Korea Trade Insurance Corporation v. ActiveON, Inc. et al

Filing 23

ORDER. Defendants' Motion to Dismiss Plaintiffs First Amended Complaint (ECF No. 14 ) is hereby granted. The FAC (ECF No. 13) is dismissed without prejudice and with leave to file a motion to file an amended complaint within thirty days of the date of this order. If no motion is filed, the Court will direct the clerk to close the case. Signed by Judge William Q. Hayes on 3/9/2018. (jao)

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UNITED STATES DISTRICT COURT

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SOUTHERN DISTRICT OF CALIFORNIA

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KOREA TRADE INSURANCE
CORPORATION, a Korean
Corporation,

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CaseNo.: 17-cv-0811-WQH-MDD

ORDER
Plaintiff,

v.

ACTIVEON, INC., a Delaware
corporation; ACTIVEON LLC, a
Delaware limited liability
company; ACTIVEON
HOLDINGS, INC., a Delaware
corporation; RCA
ELECTRONICS INC., a Delaware
corporation; ON CORP USA,
INC., a Delaware corporation;
CHONG WOEN LEE, an
individual; and HAN SUK LEE,
an individual,
Defendants.

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HA YES, Judge:
The matter before the Court is the Motion to Dismiss Plaintiff's First Amended
Complaint filed by Defendants. (ECF No. 14).

17-cv-0811-WQH-MDD

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I.

Background

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On April 21, 2017, Plaintiff Korea Trade Insurance Corporation ("K-sure") initiated

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this action by filing a Complaint (ECF No. 1). On August 18, 2017, K-sure filed the First

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Amended Complaint (the "FAC") (ECF No. 13). The FAC names seven Defendants:

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ActiveON, Inc.; ActiveON, LLC; ActiveON Holdings, Inc.; RCA Electronics, Inc.; ON

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Corp. USA, Inc.; Chong Woen Lee ("CW Lee"); and Han Suk Lee ("HS Lee"). Id. The

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FAC brings claims against CW Lee and HS Lee for "RICO conspiracy (18 U.S.C §

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1962(d))" and "civil RICO (18 U.S.C. § 1962(c))". Id. The FAC also brings claims against

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all Defendants for fraud (intentional misrepresentation), fraud (concealment), and

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negligent misrepresentation. Id.

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On September 15, 2017, Defendants filed the Motion to Dismiss Plaintiffs First

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Amended Complaint. (ECF No. 14). 1 On October 6, 2017, K-sure filed an Opposition to

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Defendants' Motion to Dismiss First Amended Complaint. (ECF No. 16). On October 16,

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2017, CW Lee and HS Lee filed a Reply Memorandum of Points and Authorities in Support

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of Motion to Dismiss. (ECF No. 18). 2 The Court held oral argument on the Motion to

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Dismiss on February 28, 2018. (ECF No. 22).

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Defendants also filed a Request for Judicial Notice in Support of Motion to Dismiss Plaintiff's First
Amended Complaint. (ECF No. 15). The Court denies Defendants' Request for Judicial Notice (ECF
No. 15) as unnecessary to the resolution of the Motion to Dismiss Plaintiffs First Amended Complaint
(ECF No. 14).
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CW Lee and HS Lee stated that the Reply was filed by them, and not the other Defendants, based on
the Notice of Receivership and Stay of Proceedings against Defendants ActiveON, Inc. fka RCA
Electronics Corp. fka ONCorp. US, Inc.; ActiveON LLC; and Clicka Holdings, Inc. fka ActiveON
Holdings, Inc. (ECF No. 17). (ECF No. 18 at 2). The Notice of Receivership and Stay of Proceedings
states that K-sure's claims against ActiveON, Inc.; ActiveON LLC; and Clicka Holdings, Inc. are stayed
by an Order Appointing General Receiver issued by the Superior Court of the State of Washington in and
for the County of King. (ECF No.17 at 2). K-sure filed a Limited Objection to Defendants' Notice of
Receivership and Stay of Proceedings. (ECF No. 19). K-sure contends that "[t]he Washington state court
receivership order does not have any automatic or binding effect on this action [because s]tale courts
simply do not have the power to enjoin or restrict a federal court action." ECF No. 19 at 2 (citing Baker
v. General Motors Corp., 522 U.S. 222, 236 n. 9 (1998)). On October 18, 2017, the Court issued an Order
stating "This case before the United States District Court for the Southern District of California is not
stayed." (ECF No. 20).
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17-cv-0811-WQH-MDD

1 II.

Allegations in the FAC

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K-sure is a corporation duly organized under the laws of the Republic of
Korea ("Korea"). K-sure is an export credit agency that focuses on promoting
trade and overseas investment of enterprises in Korea. While domiciled and
headquartered in Korea, K-sure maintains branch offices to conduct business
in various cities around the world, including one such branch office in Los
Angeles, California, which it has operated continuously since 1992.

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FAC at ii 7. "Among other functions, K-sure's Los Angeles office performs commercial

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credit investigations and credit information management, coordinates debt collection

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activities, and facilitates communications with its customers' United States-based offices,

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affiliates, and personnel, such as ON USA." Id. at ii 22.

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Defendants ActiveON, Inc.; ActiveON, LLC; ActiveON Holdings, Inc.; and RCA

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Electronics, Inc. are Delaware companies which are or were engaged in the sale or

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distribution of consumer electronics products. Id. at ilil 8-10. Defendant ON Corp US,

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Inc. "either changed its name to RCA Electronics, Inc. and then to ActiveON, Inc., or it

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otherwise merged with or was acquired by one or more of Defendants ActiveON, Inc.;
ActiveON LLC; Activeon Holdings, Inc.; and/or RCA Electronics, Inc." Id. at

ii

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Defendants CW Lee and HS Lee actively managed Defendants ON Corp US, Inc.;

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ActiveON, Inc.; ActiveON LLC; Activeon Holdings, Inc.; and RCA Electronics, Inc. as

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senior executives throughout the time periods described herein. Id. at ii 15.

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Through numerous fraudulent communications, falsified documents, and the
purposeful concealment of facts, the Defendants and their co-conspirators
fraudulently induced K-sure to issue and extend export insurance policies and
financial guarantees ("K-sure Policies") used to secure bank financing, loans
and credit facilities ("Loans") for the manufacturing and export of consumer
electronics products (primarily televisions) ("Export Products") to retailers in
the United States. When ON USA failed to remit sale proceeds from the
United States to repay the Loans covered by K-sure Policies, K-sure was
forced to make payments on the K-sure Policies in excess of $137 million
dollars.

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Id. at ii 4. The payments on the K-sure Policies were made to the Industrial Bank of Korea,

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the Korea Exchange Bank, and Nonghyup Bank. See id. at ilil 36-37, 40, 109-116. A

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number of the fraudulent communications that induced K-sure to issue and extend the

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K-sure Policies were sent from the United States by CW Lee and HS Lee. See, e.g., id. at

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,, 54, 55, 61, 63, 65, 72, 81-87, 90-92, 95, 98, 101, 103.

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III.

Standard of Review

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Federal Rule of Civil Procedure 12(b)(6) permits dismissal for "failure to state a

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claim upon which relief can be granted." Federal Rule of Civil Procedure 8(a)(2) provides

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that "[a] pleading that states a claim for relief must contain ... a short and plain statement

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of the claim showing that the pleader is entitled to relief." "[A] plaintiffs obligation to

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provide the 'grounds' of his 'entitle[ment] to relief requires more than labels and

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conclusions, and a formulaic recitation of the elements of a cause of action will not do."

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Bell At!. Corp. v. Twombly, 550 U.S. 544, 555 (2007) (alteration in original) (quoting Fed.

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R. Civ. P. 8(a)). "To survive a motion to dismiss, a complaint must contain sufficient

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factual matter, accepted as true, to 'state a claim to relief that is plausible on its face."'

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Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570). "A claim

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has facial plausibility when the plaintiff pleads factual content that allows the court to draw

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the reasonable inference that the defendant is liable for the misconduct alleged." Id.

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(citation omitted). "When there are well-pleaded factual allegations, a court should assume

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their veracity and then determine whether they plausibly give rise to an entitlement to

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relief." Id.at679.

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IV.

Discussion

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A.

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The FAC brings claims for "RICO conspiracy (18 U.S.C § 1962(d))" and "civil

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RICO

RICO (18 U.S.C. § 1962(c))" against CW Lee and HS Lee. Id. Section3 1962(c) states

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It shall be unlawful for any person employed by or associated with any

enterprise engaged in, or the activities of which affect, interstate or foreign
commerce, to conduct or participate, directly or indirectly, in the conduct of
such enterprise's affairs through a pattern of racketeering activity or collection
of unlawful debt.

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All "sections" referred to in this Order appear in Title 18 of the United States Code.
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Section 1961 (1 )(B) defines "racketeering activity" to include "any act which is indictable

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under" 18 U.S.C. § 1341 (relating to mail fraud) and 18 U.S.C. § 1343 (relating to wire

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fraud). 18 U.S.C. § 1961(1)(B). Section 1962(d) makes it "unlawful for any person to

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conspire to violate" § 1962(c). Id. at § 1962(d). Section 1964(c), commonly referred to as

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"civil RICO," "creates a private civil cause of action that allows '[a]ny person injured in

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his business or property by reason of a violation of section 1962' to sue in federal district

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court and recover treble damages, costs, and attorney's fees."

RJR Nabisco, Inc. v.

8 European Cmty., 136 S. Ct. 2090, 2097 (2016) (alteration in original) (quoting 18 U.S.C.
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§ 1964(c)).

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In order to bring its claims against CW Lee and HS Lee for injuries caused by their

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alleged violations of§ 1962(c) and§ 1962(d), K-sure must state a claim under§ 1964(c).

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Defendants contend that K-sure fails to state a claim under § 1964(c) because K-sure fails

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to allege a 'domestic' injury. ECF No. 14-1at20 (citing RJR Nabisco, 136 S. Ct. at 2106).

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K-sure contends that the FAC alleges a domestic injury. (ECF No. 15 at 13-14).

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1.

Contentions of the Parties

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Defendants contend that Plaintiff's RICO claims should be dismissed because "K-

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sure has not and cannot plausibly plead that it suffered a domestic injury to business or

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property." ECF No. 14-1 at 15 (quoting RJR Nabisco, 136 S. Ct. at 2111). Defendants

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contend that K-sure's alleged injury is the payment to the Korean Banks. Id. at 21 (citing

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FAC at iii! 140, 154). Defendants contend that injury is not domestic because "K-sure paid,

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and thus relinquished physical control of, the alleged $137 million to the Korean Banks in

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Korea," and "[a]ny economic harm or harm to K-sure's business also would have been felt

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in Korea, as that is where K-sure is incorporated and principally located." Id. at 20 (citing

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FAC at ifif 7, 20-21, 24, 108-116).

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K-sure contends that the F AC does allege a domestic mJury, focusing on the

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allegations that (1) K-sure "has maintained a Los Angeles office for more than 25 years to

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facilitate its significant business with the United States - including the transactions with

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the Defendants," ECF No. 16 at 14 (citing FAC at ifif 7, 21-23); (2) "the RICO enterprise
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1 was directed at the United States as it involved a United States based corporate enterprise
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incorporated in Delaware," id. at 14-15 (citing FAC at ifif 8-12, 129, 131); (3) "the RICO

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Defendants' alleged activities were directed at fraudulently obtaining credit guarantees

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from K-sure to facilitate the importation and sales of televisions in the United States

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through ON USA, an entity that they created in the United States," id. at 15 (citing FAC at

iii! 131, 136, 139); and(4)"muchoftheRICODefendants' racketeering activity and actions
7 taken in support of the scheme occurred in California," id. (citing FAC at ifif 136-138).

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2.

Applicable Law

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In RJR Nabisco, the United States Supreme Court addressed two questions

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concerning the extraterritorial application of RICO: "First, do RICO's substantive

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prohibitions, contained in § 1962, apply to conduct that occurs in foreign countries?

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Second, does RICO's private right of action, contained in§ 1964(c), apply to injuries that

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are suffered in foreign countries?" 136 S. Ct. at 2099.

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The Supreme Court answered the first question by "conclud[ing] that RICO applies

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to some foreign racketeering activity." Id. at 2103. The Supreme Court concluded that

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"[a] violation of§ 1962 may be based on a pattern of racketeering that includes predicate

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offenses committed abroad, provided that each of those offenses violates a predicate statute

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that is itself extraterritorial." Id.

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The Supreme Court then "turn[ed] to RICO's private right of action" and

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"conclude[d] that§ 1964(c) does not overcome the presumption against extraterritoriality."

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Id. at 2106. The Supreme Court held that "[a] private RICO plaintiff therefore must allege

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and prove a domestic injury to its business or property." Id. "Section 1964(c) ... does not

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allow recovery for foreign injuries." Id. at 2111. The Supreme Court dismissed the

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plaintiffs' claims under § 1964(c) because they "rest[ed] entirely on injury suffered

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abroad." Id.

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The plaintiffs in RJR Nabisco waived their claims for domestic injuries, so the

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Supreme Court did not have to decide whether the injuries suffered by the plaintiffs were

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domestic or foreign. Id. The Supreme Court did state that "[t]he application of [the
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1 domestic injury] rule in any given case will not always be self-evident, as disputes may
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arise as to whether a particular alleged injury is 'foreign' or 'domestic."' Id. The Supreme

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Court also stated that § 1964(c)' s domestic injury requirement "does not mean that foreign

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plaintiffs may not sue under RICO." Id. at 2110 n.12.

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Since the Supreme Court decided RJR Nabisco, a number of district courts and the

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Second Circuit Court of Appeals have decided whether the plaintiffs before them alleged

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domestic injuries for which they could recover under § 1964(c). Many of these courts

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found that the location of the plaintiff alleging economic injury was relevant to the location

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of the injury allegedly suffered by that plaintiff. See, e.g., Armada (Singapore) Pte Ltd. v.

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Amcol Int'! Corp., 244 F. Supp. 3d 750, 755 (N.D. Ill. 2017), reconsideration denied,

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motion to certijj; appeal granted, No. 13 C 3455, 2017 WL 1862836 (N.D. Ill. May 9,

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2017) (collecting cases applying the rule that "a corporate entity generally suffers

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economic harm in its principal place of business"); Bascunan v. Daniel Yarur ELS

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Amended ComplaintA, No. 15-CV-2009 (GBD), 2016 WL 5475998, at *4 (S.D.N.Y. Sept.

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28, 2016) (determining "where an economic injury accrued," by "ask[ing] two common-

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sense questions: who became poorer, and where did they become poorer."' (alterations and

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quotations omitted)). The Second Circuit Court of Appeals focused on the location of the

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property that the plaintiff allegedly lost because of the defendants' actions. Bascunan v.

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Elsaca, 874 F.3d 806, 820-21 (2d Cir. 2017) ("[A]bsent some extraordinary circumstance,

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the injury is domestic if the plaintiffs property was located in the United States when it

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was stolen or harmed, even if the plaintiff himself resides abroad."). At least one district

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court decided whether an injury was domestic under § 1964(c) by examining the

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defendants' conduct and its purposes. Tatung Co., Ltd. v. Shu Tze Hsu, 217 F. Supp. 3d

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1138, 1156 (C.D. Cal. November 14, 2016) (concluding that the plaintiff suffered a

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domestic injury because "the defendants specifically targeted their [injury-inducing]

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conduct at California with the aim of thwarting [the plaintiffs] rights in California"); but

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see Cevdet Aksut Ogullari Koll. Sti v. Cavusoglu, 245 F. Supp. 3d 650, 658 (D.N.J. 2017)

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("[T]he only relevant inquiry is where Plaintiffs injury occurred-i.e. where the impact of
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Plaintiff's injury was felt-and not where the predicate acts occurred."); Bascunan, 2016

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WL 5475998, at *6 ("[An] approach[ ]which focuses on ... the defendant's contacts with

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the forum . . . to determine where a plaintiff suffered an alleged RICO injury[ ]is

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misguided.").

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3.

Analysis

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The FAC alleges that K-sure is a Korean export credit agency headquartered and

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domiciled in Korea. FAC at ,-i 7. K-sure has a "branch office[]" in Los Angeles that

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"performs commercial credit investigations and credit information management,

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coordinates debt collection activities, and facilitates communications with its customers'

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United States-based offices, affiliates, and personnel."

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"fraudulently induced K-sure to issue and extend export insurance policies and financial

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guarantees ('K-sure Policies') used to secure bank financing, loans and credit facilities

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('Loans')." Id. at ,-i 4. CW Lee and HS Lee did so, in part, "[t]hrough numerous fraudulent

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communications," many of which were sent from the United States. Id. at ,-i,-i 4, 50-106.

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"When ON USA failed to remit sale proceeds from the United States to repay the Loans

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covered by K-sure Policies, K-sure was forced to make payments on the K-sure Policies in

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excess of $137 million dollars." Id. at ,-i 4. 4 Those payments were made to the Industrial

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Bank of Korea, the Korea Exchange Bank, and Nonghyup Bank. See id. at ,-i,-i 36-40, 109-

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116. The FAC does not allege the location of the $137 million dollars before K-sure paid

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it out.

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headquartered in Korea, it is not reasonable to infer that the $137 million dollars was

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located in the United States before K-sure paid it out. The FAC also does not allege where

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Bank of Korea, the Korea Exchange Bank, and Nonghyup Bank are headquartered or

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domiciled. See id. Considering the names of those banks and K-sure's role as an export

See id.

Id.

CW Lee and HS Lee

Because K-sure is allegedly a Korean corporation domiciled and

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While K-sure alleges that its "business interests, which include operations within the United
States ... , suffered significant damages as a result of Defendants' conduct," K-sure does not allege any
facts showing any damage to its business interests beyond the $137 million dollars of payments.

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1 credit agency, it is not reasonable to infer that the banks are headquartered or domiciled in
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the United States. In sum, the FAC alleges that the injuries suffered were payments made

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by a Korean company to other Korean companies in Korea.

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The Court finds that K-sure has failed to allege that it suffered a domestic injury

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under § 1964(c). Consequently, K-sure has failed to state any civil RICO claims. RJR

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Nabisco, 136 S. Ct. at 2111. K-sure's RICO claims are dismissed.
4.

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Leave to Amend

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Defendants request K-sure's RICO claims be dismissed without leave to amend.

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(ECF No. 14-1at23). K-sure contends that it should be permitted to file a second amended

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complaint because it "can add additional allegations and details in an amended pleading to

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cure [the] deficiencies identified by the Court." (ECF No. 16 at 30).

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A district court may dismiss a claim without leave to amend if "any proposed

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amendment would be futile." Reddy v. Litton Indus., Inc., 912 F.2d 291, 296 (9th Cir.

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1990) (citing Klamath-Lake Pharmaceutical Ass 'n v. Klamath Medical Serv. Bureau, 701

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F.2d 1276, 1292-93 (9th Cir.)). Defendants contend that any amendment to the FAC

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would be futile because "K-sure cannot dispute that [the $137 million dollars in] payments

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took place in Korea, where both K-sure and the Korean Banks are located," and "all of the

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circumstances surrounding the financing, the substantive communications, and the claims

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made by and payments made to the Korean Banks[ ]occurred in Korea." (ECF No. 14-1 at

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23). The Court does not find that any amendment to the FAC would be futile at this stage

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of the proceedings.

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B.

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In addition to their RICO claims, K-sure brings claims under state law for fraud

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(intentional misrepresentation), fraud (concealment), and negligent misrepresentation.

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FAC at I. K-sure alleges that the Court "has subject matter jurisdiction ... over K-sure's

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claims under state laws as such claims are so related to claims in the action under the laws

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of the United States of America that they form part of the same case or controversy ...."

Fraud and Misrepresentation

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iJ 18. Defendants ask the Court to decline to exercise pendant jurisdiction over

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Id. at

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K-sure's state law claims. (ECF No. 14-1at10).

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Under 28 U.S.C. § 1367,

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In any civil action of which the district courts have original jurisdiction, the
district courts shall have supplemental jurisdiction over all other claims that
are so related to claims in the action within such original jurisdiction that they
form part of the same case or controversy under Article III of the United States
Constitution.

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"A state law claim is part of the same case or controversy when it shares a 'common
nucleus of operative fact' with the federal claims .... " Bahrampour v. Lampert, 356 F.3d
969, 978 (9th Cir. 2004) (quoting Trs. of the Constr. Indus. & Laborers Health & Welfare
Trust v. Desert Valley Landscape Maint., Inc., 333 F.3d 923, 925 (9th Cir. 2003)).

A district court may decline to exercise supplemental jurisdiction over a state law
claim if the district court has dismissed all claims over which it has original jurisdiction.
28 U.S.C. §1367(c). In deciding whether to exercise supplemental jurisdiction, a court
must consider the underlying objective of "most sensibly accommodating the values of
economy, convenience, fairness, and comity." Exec. Software N. Am., Inc. v. USDC for
the Cent. Dist. of Calif, 24 F.3d 1545, 1557 (9th Cir. 1994) (internal quotations omitted).

"The decision whether to continue to exercise supplemental jurisdiction over state law
claims after all federal claims have been dismissed lies within the district court's
discretion." Satey v. JPMorgan Chase & Co., 521F.3d1087, 1091 (9th Cir. 2008) (citing
Foster v. Wilson, 504 F .3d 1046, 1051 (9th Cir. 2007)). "[I]n the usual case in which all

federal-law claims are eliminated before trial, the balance of factors to be considered under
the pendent jurisdiction doctrine-judicial economy, convenience, fairness, and comitywill point toward declining to exercise jurisdiction over the remaining state-law claims."
Id. (quoting Carnegie-Mellon Univ. v. Cohill, 484 U.S. 343, 351 (1988)).

The Court has dismissed all ofK-sure's claims brought under federal law. The Court
finds that "the balance of factors to be considered under the pendent jurisdiction doctrinejudicial economy, convenience, fairness, and comity- ... point toward declining to

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exercise jurisdiction over the remaining state-law claims." Id. (quoting Carnegie-Mellon

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Univ. v. Cohill, 484 U.S. 343, 351 (1988)). Accordingly, the Court declines to exercise

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jurisdiction over K-sure's state law claims for fraud and negligent misrepresentation.

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V.

Conclusion

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Defendants' Motion to Dismiss Plaintiffs First Amended Complaint (ECF No. 14)

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is HEREBY GRANTED. The FAC (ECF No. 13) is DISMISSED without prejudice and

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with leave to file a motion to file an amended complaint within thirty days of the date of

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this order. Ifno motion is filed, the Court will direct the clerk to close the case.

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DATED:

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