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Tech-Sonic, Inc. v. Sonics & Materials, Inc.

United States District Court, D. Connecticut

July 20, 2016

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

          FINDINGS OF FACT AND CONCLUSIONS OF LAW

          Michael P. Shea, U.S.D.J.

         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).” Sprint Communications 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, Original TS 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 backdated; 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 “all assets” 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 and his wife-who had relocated to the United States and set up TS USA-dealt with the defendant, Sonics, under the Agreement. (Id. at 54-58.) Mr. Ou testified that he and his wife placed orders with Sonics on behalf of Original TS or TS USA; product was delivered to TS USA, which sent the product to TS Korea or TS Beijing for incorporation into welding equipment. (Id. at 55-59.) Thus, I find that at the time of the purported transfer, Original TS owned the Agreement that it allegedly assigned to TS USA.

         As discussed below, whether the assignment of the Agreement was effective under South Korean law turns on the number of directors of Original TS at the time of the purported assignment, whether Mr. Ou could assign the Agreement as the sole shareholder of Original TS, and whether the Agreement was a “major asset.”

         C. Number of Directors at the Time of the Purported Assignment

         For the reasons that follow, I find that there were three members of the board of directors of Original TS at the time the resolution purporting to assign Original TS’s right of action to TS USA was “adopted, ” which was some time after October 22, 2011.

         According to translations of the corporate registry introduced into evidence, Original TS is a stock corporation with 50, 000 issued shares of common stock and total capital of 500 million Korean won. (Pl.’s Ex. 1 at 1.) The registry shows that three directors were appointed or reappointed on the following dates: Byoung See Ou, appointed March 31, 2001, re-appointed March 31, 2004, and re-appointed March 27, 2007; Jin Ah Cho, appointed March 31, 2004, and reappointed March 27, 2007; Byoung Seung Yoo, appointed March 31, 2006.[5] (Id. at 1-3.) The registry also shows that Mr. Ou was the “representative director, ” (id. at 1), which means that he was the chief executive officer, (Hearing Tr. At 140).[6] See also Chanho Park, Commercial Law, in Introduction to Korean Law 202 (Korea Legislation Research Institute, ed., 2013).

         Under Article 383(2) of the Korean Commercial Act, [7] a director’s term may not exceed three years, and the entries on the corporate registry described above indicate that Original TS appointed its directors for three-year terms. See Commercial Act, Art. 383(2) (S. Kor.) (“The term of office of directors shall not exceed three years.”). Thus, according to the registry, Byoung See Ou’s and Jin Ah Cho’s tenures as directors expired on March 27, 2010, while Byoung Seung Yoo’s expired on March 31, 2009. There is no entry on the registry and there was no evidence presented at the hearing that any director was appointed to a term that extended beyond March 27, 2010, let alone to the time of the purported assignment in 2011.

         Nonetheless, under Article 386(1) of the Korean Commercial Act, “[a] director retiring from office due to the expiration of his/her term of office or due to resignation shall continue to have the rights and obligations of a director until a newly elected director takes office, if the number of directors remaining in office would otherwise become fewer than the minimum number prescribed by Acts or by the articles of incorporation.” Commercial Act, Art. 386(1). The “Acts” referred to in Article 386(1) refer to other provisions of the Commercial Act, which specify that in a stock corporation, “[t]he number of directors shall be three or more.” Commercial Act, Art. 383(1). In May 2009, an amendment to this provision allowed for as few as one or two directors in companies with total capital of less than one billion won; that is, the amendment raised the capital threshold for an exception allowing fewer than three directors, which, since 1998, had been less than 500 million won. Commercial Act, Art. 383(1); (Ri Bong Han Dep. at 49, Jan. 5, 2015, ECF No. 153).[8]

         Thus, for most of the duration of the terms of the directors shown on the corporate registry, Original TS was required by the Korean Commercial Act to have three directors, inasmuch as the registry reflects that it has capital of 500 million won.

         With the amendment of May 2009, if the articles of incorporation did not require more directors, Original TS was permitted to have only one director under the Korean Commercial Act. But according to Attorney Ryoo, see supra note 8, Original TS would have had to change its articles of incorporation to allow it to have a single director, (Hearing Tr. at 132-33). There was no evidence presented about the content of Original TS’s articles of incorporation. Mr. Ou testified that he could not remember whether he had ever seen articles of incorporation and, if they existed, he knew nothing of their content. (Id. at 64.) At least from 2003 to May 2009, Original TS was required by the Korean Commercial Act to have three directors and, unless its articles of incorporation were contrary to Korean law, they must have specified three during this period. Both Attorney Han and Attorney Ryoo made clear that a Korean stock corporation’s articles of incorporation may not permit fewer directors than the minimum set forth in the Korean Commercial Act. (E.g., Hearing Tr. at 132-33.) Thus, it is reasonable to infer-from the appointment of three directors-that Original TS’s articles of incorporation required three directors.

         Further, as noted, even if a director were to retire at the expiration of his term or to quit his position, the director would retain his legal rights and obligations until a replacement director was appointed. Commercial Act, Art. 386; (Ri Bong Han Dep. at 99-100). Korean law required Original TS to update the corporate registry to reflect any action with respect to directors. (Ri Bong Han Dep. at 60.) There are no such updating entries on the registry. In fact, the registry continued to list all three directors-even though their terms had expired-until December 2, 2013, when they were literally crossed out as a result of the company’s dissolution.[9] No evidence was presented in the form of corporate records indicating that before December 2, 2013, any of the three directors retired, died, resigned, or were dismissed. In other words, any third party who might have dealt with Original TS from 2003 until 2013 would likely have concluded that the corporation had the three directors shown on its corporate registry, i.e., Ou, Cho, and Yoo.

         The defendant’s second expert, Attorney Han, agreed with this analysis. He testified that after a May 2009 amendment to the Korean Commercial Act, a stock corporation was required to have three directors, unless the stock corporation had less than one billion won in paid-in capital, in which case the corporation could have one or two directors. (Ri Bong Han Dep. at 49.) As of December 2, 2013, Original TS was dissolved and the directors’ names were crossed out on the registry. (Hearing Tr. at 146.) Immediately before this date, however, the register reflected that there were three directors, namely, Ou, Cho, and Yoo. Therefore, I conclude that Original TS had three directors at the time of the assignment in 2011, even though the document purporting to transfer the Agreement states that Mr. Ou is the sole director of Original TS. As discussed below in Part V.A, Mr. Ou could not assign the Agreement as a director if the Agreement was a major asset.

         D. Whether Mr. Ou Was the Sole Shareholder of Original TS

         The parties dispute whether Mr. Ou was the sole shareholder of Original TS and whether a sole shareholder could have assigned the Agreement under Korean law. Based on the evidence presented by the parties, I find that Mr. Ou was the sole shareholder of Original TS. Mr. Ou’s testimony on this point was admittedly unclear, but he has met his burden of showing that he was the sole shareholder. At first, Mr. Ou said that he was the only shareholder and that there were never any others. (Id. at 24-25.) But then Mr. Ou testified that he had given shares in name only to the board of directors:

Q: Did TechSonic Co. ever have any other shareholders, Mr. Ou?
A: Maybe using someone’s name - Q. Did it have shareholders, yes or no?
A: Yes, sometimes.
. . .
Q: Did you testify in your deposition, Mr. Ou, that there were, in fact, three shareholders of TechSonic Co., yourself, your uncle and your sister?
A: Beginning of when we registered TechSonic Co. it requires a three board member. So they, in order to be the board member, they got to have five percent, one percent, they got to have something so they can be a board member. So we just give them name. They have nothing to do with anything shared, actual anything. It is five, six people company.

(Hearing Tr. at 114-15.) Later, Mr. Ou said that at some point he became the sole shareholder:

The Court: So here’s my question for you. . . . I’m asking you whether there were other ...

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