Tech-Sonic, Inc. v. Sonics & Materials, Inc., 3:12-cv-01376 (MPS)

• Decision Date: 20 July 2016
• Docket Number: No. 3:12-cv-01376 (MPS),3:12-cv-01376 (MPS)
• Court: U.S. District Court — District of Connecticut
• Parties: TECH-SONIC, INC., Plaintiff, v. SONICS & MATERIALS, INC., Defendant.

TECH-SONIC, INC., Plaintiff, v. SONICS & MATERIALS, INC., Defendant.

No. 3:12-cv-01376 (MPS)

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

July 20, 2016

FINDINGS OF FACT AND CONCLUSIONS OF LAW

I. Introduction

This is a breach of contract case between the plaintiff Tech-Sonic Inc. ("TS USA") and the defendant Sonics Materials ("Sonics"). Tech-Sonic Co. ("Original TS"), a South Korean stock corporation, entered into an exclusive sales agreement ("Agreement") with Sonics. Original TS then purportedly assigned the right to sue under the Agreement to TS USA. TS USA has sued Sonics under the Agreement. The parties contest whether the assignment was effective and thus whether TS USA has standing to sue under the Agreement. The effectiveness of the assignment turns on two issues: (1) whether at the time of the purported assignment Original TS owned the Agreement that it purported to assign, and (2) whether the purported assignment was an effective corporate action under South Korean law.

As discussed in more detail below, TS USA has not met its burden of showing that the purported assignment of the Agreement was an effective corporate action under South Korean law and thus that it is the assignee of the Agreement. Under South Korean law, a stock company such as Original TS can assign a so-called "major asset" only through a resolution of the board of directors. The sole shareholder or chief executive officer, known as a "representative director," of such a stock company cannot unilaterally assign the company's major assets. The Agreement is a major asset of Original TS. At the time of the purported assignment, Original TS had three members of the board of directors. Although TS USA submitted a document purporting to make the assignment, signed by Byoung Ou, Mr. Ou was not the sole member of the board of directors at that time. As there is no evidence of a valid resolution by the board of directors of Original TS effectuating the assignment, TS USA has not shown that it is the assignee of the Agreement. Therefore, TS USA lacks standing.

In the alternative, TS USA has requested leave to amend its complaint under Federal Rule of Civil Procedure 17 so that Original TS may join the case, ratify the lawsuit, or be substituted as a party. I deny that request because Rule 17 cannot cure a jurisdictional defect in this context.

Thus, I dismiss this case for lack of jurisdiction because TS USA lacks standing.¹

II. Procedural History

TS USA filed this suit on March 26, 2012 in the United States District Court for the Southern District of Ohio. On September 21, 2012, the case was transferred to the United States District Court for the District of Connecticut. On February 28, 2013, the Court granted Sonics' Motion to Dismiss all of the claims against it except for a breach of contract claim. On September 23, 2014, Sonics moved to dismiss for lack of subject matter jurisdiction and both parties moved for summary judgment. I denied those motions without prejudice after determining that genuine disputes of material fact prevented me from deciding the jurisdictional issue as a matter of law. On January 8, 2016, I held an evidentiary hearing to resolve the jurisdictional question. The sole witness at the hearing was Byoung Ou, principal of TS USA.² I have also considered post-hearing and supplemental briefs submitted by the parties, together with exhibits including, among others,a deposition given by a South Korean lawyer retained by Sonics and affidavits by a South Korean lawyer retained by TS USA.

III. Legal Standard

A district court sua sponte "must first resolve the subject matter jurisdictional issue on which the Plaintiff's Article III standing depends before awarding either side a judgment that is, in essence, a judgment on the merits." Alliance for Environmental Renewal, Inc. v. Pyramid Crossgates Co., 436 F.3d 82, 83 (2d Cir. 2006); Fed. R. Civ. P. 12(h)(3) ("If the court determines at any time that it lacks subject-matter jurisdiction, the court must dismiss the action."). A court may consider evidence outside of the pleadings in deciding whether it has subject matter jurisdiction. Building & Const. Trades Council v. Downtown Develop., Inc., 448 F.3d 138, 150 (2d Cir. 2006). After jurisdictional discovery, if there is a genuine issue of material fact the court may hold an evidentiary hearing on Article III standing unless the court's "fact-finding on the jurisdictional issue will adjudicate factual issues required by the Seventh Amendment to be resolved by a jury . . . ." Alliance for Environmental Renewal, Inc., 436 F.3d at 88. In this case, both parties expressed a preference that the court hold an evidentiary hearing and decide the jurisdictional issue without a jury and before trial. The plaintiff has the burden of establishing standing under Article III by a preponderance of the evidence. Aurecchione v. Schoolman Transp. Systems, Inc., 426 F.3d 635, 638 (2d Cir. 2005).

"[T]o have Article III standing, a plaintiff must adequately establish: (1) an injury in fact (i.e., a 'concrete and particularized' invasion of a 'legally protected interest'); (2) causation (i.e., a 'fairly . . . trace[able]' connection between the alleged injury in fact and the alleged conduct of the defendant); and (3) redressability (i.e., it is 'likely' and not 'merely speculative' that the plaintiff's injury will be remedied by the relief plaintiff seeks in bringing suit)." SprintCommunications Co., L.P. v. APCC Services, Inc., 554 U.S. 269, 273-74 (2008) (quoting Lujan v. Defenders of Wildlife, 504 U.S. 555, 560-61 (1992)). At issue is whether TS USA suffered an injury in fact.

Deciding the effectiveness of the assignment in this case requires the Court to apply South Korean law. "[A] court's determination of foreign law is treated as a question of law . . . ." Karah Bodas Co. v. Perusahaan Pertambangan Minyak Dan Gas Bumi Negara, 313 F.3d 70, 80 (2d Cir. 2002). "In determining foreign law, the court may consider any relevant material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence. The court's determination must be treated as a ruling on a question of law." Fed. R. Civ. P. 44.1.

IV. Findings of Fact

I assume the parties' familiarity with the facts and allegations and set forth only my findings on the facts related to jurisdiction.³

A. The Purported Assignment From Original TS to TS USA

Sonics and Original TS entered into a contract on February 21, 2005. (Pl.'s Ex. 5 at 1.) Some time after October 22, 2011, Byoung Ou, an owner of Original TS, signed a document called "Action Without a Meeting by the Sole Shareholder and Sole Director of Techsonic Co. (Gyeonggi-Do, South Korea)." (Pl.'s Ex. 6 at 1; Def.'s Ex. 103 at 1-3; Hr. Tr. at 106, 108-09.) The document purports to assign to TS USA the right to bring suit under the contract between Original TS and Sonics. (Pl.'s Ex. 6 at 1.) The document states that Original TS was formed as a Yuhan Hoesan, which is similar to a closely-held corporation. (Pl.'s Ex. 6 at 1.) However, OriginalTS is a Chusik Hoesa, which is more akin to a stock corporation. Robert L. Brown, Corporate Counsel's Guide to Doing Business in South Korea § 6:5 (Thomson Reuters 2014); (Ri Bong Han Dep. at 81-82, Jan. 5, 2015, ECF No. 153; Hearing Tr. at 111-12). The document is also back-dated; it was not signed until after October 2011, but the document states that it is effective as of January 1, 2011. (Hearing Tr. at 110-12.)

B. Original TS's Ownership of the Right of Action at the Time of the Purported Assignment

Sonics has argued that Original TS did not own the right of action at the time of the purported assignment, having earlier assigned it to a different entity. I find, however, that Original TS owned the Agreement when it purportedly assigned it to TS USA some time after October 2011. Mr. Ou's testimony on this issue was not crystal clear, but a few points emerged with sufficient clarity to permit the following findings. At some point, the Korean government gave a $300,000 grant to Original TS for research and development. (Hearing Tr. at 43.) Original TS was required to return thirty percent of the grant to the Korean government. (Id.) To avoid the repayment obligation, Mr. Ou, at the advice of his brother-in-law, Seong Min Cho, reported to the Korean tax authorities that Original TS was, in effect, closing down its Korean operations; although Mr. Ou signed a letter to this effect in August 2007 while he was living in the United States, Mr. Cho, who was running the Korean operations for Mr. Ou, did not deliver it to the Korean authorities until 2008. (Id. at 42-46; Pl.'s Ex. 4 at 1; Def.'s Ex. 100 at 1.)

The Korean operations of Original TS, but not the Agreement or other intangible assets, were assumed by a non-stock corporation owned entirely by Mr. Ou known as Tech Sonic Korea ("TS Korea"). (Hearing Tr. at 42-46, 51-53.) There was no evidence of a formal assignment of assets—let alone an assignment of the right of action—by Original TS to TS Korea, and although Sonics has pointed to other documents submitted or subscribed to by Mr. Ou suggesting that "allassets" were transferred to TS Korea, I find that those alleged contradictions stem from Mr. Ou's language difficulties. In 2004, Original TS had set up another entity in China to handle its operations there—Beijing Techsonic ("TS Beijing"). (Id. at 40.) Translations of records from the Chinese government show that Original TS remains the "investor" and "shareholder" in TS Beijing, confirming that Original TS did not assign all its assets to TS Korea. (Pl.'s Ex. 2 at 1; Pl.'s Ex. 3 at 1.)

Even though Original TS told Korean tax authorities that it was closing, Original TS continued to do business with Sonics. Mr. Ou testified that his brother-in-law and TS Korea had no dealings with Sonics and that his brother-in-law did not even speak English.⁴ (Id. at 54-55, 57-58.) Mr. Ou testified that only he...