Magnus Electronics, Inc. v. La Republica Argentina

• Decision Date: 08 September 1987
• Docket Number: No. 86-1789,86-1789
• Citation: 830 F.2d 1396
• Parties: MAGNUS ELECTRONICS, INC., Plaintiff-Appellant, v. LA REPUBLICA ARGENTINA, Defendant-Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1396

830 F.2d 1396

MAGNUS ELECTRONICS, INC., Plaintiff-Appellant, v. LA REPUBLICA ARGENTINA, Defendant-Appellee.

No. 86-1789.

United States Court of Appeals, Seventh Circuit.

Argued April 24, 1987.

Decided Sept. 8, 1987.

Scott A. Brainerd, Brainerd & Bridges, Chicago, Ill., for defendant-appellee.

Bruno A. Ristan, Kaplan, Russin & Vecchi, Washington, D.C., for plaintiff-appellant.

Before BAUER, Chief Judge, CUDAHY and FLAUM, Circuit Judges.

CUDAHY, Circuit Judge.

Magnus Electronics, Inc. ("Magnus") sued the Argentine Republic ("Argentina") for damages for converting Magnus' goods. The district court dismissed the complaint on the basis of res judicata and lack of subject matter jurisdiction, Fed.R.Civ.P. 12(b)(1). Magnus Electronics, Inc. v. Argentine Republic, 637 F.Supp. 487, 496 (N.D.Ill.1986) ("Magnus II "). The court also sanctioned Magnus under Rule 11 of the Federal Rules of Civil Procedure. Magnus Electronics, Inc. v. Argentine Republic, 112 F.R.D. 141 (N.D.Ill.1986). Magnus appeals the dismissal of its complaint as well as the assessment of fees. We conclude that res judicata bars Magnus from maintaining this suit. We also remand the case to allow the district court an opportunity to reconsider its decision to sanction Magnus under Rule 11. Magnus and Argentina each request that this court sanction the other party under Rule 38. Fed.R.App.P. 38. We decline both invitations.

I.

This case has had a long and tortured life in the district court and has resulted in a number of opinions from that court. We discuss here only those facts necessary for purposes of this appeal; curious readers can turn to the opinions of the district court for further information. ¹ The facts as related here are taken from Magnus' complaint. Under the well-pleaded complaint rule, we take these allegations as true for the purpose of considering the propriety of the district court's dismissal of this suit.

In October 1981, Magnus entered into a contract to sell generators to Alfredo DiLullo, a resident of Argentina. Complaint p 2, Record No. 1. DiLullo bought the goods for resale to the Argentine government pursuant to an award of a contract he had received as low bidder in a competitive bidding process. Id. p 3. Under the sales contract, Magnus was to deliver the goods to the Royal Bank of Canada (the "RBC") as consignee in Buenos Aires. The RBC was to deliver the generators to DiLullo upon payment of the purchase price. Id. p 4. Magnus hired a freight-forwarder to ship the goods from Chicago to Miami. Id. p 5. In Miami, Aerolineas Argentinas ("AA") took possession of the generators and transported them to Buenos Aires in November 1981 under an airway bill that designated the RBC as sole consignee. Id. paragraphs 5, 7. After the goods arrived in Buenos Aires, agents of AA and the Argentine Air Force conspired together to seize the goods without making payment. Id. p 8. At least one document was forged by an AA agent to facilitate the conversion. Id.

The disappearance of its generators precipitated a number of suits by Magnus. Magnus first sued AA and RBC for breaching their obligations to Magnus. The district court dismissed the complaint as to AA because Magnus' claims were barred by the two-year statute of limitations provided in the Warsaw Convention. Magnus Electronics, Inc. v. Royal Bank of Canada, 611 F.Supp. 436 (N.D.Ill.1985). Magnus then brought suit against Argentina, alleging that Argentina fraudulently converted the goods for the benefit of the Argentine military. The district court dismissed that suit for lack of personal jurisdiction because Magnus improperly served process on Argentina under the Foreign Sovereign Immunities Act of 1976 (the "FSIA"). ² 28 U.S.C. Sec. 1608(a)(3) (1982). The court also held that Magnus' complaint failed to allege subject matter jurisdiction under the FSIA. Magnus Electronics, Inc. v. Royal Bank of Canada, 620 F.Supp. 387 (N.D.Ill.1985) ("Magnus I" ). Magnus claimed that the district court had subject matter jurisdiction over its claim under the last clause of section 1605(a)(2) of the FSIA. Section 1605(a)(2) provides:

(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case--

....

(2) in which the action is based upon a commercial activity carried on in the United States by the foreign state; or upon an act performed in the United States in connection with a commercial activity of the foreign state elsewhere; or upon an act outside the territory of the United States in connection with a commercial activity of the foreign state elsewhere and that act causes a direct effect in the United States.

28 U.S.C. Sec. 1605(a)(2) (1982). The district court found that Magnus failed to allege both that Argentina was involved in any "commercial activity" in this case and that Argentina's conduct had a "direct effect" in the United States.

Subsequent to the entry of judgment against Magnus, Magnus belatedly filed a motion in which it requested the district court to consider additional facts not asserted in its complaint. The district court ruled on this motion from the bench. The court pointed out that Magnus' motion had to be considered under Rule 60(b), ³ and it found that no grounds had been shown entitling Magnus to relief under that provision. During the course of the hearing on Magnus' motion, the following colloquy took place between the court and the attorney for Magnus, Mr. Brainerd:

THE COURT: And, finally, Rule 15(a) which talks about liberally granting leave to amend--

MR. BRAINERD: Yes.

THE COURT: --isn't applicable when an action is dismissed. It relates to leave being granted liberally and freely before that.

Now, I ruled based on the facts that you had asserted in your third effort at a complaint.

MR. BRAINERD: The second amended?

THE COURT: Yes. [ ] [S]ubject matter [ ] jurisdiction was lacking.

MR. BRAINERD: Yes.

THE COURT: And, I stated the reasons for it.

MR. BRAINERD: Right.

THE COURT: If you want to try again with your other set of facts, I guess you are free to do that because subject matter jurisdiction is not, of course, a determination on the merit[s]. But, you are going to have to do it in the context of filing a lawsuit and serving the Argentine Republic and avoiding the several problems that plagued your efforts the last time around.

MR. BRAINERD: Yes. The second amended complaint I freely admit was less than artfully drafted--

THE COURT: No, it was very artfully drafted. It just didn't get federal jurisdiction. So, you know, there is nothing--

MR. BRAINERD: It didn't contain a lot of essential elements of what I consider to be in the case.

THE COURT: Well, you are free to do that now but not in this lawsuit.

....

THE COURT: All right.

In any event, the reason for the denial of the motion is basically it's a Rule 60(b) motion and you have not asserted the appropriate justifications. And in addition to that there is no prejudice. So that--

MR. BRAINERD: I understand that. It's just that--

THE COURT: --it is denied.

MR. BRAINERD: I just cannot see the waste of time--

THE COURT: It is not a waste of time. You are going to have to do the ground work again anyhow. Okay.

MR. BRAUN [Defendants' counsel]: Thank you.

MR. BRAINERD: Thank you.

Reprinted in Magnus II, 637 F.Supp. at 496.

Magnus then filed the present suit against Argentina, again alleging that Argentina had converted its goods and again attempting to invoke the district court's jurisdiction over Argentina under the FSIA. Specifically, Magnus alleged that the district court had jurisdiction under either the first or third clause of section 1605(a)(2); ⁴ Magnus claimed that its suit was based on Argentina's commercial activity in the United States or that it arose from Argentina's commercial activity outside the United States that caused a direct effect in the United States. To overcome the difficulties with subject matter jurisdiction pointed out by the district court in Magnus I, Magnus' complaint included a number of allegations respecting the relationship between Argentina, AA and DiLullo. Magnus alleged that Argentina conspired with AA and DiLullo to cause Magnus injury in the United States and that AA was Argentina's "agent," Complaint paragraphs 7, 10, 11, Record No. 1, "wholly-owned instrumentality," id. paragraphs 7, 11, and "alter-ego," id. p 7, and that DiLullo was Argentina's "agent," id. p 3. The district court held that, under the principles of res judicata, Magnus I barred the present suit and, in the alternative, that Magnus' complaint failed adequately to allege subject matter jurisdiction. Magnus II, 637 F.Supp. 487. The district court also concluded that Rule 11 sanctions might be appropriate; it ordered Magnus to submit an investigative report detailing the bases for its allegations of subject matter jurisdiction. After considering Magnus' investigative report, the court concluded that Magnus should be sanctioned under Rule 11. Magnus, 112 F.R.D. 141.

II.

The first issue we address is whether Magnus is barred by the doctrine of res judicata from maintaining this suit. Res judicata or claim preclusion

provides that when a final judgment has been entered on the merits of a case, "[i]t is a finality as to the claim or demand in controversy, concluding parties and those in privity with them, not only as to every matter which was offered and received to sustain or defeat the claim or demand, but as to any other admissible matter which might have been offered for that purpose."

Nevada v. United States, 463 U.S. 110, 129-30, 103 S.Ct. 2906, 2918, 77 L.Ed.2d 509 (1983) (quoting Cromwell v. County of Sac, 94 U.S. (4 Otto) 351, 352, 24 L.Ed. 195 (1876)).

It is undisputed that Magnus' complaint here alleges the same cause of action as was alleged in Magnus I. In both cases, Magnus claimed that Argentina wrongfully converted the generators. ⁵ It is also clear that there is an identity of ...