National City Bank of NY v. Republic of China

Background

A Chinese government railway agency opened a $200,000 deposit account in New York in 1948 and later sued the New York bank when the bank refused to return the funds. The bank had asserted two counterclaims seeking about $1.63 million on defaulted Chinese Treasury Notes. A federal district court dismissed the bank’s counterclaims after the Republic of China pleaded sovereign immunity. The court of appeals affirmed and denied the bank leave to amend its claims to be setoffs while the bank’s appeal was pending.

Reasoning

The core question was whether a foreign government that brings a suit in a U.S. court can be met with counterclaims or setoffs that would reduce its recovery. The Court assumed the Republic of China had ordinary foreign sovereign immunity but held that immunity is not absolute when a sovereign invokes U.S. courts. The opinion cited historical trends, laws that subject governments and agencies to some suits, and the State Department’s practice of limiting immunity for commercial acts. The Court found that fairness and the nature of the parties’ business relationship justified allowing the bank’s claims to proceed as defenses or setoffs. It reversed the lower courts and directed that the bank’s counterclaims be reinstated for further proceedings.

Real world impact

Banks and creditors can now press counterclaims or setoffs against foreign governments that sue in U.S. courts, potentially reducing what those governments can recover. Foreign governments with assets in the United States face greater risk that unrelated creditor claims may be asserted against them. The case was remanded for further proceedings, so factual and judgmental issues remain to be decided.

Dissents or concurrances

Justice Reed dissented, arguing that courts should not cut back sovereign immunity without action by Congress or the Executive and warning of harm to international comity and financial relations.