruption." By agreement, dated October 8, 1984,
KKL and Wah Kwong agreed to require joint signatures
on all KKL checks.
In January 1986, a vessel was arrested in L.A., and
Wah Kwong issued a press release saying KKL owed[it]
$10 million. Wah Kwong blocked payments to creditors
who in turn shortened their credit terms and forced a
shortage of funds from KKL. Soon after, KKL ceased
doing business and Wah Kwong also went into
receivership.
On May 14, 1986, an agreement ("Deed") was
consummated between the Liquidator, KKL, Karlander,
and several Wah Kwong subsidiaries which concerned
the prospective proceeds of the Weyerhauser
arbitration pending in San Francisco, California
between Karlander and Weyerhauser Co. (Weyco).
Karlander had previously assigned its rights in the
arbitration outcome on January 10, 1984 to KKL. KKL,
in turn, assigned its rights in the arbitration outcome
to a Wah Kwong subsidiary, as security for repayment
of the $6 million loan. Under the terms of the "Deed,"
any proceeds from Weyco claims would be paid to the
Liquidator. The Liquidator, in turn, agreed to distribute
the first $6 million to a Wah Kwong subsidiary in
satisfaction of the loan. Following distribution of some
other monies, the rest of the proceeds would be held by
the Liquidator for the purposes of administering KKL
while in bankruptcy.
A second agreement, dated May 14, 1986, also
entitled "Deed", stated that the shipowners had
"suffered damages as a result of a breach by KKL of the
terms and conditions of its charters." There is a
20
disagreement as to whether this was true, with KKL
asserting that Wah Kwong was in breach by milking it
of funds and Wah Kwong asserting that KKL could not
meet its obligations and therefore [that Wah Kwong]
was entitled to the funds. Both "Deeds" were submitted
to the Australian Courts and were approved.
. . . .
Since, in this case, the creditors were not notified
prior to the date the Court ratified the agreement
between the Liquidator and Wah Kwong, and in
addition, were not notified of the original S 304 filing,
this Court finds that the procedural protections
available to creditors in the United States were not
given to the United States creditors in Australia. This
is a serious omission.
. . . .
. . . . Wah Kwong's loan was made payable either on
demand or by mutual agreement; Wah Kwong's
president sat on the Board of Directors of KKL; and
someone from Wah Kwong was required to co-sign
checks prior to issuance. Additionally, it was Wah
Kwong who allegedly overdrew on monies held by KKL
which hampered its ability to pay creditors and led to
the involuntary petition being brought against KKL. On
its face there appear to be substantial allegations of
insider machinations . . . .
Both the laws and the public policy of the United
States will be violated if the case is permitted to
proceed under Australian law. The claims of the
creditors may have already been prejudiced by the
dealings between the Liquidator and Wah Kwong, and
this Court does not intend to stand idly by while
United States[ ] citizens and creditors are harmed.
Interpool, 102 B.R. at 375-76, 379, 380.
On April 5, 1988, the U.S. bankruptcy trustee entered
into a settlement with MSI. The settlement included a full
release by the trustee of KKL's claims against MSI, Wah
Kwong, and all other Wah Kwong subsidiaries that had
dealt with KKL. It also included an agreement that MSI
21
would fund prosecution of KKL's arbitration claim against
the Weyerhauser Company, which the trustee regarded as
KKL's principal asset. The settlement also recognized MSI
as a KKL creditor and agreed to share proceeds of the
Weyerhauser claim. The settlement was approved by the
District Court.
E. The Illinois Litigation
GLO, which was a shipping agent and a KKL creditor,
sued Wah Kwong in federal district court in Illinois in 1989.
GLO, like Southern Cross, is wholly owned by a corporation
that is at least forty percent owned by Vangsnes. Although
GLO sought compensation in the liquidation proceedings, it
was unsuccessful, and it sued Wah Kwong on the theory
that Wah Kwong entered into a partnership or alter-ego
relationship with KKL, making it responsible for KKL's
debts. Wah Kwong once again took the position that it was
a creditor, not a partner, and that the court therefore
lacked personal jurisdiction over it.
According to GLO, a partnership existed because Wah
Kwong had a right to receive a share of KKL's profits,
agreed to share KKL's losses, and exercised general control
over KKL. The Court of Appeals for the Seventh Circuit,
affirming the decision of the District Court for the Northern
District of Illinois, held that English law applied, which put
the burden of proof of demonstrating partnership on GLO.
See Great Lakes Overseas, Inc. v. Wah Kwong Shipping
Group, Ltd., 990 F.2d 990, 994 (7th Cir. 1993) ("GLO"). The
court found that the central issue was the characterization
of Wah Kwong's $6 million payment to KKL. Wah Kwong
described the transaction as a loan that was part of a
workout arrangement through which Wah Kwong could
obtain the charterhire KKL owed it. GLO, on the other
hand, asserted that the $6 million was not an enforceable
debt obligation but essentially an equity investment by Wah
Kwong in a partnership with KKL.
The court in GLO held that the $6 millon was in fact a
loan, and that the Wah Kwong-KKL relationship was
therefore a creditor-debtor relationship and not an equity
arrangement. Although the side letters indicated that the
money was repayable "on mutual agreement," Wah Kwong
22
was entitled to demand repayment if KKL's liabilities
exceeded $10.6 million, a situation which in fact developed.
Moreover, English law recognizes that, under appropriate
circumstances, transactions may be "loans" even when
repayment of the loan is only by mutual agreement. See id.
at 995 n.7. Furthermore, the court found that Wah Kwong
was not entitled to share in KKL's profits, as a partner
would be. The close corporate relationship between KKL
and Wah Kwong, the court concluded, could readily be
explained as an arrangement by which Wah Kwong could
attempt to obtain money due on the ships it had chartered
to KKL, especially in light of the fact that this arrangement
was recommended by Price Waterhouse as a way to protect
Wah Kwong's position as a major KKL creditor. See id. at
996.
The immediate consequence of the decision that Wah
Kwong was a creditor was that there was no personal
jurisdiction over Wah Kwong, which could only be haled
into Illinois courts if it had a partnership or alter-ego
relationship with KKL. See id. at 998. The plaintiffs here
contend that the Seventh Circuit misinterpreted the various
agreements between the parties and relied on certain
paragraphs that were made ineffective by amendment in
later agreements, thus erroneously finding a debtor-creditor
relationship. They also contend that depositions in the GLO
case revealed important elements of Wah Kwong's
fraudulent scheme: George and Frank Chao, it is
contended, admitted that Wah Kwong overdrew on KKL
earnings to pay themselves charterhire in excess of that to
which they were entitled under their agreement with KKL,
while KKL was neither insolvent nor in arrears on
charterhire payments. The plaintiffs argue that, because
they were not parties to the Illinois litigation, this evidence
only became available to them in late 1992 (Southern
Cross) and mid-1993 (TIP).
F. The Present Dispute
On December 6, 1996, Southern Cross and TIP filed a
complaint in federal district court in New Jersey alleging a
fraudulent breach of contract by Wah Kwong and seeking
damages of $7.2 million. The plaintiffs alleged that, when
KKL went into liquidation, it owed them substantial sums
23
for services rendered. The plaintiffs' theory was essentially
that Wah Kwong controlled KKL, looted the company and
drove it into bankruptcy, and then, adding insult to injury,
distanced itself from KKL so as to be treated as a preferred
creditor, rather than a partner responsible for KKL's debts.
Thus, the plaintiffs are attempting to recover from Wah
Kwong the money that KKL owed them, along with
associated damages.
The complaint alleged that Wah Kwong knew that it was
participating in a partnership that was to share KKL's
profits and losses. It further alleged that Wah Kwong and
its principals consistently misrepresented this relationship
to the Australian liquidator, the District Court for the
District of New Jersey, the U.S. bankruptcy trustee, the
District Court for the Northern District of Illinois, and the
Court of Appeals for the Seventh Circuit. These knowingly
false representations are said to have enabled Wah Kwong
to enter into settlement agreements with the liquidator and
the trustee that resulted in an estate with insufficient funds
to pay its creditors. Judge Thompson granted Wah Kwong's
12(b)(6) motion on the ground that the statute of limitations
had run.
III. The Statute of Limitations
A. The District Court's Opinion
The District Court reasoned that the purported
misrepresentations occurred prior to January 1986, since
on the plaintiffs' own allegation it was at that time that the
Australian liquidator directed that the $6 million loan be
repaid by KKL. Under New Jersey law, the statute of
limitations for fraud is six years, see N.J. Stat. Ann.
S 2A:14-1, and a cause of action accrues when a plaintiff
knows or should know of its existence, see Bougher v.
University of Pittsburgh, 882 F.2d 74, 80 (3d Cir. 1989). The
plaintiff must be aware of an injury and a causal
relationship between the injury and an actor, but need not
know that the conduct is tortious or legally wrongful. See
Baird v. American Med. Optics, 713 A.2d 1019, 1026 (N.J.
1998). When the gist of the action is fraud concealed from
the plaintiff, the statute begins to run on discovery of the
24
wrong or of facts that reasonably should lead the plaintiff
to inquire into the fraud. See N.J. Stat. Ann. S 2A:14-1;
Lopez v. Swyer, 300 A.2d 563, 567 (N.J. 1973).
The District Court held that the plaintiffs had notice of
the alleged misrepresentations at the time they were made
and that there was no reason to toll the statute. The court
noted that the Australian liquidator had agreed that Wah
Kwong was a creditor in the 1986 settlement agreement,
thus demonstrating that Wah Kwong's position was open
and notorious. The court also reasoned that Vansgnes was
involved in the Australian liquidation on behalf of KKL and
was aware of the arguments Wah Kwong was making to the
liquidator.
B. The Plaintiffs' Arguments
The plaintiffs argue that the District Court failed to draw
all reasonable inferences in their favor, as is required when
there is a 12(b)(6) motion to dismiss, and that it wrongly
assumed the existence of certain facts not evident on the
face of the complaint. In this procedural posture, we must
take all properly pleaded facts as true. See Morse v. Lower
Merion Sch. Dist., 132 F.3d 902, 906 (3d Cir. 1997). When
the applicability of the statute of limitations is in dispute,
there are usually factual questions as to when a plaintiff
discovered or should have discovered the elements of its
cause of action, and thus "defendants bear a heavy burden
in seeking to establish as a matter of law that the
challenged claims are barred." Van Buskirk v. Carey
Canadian Mines, Ltd., 760 F.2d 481, 498 (3d Cir. 1985). If
the complaint's allegations, taken as true, allege facts
sufficient to toll the statute of limitations, it must survive a
motion to dismiss. See Leone v. Aetna Cas. & Sur. Co., 599
F.2d 566, 569 (3d Cir. 1979).
The plaintiffs allege that, though they were aware of Wah
Kwong's position that it was a creditor and not a partner of
KKL, they did not have notice that this position was false
until they obtained documentary evidence in 1992 after
obtaining discovery documents from the GLO litigation. As
they point out, as late as 1996, the Australian courts
refused to allow the Australian creditors (including
Vansgnes and TIP) access to KKL corporate information and
25
Wah Kwong's dealings with the liquidator. They maintain
that the statute of limitations did not begin to run until
they had some notice that Wah Kwong's misrepresentation
was false.
We agree that the mere representation that one is a
creditor and not a partner, without more, is not suspicious.
While the District Court characterized Wah Kwong's alleged
misrepresentation as "open and notorious," it was not
openly and notoriously a misrepresentation. One would
have to know other facts, not necessarily within the
reasonable ken of an unrelated creditor, to know that a
party that held itself out as a creditor was in fact a partner.
Thus, the limitations period did not start to run when the
plaintiffs knew or should have known that Wah Kwong
represented itself as a creditor. Rather, the period would
begin to run only when they knew or should have known
information that would have led a reasonable person to
question that representation. See Hauptmann v. Wilentz,
570 F. Supp. 351, 397-98 (D.N.J. 1983), aff 'd without
opinion, 770 F.2d 1070 (3d Cir. 1985).
In addition, the District Court should not have imputed
Vansgnes's knowledge to Southern Cross and TIP. First,
there is nothing in the pleadings or in the published
decisions of any court that suggests that TIP is in any way
related to Vansgnes. Second, while Vansgnes's ownership of
a large amount of Southern Cross stock could potentially
justify imputing his knowledge to Southern Cross, such an
imputation could not be made in the context of a 12(b)(6)
motion. Wah Kwong cites cases concerning shareholder
derivative suits for the proposition that Vansgnes and
Southern Cross are in privity, but privity means different
things in different contexts.
In this case, imputing Vansgnes's knowledge to Southern
Cross would require resolving issues of fact. Southern
Cross argues that Vansgnes was not authorized to act for
it (though he signed the Heads of Agreement on its behalf,
allegedly as the result of an error) and that he never
communicated any of the relevant facts to it. It submitted
an affidavit that Vangsnes was never an officer, employee,
agent, director, or shareholder of Southern Cross. Another
sticking point is that the complaint and the published
26
judgments do not reveal that Vansgnes participated in the
1986 proceedings, which were kept confidential from
nonparticipants. The parties have not directed our attention
to the relevant Australian procedures. The Australian
liquidator took over the management of KKL, and we
cannot find any suggestion that Vansgnes was involved in
the Wah Kwong-liquidator settlement negotiations. Possibly
he was, and if this were a summary judgment motion we
might have the evidence to prove it, but the District Court
could not so assume within the 12(b)(6) framework.
If Vansgnes's knowledge in 1986 were dispositive, we
would be obliged to reverse, as these are issues not
appropriate for judgment on the pleadings. However,
Vansgnes was not the only possible source of the plaintiffs'
knowledge. We turn, therefore, to the 1988 Interpool
decision.
C. The Importance of Interpool
To resolve a 12(b)(6) motion, a court may properly look at
public records, including judicial proceedings, in addition
to the allegations in the complaint. See City of Pittsburgh v.
West Penn Power Co., 147 F.3d 256, 259 (3d Cir. 1998)
(public records); Pension Benefit Guar. Corp. v. White
Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir. 1993)
(same); Iacaponi v. New Amsterdam Cas. Co., 379 F.2d 311,
311-12 (3d Cir. 1967) (previous litigation referred to in
complaint); In re Woodmar Realty Co., 294 F.2d 785, 788
(7th Cir. 1961) (previous opinions); DiNicola v. DiPaolo, 945
F. Supp. 848, 855 n.2 (W.D. Pa. 1996) (same); Kithcart v.
Metropolitan Life Ins. Co., 62 F. Supp. 93, 94 (W.D. Mo.
1944) (same), aff'd, 150 F.2d 997 (8th Cir. 1945).
Specifically, on a motion to dismiss, we may take judicial
notice of another court's opinion--not for the truth of the
facts recited therein, but for the existence of the opinion,
which is not subject to reasonable dispute over its
authenticity. See Kramer v. Time Warner Inc., 937 F.2d 767,
774 (2d Cir. 1991); United States v. Wood, 925 F.2d 1580,
1582 (7th Cir. 1991); see also Funk v. Commissioner, 163
F.2d 796, 800-01 (3d Cir. 1947) (whether a court may
judicially notice other proceedings depends on what the
27
court is asked to notice and on the circumstances of the
instant case).7
Judge Politan's opinion in Interpool is judicially
noticeable. Moreover, it is a document on which the
plaintiffs rely, as they specifically reference it in the
complaint to show Wah Kwong's fraudulent behavior. We
may therefore examine the decision to see if it contradicts
the complaint's legal conclusions or factual claims. See City
of Pittsburgh, 147 F.3d at 259 (court may examine
documents of unquestioned authenticity on which the
plaintiff 's claim depends); Pension Benefit Guar. Corp., 998
F.2d at 1196 (same); Romani v. Shearson Lehman Hutton,
929 F.2d 875, 879 & n.3 (1st Cir. 1991) (rejecting a fraud
claim in light of the underlying documents, pursuant to a
12(b)(6) motion).
Our inquiry proceeds in two steps. First, we establish
that a reasonable creditor who filed a claim in a bankruptcy
proceeding would examine published opinions in that
proceeding. Therefore, such a creditor "should have known"
the contents of a published opinion, for purposes of
starting the limitations period. Second, we conclude that
Judge Politan's Interpool opinion contained sufficient
information to put a reasonable creditor on notice that Wah
Kwong's claim to be a mere creditor (and not some kind of
"insider" or partner in the affairs of KKL) was suspicious.
_________________________________________________________________
7. We have held that a court that examines a transcript of a prior
proceeding to find facts converts a motion to dismiss into a motion for
summary judgment. See Kauffman v. Moss, 420 F.2d 1270, 1274-75 (3d
Cir. 1970). We do not call Kauffman into question when we hold that
judicially noticing the existence of a published opinion is proper to
resolve a 12(b)(6) motion. Recently, courts and commentators have paid
more attention to the distinction between judicially noticing the
existence
of prior proceedings and judicially noticing the truth of facts averred in
those proceedings. See 21 Charles Alan Wright & Kenneth W. Graham,
Jr., Federal Practice & Procedure: EvidenceS 5106, at 247 (1999 Supp.).
It has been suggested that the appropriate analogy is the hearsay rule,
which allows an out-of-court statement to be admitted into evidence for
purposes other than establishing the truth of the statement. See id.; see
also Colonial Leasing Co., Inc. v. Logistics Control Group Int'l, 762 F.2d
454, 459 (5th Cir. 1985) (making the distinction between existence and
truth).
28
As a result, the plaintiffs, who were creditors in that
proceeding, should have known the relevant facts about
Wah Kwong's alleged misrepresentations more than six
years before the filing of the complaint, and the statute of
limitations bars this suit.
1. The Obligations of a Bankruptcy Creditor Filing a
Claim
The plaintiffs argue that they were not true parties to the
Interpool litigation, but merely filed their claims in
bankruptcy court as creditors after receiving notice from
the U.S. bankruptcy trustee. Interpool actually involved a
number of consolidated creditors' claims against KKL and a
distinct S 304 proceeding challenging the propriety of U.S.
bankruptcy jurisdiction while the Australian liquidation
was already pending. Though Southern Cross was a named
party in Interpool, it alleges that it was not involved in
litigating the S 304 proceeding and participated actively only
in other aspects of the case involving creditors' claims
against various freights.
The District Court rejected the plaintiffs' distinction
between the S 304 proceeding--in which the allegations of
Wah Kwong's misconduct were made--and the run-of-the-
mill creditors' claims. It noted that Southern Cross was
represented by counsel who entered an appearance in the
litigation, and that TIP, though not a named party,filed a
claim after receiving notice. According to the District Court,
Wah Kwong's arguments were put forth in the S 304 aspect
of the litigation and in Judge Politan's opinion, and the
plaintiffs neglected their duty of due diligence if they were
not aware of Wah Kwong's position. While the District
Court should not have taken "arguments" before Judge
Politan into account on a 12(b)(6) motion, for the reasons
that follow we agree that the plaintiffs should have taken
notice of Judge Politan's opinion explaining the
appointment of a U.S. bankruptcy trustee despite the
ongoing Australian litigation.
First, and at the very least, a reasonable creditor should
have inquired why the court found it necessary to have a
U.S. proceeding in the face of an ongoing foreign
liquidation. Although Southern Cross argues that it did not
29
participate in the S 304 aspect of the Interpool case, the
result that the Australian liquidator sought was to void the
U.S. attachment of Southern Cross's freights. Southern
Cross was served with all relevant papers, and the
contention that it was somehow insulated from theS 304
proceedings is simply untenable. In these circumstances,
Southern Cross should have examined Judge Politan's
opinion resolving the Australian liquidator's S 304 claim.
TIP's obligations as a reasonable creditor are much more
difficult to determine. Unfortunately, the record of the
Interpool proceedings has not been preserved in its entirety,
though there is evidence that, in 1990, the Australian
liquidator was unable to serve TIP with documents in the
case because it had moved, and its forwarding order had
expired. At all events, TIP had notice of the pending U.S.
bankruptcy proceeding triggered by Judge Politan's opinion,
because it filed a claim in that proceeding.8 Judge Politan's
opinion was not simply "notice in the air," as TIP
participated in the resultant proceedings. See People v. Hill,
952 P.2d 673, 699-700 (Cal. 1998) (judicially noticing prior
opinions to show that a prosecutor involved in the prior
cases had notice of a particular problem). We conclude that
TIP also should have read Judge Politan's opinion, given the
circumstances of the case.
2. The Content of the Interpool Opinion
Because a reasonable creditor in the plaintiffs' position
would have read the opinion, the statute of limitations
would start to run if the opinion was sufficient as a matter
_________________________________________________________________
8. The complaint does not specifically allege that TIP filed a claim in
the
U.S. bankruptcy proceeding, though it does allege that the plaintiffs were
unsecured creditors and that "the unsecured United States creditors"
were harmed by Wah Kwong's representations to the U.S. bankruptcy
trustee. Logically, only competing claimants could have been harmed by
Wah Kwong's acts, and thus the only reasonable reading of the
complaint is that the plaintiffs filed claims. In their brief, the
plaintiffs
state that they both filed claims in the bankruptcy proceeding. The brief
is not evidence, but it allows us to interpret the complaint. See Doe v.
Johnson, 817 F. Supp. 1382, 1399 n.13 (W.D. Mich. 1993); Ricciotti v.
Warwick Sch. Comm., 319 F. Supp. 1006, 1010 n.3 (D.R.I. 1970); 5A
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure
S 1364, at 480-81 (1990).
30
of law to give a creditor notice of the facts underlying the
fraud claim. We find that the published opinion in Interpool
was sufficient to put the plaintiffs on notice that there was
evidence that Wah Kwong was KKL's partner and thus to
distrust Wah Kwong's representations that it was a mere
creditor. Cf. Hal Roach Studios, Inc. v. Richard Feiner & Co.,
Inc., 896 F.2d 1542, 1548 (9th Cir. 1989) (holding that
controlling statutory language can be sufficiently clear to
start a limitations period running as a matter of law). It is
not relevant whether Judge Politan's interpretation of the
facts was correct; what is critical is that his interpretation
was published and available to KKL's creditors, and that
the discrepancy between Wah Kwong's claims to be a
creditor and Judge Politan's conclusions was evident on the
face of the opinion.
Judge Politan described the Wah Kwong-KKL link as
follows: "The relationship between Wah Kwong and KKL
was described as a joint venture agreement. Wah Kwong
corporate individuals were considered to be partners for the
purpose of ``earnings or distribution of earnings' of KKL."
Interpool, 102 B.R. at 375-76. This adequately disclosed the
alleged partnership agreement behind the plaintiffs' claims.
Moreover, the opinion repeatedly indicated that Wah
Kwong might have acted illegitimately. Interpool discussed
the troubling features of the arrangement between the
Australian liquidator and Wah Kwong, which the plaintiffs
now attack as fraudulent. Indeed, Judge Politan was so
concerned about the fairness of the Australian settlement
that he appointed a U.S. bankruptcy trustee to administer
KKL's U.S. assets. Furthermore, the plaintiff 's complaint in
this case itself demonstrates that the plaintiffs were (or
should have been) aware of Wah Kwong's position that it
was a creditor, as both the plaintiffs and the defendant
were competing creditors in the U.S. bankruptcy
proceeding.
In sum, the plaintiffs should have been aware of evidence
of the alleged "true facts" after the 1988 Interpool opinion;
they were also aware of the allegedly false representation
during the bankruptcy proceedings. It follows that they
should have known all the information sufficient to begin
the running of the statute of limitations, which thus ran on
31
the plaintiffs' fraud claims before the December 6, 1996,
complaint was filed. The judgment of the District Court will
be affirmed.9
A True Copy:
Teste:
Clerk of the United States Court of Appeals
for the Third Circuit
_________________________________________________________________
9. Because we find that the statute of limitations has run for both
plaintiffs, we need not address Wah Kwong's other arguments.
32