Commercial Litigation and Arbitration

Rule 11 and § 1927 Sanctions Predicated on Factual Findings Concerning Foreign Corporate Transactions That Are Contradicted by Foreign Court Determinations Reversed — Arguments Thus Validated Are Not Entirely Groundless

Philos Techs., Inc. v. Philos & D, Inc., 2015 U.S. App. LEXIS 16812 (7th Cir. Sept. 22, 2015):

This lawsuit involves a complicated transaction-or set of transactions-among several related companies, most of which are based in the Republic of Korea. At its core, the lawsuit alleges that the defendants, Kore-an company Philos & D, Inc. (P&D), and Korean citizens Don-Hee and Jae-Hee Park, unlawfully retained equipment that plaintiff Philos Technologies, Inc. (Philos Tech), had sent to P&D as part of a business deal. Although we part company with the district court's reasoning, we agree with that court's conclusion that it lacked personal jurisdiction over the defendants. We also affirm the district court's denial of Philos Tech's motion asking the court to vacate its judgment on account of the Parks' alleged fraud. Finally, although we understand the district court's frustration with Philos Tech, we conclude that its imposition [*2]  of sanctions on that company cannot stand in light of the many legal and factual uncertainties involved in this case. We therefore vacate the court's sanctions order.



Philos Tech filed this lawsuit in the Northern District of Illinois in December 2008, alleging that the Defendants had unlawfully converted its property. The complaint asserts that Defendants had agreed to increase Philos Tech's shares of P&D after Philos Tech sent additional equipment to P&D in Korea, but that Defendants reneged on this agreement. This prompted Philos Tech to demand the return of its equipment. Defendants refused to comply and, according to Philos Tech, wrongfully retained the equipment.

Defendants did not appear in the Illinois court to answer the complaint. The district court thus granted Philos Tech's motion for default judgment and awarded damages. After Philos Tech attempted to enforce this judgment in Korea, Defendants filed a motion to vacate the judgment under Federal Rule of Civil Procedure 60(b)(4), asserting that the Illinois court's judgment was void for lack of personal jurisdiction. The district court concluded that the request was untimely, but we reversed that judgment in Philos Technologies, Inc. v. Philos & D, Inc., 645 F.3d 851 (7th Cir. 2011). Defendants then renewed their motion to vacate.

The district court held an evidentiary hearing to determine whether it had personal jurisdiction over [*10]  Defendants. At the hearing, Defendants called Sam Ko and Sung-Hyun Nam, a former PLST vice-president. Philos Tech presented no witnesses. Relying on the live testimony, affidavits from the Parks, and other documentary evidence, the district court vacated the default judgment and dismissed the complaint for lack of personal jurisdiction. It largely credited Defendants' version of the facts. It found, for example, that Philos Ko had contacted the Parks in October 2007 to propose a joint venture. It determined that Don-Hee Park had not engaged in any negotiations during his May 2007 trip to Illinois and that he had not come to Illinois in May 2008 at all. It rejected Philos Tech's contention that the written agreements of December 20, 2007, were rescinded and re-placed with an oral agreement between Philos Tech and the Parks; instead, the court concluded, the joint venture had always been between the two Korean companies, P&D and PLST. The court criticized what it viewed as the "sham transaction" in which P&D was designated as a foreign di-rect investment company; it took the position, however, that it did not need to wade into the details of this potential [*11]  problem under Korean law in order to determine whether it had personal jurisdiction over Defendants. Finally, the court opined that Philos Tech's claim was really one for breach of contract rather than conversion, and it concluded that even if it were to believe that Philos Tech manufactured the equipment in Illinois as part of some sort of agreement with P&D, these facts still were insufficient to confer personal jurisdiction over Defendants. They simply bought a product from an Illinois company, the court reasoned, and this action does not constitute purposeful availment of the benefits of Illinois law.

After the court's ruling, Defendants filed a motion for sanctions against Philos Tech and its counsel under Federal Rule of Civil Procedure 11 and 28 U.S.C. § 1927. The district court imposed sanctions pursuant to Rule 11 in the amount of $778,489.72 against Philos Tech, finding that Philos Tech had lied in order to demonstrate that the court had personal jurisdiction over the defendants. The district court also thought that Philos Tech had falsely claimed that it had a meeting with the defendants on December 20, 2007, and the court pointed to Philos Tech's failure to discuss the written agreements with [*12]  PLST in its complaint and to the other changes in its story.

Philos Tech later filed a motion for relief from the judgment under Federal Rule of Civil Procedure 60(b)(3) (fraud by opposing party), (b)(6) (catch-all), and (d)(3) (fraud on the court). It argued that the recent Korean convictions of the Parks for perjury in connection with statements regarding the joint venture were grounds for vacating the judgment, because those convictions showed that the Parks had lied to the court about the nature of the joint venture. The district court denied the motion, noting that the Korean judgment postdated its own judgment and reasoning that its prior determination of the facts was "not dependent on the truthfulness or falsity of the Parks' testimony."

Philos Tech appealed the district court's orders vacating the court's previous default judgment, imposing sanctions, and denying its Rule 60 motion. The defendants cross-appealed the district court's denial of sanctions against Philos Tech's counsel, but we later dismissed the cross-appeal upon the joint motion of the parties. See FED. R. APP. P. 42(b). The district court had subject-matter jurisdiction under 28 U.S.C. § 1332(a)(2). (The parties are diverse: Philos Tech is an Illinois corporation with its principal place of business [*13]  in Illinois; P&D is a Korean corporation with its principal place of business in that country; and Don-Hee and Jae-Hee Park are citizens of Korea.) We have appellate juris-diction pursuant to 28 U.S.C. § 1291.



We now address Philos Tech's appeal of the district court's grant of sanctions against it under Federal Rule of Civil Procedure 11. We review a district court's grant of Rule 11 sanctions for abuse of discretion; an order imposing sanc-tions based on an error of law or a clearly erroneous finding of fact is a per se abuse of discretion. See Hartmarx Corp. v. Abboud, 326 F.3d 862, 866-67 (7th Cir. 2003).

The district court found sanctions appropriate based on its finding that Philos Tech "made its submissions to this District Court with an improper purpose and with a faulty factual basis." It pointed to the discrepancy between the complaint's allegation that Philos Tech had a "meeting" with the Parks and contracted with them to form a joint venture, and Philos Tech's later contention that its meeting was really a telephone conversation it had (likely with only Jae-Hee Park) after the Parks had executed written agreements with PLST. The court also thought that Philos Tech was lying about the existence of an oral agreement with P&D; it found instead that PLST had always been P&D's joint venture partner. It branded the relationship between Philos Tech and P&D, documented by the articles of incorporation and other papers, [*27]  as a sham that the parties had perpetrated in order to obtain benefits from the Korean government.

These would be serious problems indeed if they were supported by a proper record. But they are not. The record that was developed in the hearing before the court focused on personal jurisdiction, not the merits. Such issues as the scope of the telephone meeting that occurred, why (in this close-knit group of family companies) an oral agreement might quickly have superseded a written agreement, what Korean law provides in the way of benefits to foreign investors, and how the Korean authorities would have viewed the parties' arrangements, were not adequately explored. On the record before us, it is impossible to evaluate either the legal significance of P&D's articles of incorporation and other official documents or the legitimacy of the parties' transfers of funds and equipment between Korea and the United States. And without more information about Korean law, we cannot tell whether the parties' attempts to obtain foreign direct investment benefits were part of a valid business strategy or a sham meant to deceive Korean officials.

In the absence of a solid reason for condemning the joint [*28]  venture reflected in P&D's articles of incorporation as a "sham," we cannot be confident that Philos Tech was untruthful in its filings about its dealings with P&D and the Parks. On such a murky record, where the legal implications of the parties' actions are so uncertain, the court was wrong to characterize Philos Tech's bid for personal jurisdiction in the Northern District of Illinois as unscrupulous or underhanded. Philos Tech's argument that personal jurisdiction over Defendants existed was not baseless. If Philos Tech had not taken such a passive position at the critical hearing, then there would have been some chance that the district court might have found personal jurisdiction. (Several Korean courts have found that it was a joint venture partner of P&D, after all.) A court should not impose sanctions on a party that loses an argument, as long as the argument was not entirely groundless. See Nat'l Wrecking Co. v. Int'l Bhd. of Team-sters, Local 731, 990 F.2d 957, 963 (7th Cir. 1993). Philos Techhad enough support for its contentions related to personal jurisdiction to avoid Rule 11 sanctions.

Our uncertainty about relevant Korean law, the existence of related Korean litigation, and principles of comity reinforce our doubts about the propriety [*29]  of sanctions. See Hilton v. Guyot, 159 U.S. 113, 164 (1895) ("[Comity] is the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation."). Before the district court issued its sanctions order, several Korean courts had made findings that contradicted the factual determinations that undergirded the district court's imposition of sanctions. In particular, those courts determined that Philos Tech was P&D's joint venture partner. The district court's sanctions order unnecessarily put it in conflict with the Korean judiciary. Especially since possible abuse of Korean law played a significant role in the court's decision, there is every reason to defer to the Korean courts' assessment of that issue. The existence of these Korean court judgments, combined with the many legal and factual uncertainties in this case, lead us to conclude that the district court went too far when it imposed sanctions on Philos Tech.

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