U.S. Backs China's Move to Reopen 1911 Railroad Bond Case

The State Department yesterday joined the People's Republic of China in asking a federal court in Birmingham, Ala., to set aside a $41.3 million default judgment against China in a dispute with American citizens who hold 72-year-old railway bonds issued by the Imperial Chinese government under the Ching Dynasty.

The motion, filed by the Justice Department, included an unusual personal affidavit from Secretary of State George P. Shultz.

In the interest of U.S. foreign policy, Shultz said in the affidavit, the default judgment should be set aside so the Chinese government can have "its day in court."

Shultz stressed in the affidavit that the issue is of extreme importance to the Chinese government, and that in meetings last February in Peking, "Chairman Deng Xiaoping personally expressed to me his government's serious concern about the default judgment . . . and his apprehension that that judgment was and would continue to be a major irritant in bilateral relations."

The U.S. position spelled out in yesterday's motion does not back all of China's claims. L. Brad Marman Jr., a spokesman for the Justice Department, said, "We do not pass judgment on the merits of the case. We just want the court to hear their side of it."

The Hukuang Railway bonds were sold in 1911--just months before the revolution that eventually led to the founding of the People's Republic of China--to finance a rail link between Peking and Canton.

The successor governments made regular interest payments on the bonds until the early 1930s and sporadic payments during the late 1930s.

By the time the bonds were to have matured in 1951, the current government had been in power for two years.

It balked at honoring bond commitments made 40 years earlier by leaders that it considerers to have been corrupt exploiters of the Chinese people and country. The current Chinese government has charged that the bonds were one means by which the imperial government "intensified its oppression and plunder of the Chinese people."

The lawsuit against China was filed in November, 1979, shortly after the United States formally recognized the People's Republic of China, by Birmingham attorney W. Eugene Rutledge, who represents more than 300 Americans now holding the bonds.

Rutledge, who won the $41.3 million default judgment almost a year ago, described yesterday's State Department intervention as "unappetizing at best." He said that the court ordered the default because China refused to recognize the lawsuit. Criticizing "deceitful treatment from my own government," Rutledge said he doesn't think China should have a second chance in court.

Rutledge is seeking court permission to seize Chinese assets in this country to satisfy the judgment, but would not reveal what he plans to seize. "I'm afraid they'll ship it out of the country. I don't want them to know what I know they've got," he said.

Last July, after extensive discussions with U.S. diplomatic authorities, China retained attorney Eugene Theroux of Baker & McKenzie to handle the case.

In an unusual action, China filed papers in U.S. District Court in Birmingham last Friday asking that the case be dismissed. State Department sources said they believe that the filing marked the first time that China ever has officially entered into a legal proceeding in a foreign country.

U.S. officials blame much of the problem on cultural misunderstandings. For example, China has charged that Chinese translations of legal documents sent to them were "inaccurate, confusing and materially misleading."

In addition, China claims that under the laws of sovereign immunity they are not under the jurisdiction of U.S. courts.

The U.S. government brief said, "The People's Republic of China believes that the questions involved in cases such as this are to be resolved in government-to-government negotiations, and that under international law a state is not subject to the jurisdiction of a foreign court without its consent."

China said it intends to argue that the 1976 Foreign Sovereign Immunities Act, which says sovereign immunity may not apply in ceratin cases involving commerical activities, cannot be applied retroactively to the 1911 bond issue.

Even if China were subject to U.S. law, a State Department official said, Alabama law provides a statute of limitations of 10 years on defaulted bond cases which would have expired in 1961, 10 years after the maturity date of the bonds.

China also is expected to argue that many of the bonds in question are held not by the original purchasers, but by speculators who purchased them long after the 1951 maturity date, knowing at the time that they were in default.