Nantong Tongyu Drawnwork Prods. Co. v. Gao

NANTONG TONGYU DRAWNWORK PRODUCTS CO. LTD et al., Plaintiffs and Respondents, v. LIQUI GAO et al., Defendants and Appellants.

B287171

COURT OF APPEAL OF THE STATE OF CALIFORNIA SECOND APPELLATE DISTRICT DIVISION SEVEN

September 15, 2020

NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS

California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.

(Los Angeles County Super. Ct. No. GC049276)

APPEAL from a judgment of the Superior Court of Los Angeles County, Laura A. Matz, Judge. Affirmed.

Law Offices of Paul P. Cheng, John P. Fitzmorris, Rebecca J. Gardner and Paul P. Cheng for Defendants and Appellants.

Law Offices of Steven P. Chang, Steven P. Chang; Law Offices of Gene H. Shioda, Gene H. Shioda; Manning & Kass, Ellrod, Ramirez, Trester and Steven J. Renick for Plaintiffs and Respondents.

____________________ Nantong Tongyu Drawnwork Products Co. Ltd., Zao Zhuang Jintian Commerce & Trade Ltd., Changzhou Jiaen Bed-Clothes Products Co., Guandong Silique Int'l Group Manufacturer and Kangfumei Textile Co. Ltd. of Zhuji City sued Pacirim Intertrade Inc., Denghai "Derek" Zhang, Liqui Gao, Eric Ran Zhang¹ and others for breach of contract, fraudulent transfer and related claims. Following a bench trial the court entered judgment against Pacirim, Derek, Gao and Eric, awarding plaintiffs $4.1 million against Derek, Gao and Pacirim for breach of contract and $3.8 million against Eric on the fraudulent transfer claim. Derek, Gao and Eric appeal, contending the lawsuit was barred by a bankruptcy stay and judgment on the fraudulent transfer claim was error for a number of reasons. We affirm.

FACTUAL AND PROCEDURAL BACKGROUND

1. The Relationship Between the Parties

Plaintiffs are textile manufacturers located in China. Pacirim imports textiles from China and sells the textiles to retail stores in the United States. It is undisputed that at all relevant times Gao was the sole shareholder, as well as an officer and director, of Pacirim. Gao's husband, Derek, was the president, treasurer and secretary of Pacirim and exercised primary control of the company's operations. Eric is Gao and Derek's son.

Between 2005 and 2009 plaintiffs sold textiles to Pacirim. Beginning in 2008 Pacirim began delaying payments owed to plaintiffs and in 2009 ceased making payments. On October 6, 2011 Pacirim filed a voluntary petition for relief under Chapter 7 of the United States Bankruptcy Code (11 U.S.C. §§ 701-784) and identified plaintiffs as unsecured creditors.

2. Plaintiffs' Claims

Plaintiffs filed their complaint on April 10, 2012, an amended complaint on July 27, 2012 and the operative second amended complaint on August 17, 2015. The second amended complaint alleged causes of action for breach of contract against Pacirim and fraudulent transfer against all defendants.²

The second amended complaint alleged Gao, Derek and Eric were alter egos of Pacirim and had intentionally undercapitalized Pacirim by, among other things, transferringassets improperly from Pacirim to defeat the collection efforts of Pacirim's creditors.

3. Evidence at Trial

a. Breach of contract and alter ego claims

Prior to trial the parties stipulated Pacirim had breached contracts with each plaintiff and collectively owed plaintiffs approximately $4.1 million.³ The date of the breaches was stipulated to have been October 6, 2011 (the date Pacirim filed for bankruptcy protection).

In support of their effort to hold Gao and Derek personally liable for Pacirim's breach of contract, plaintiffs presented evidence Gao and Derek commingled funds by, among other things, using proceeds from a personal loan taken by Gao and Derek to pay Pacirim's creditors and by having Pacirim make a substantial number of payments on the loan. Plaintiffs' accounting expert opined Gao and Derek depleted Pacirim's funds by making payments to Gao as shareholder and improperly used Pacirim's money for personal expenses.

b. The fraudulent transfer of $1.4 million to Eric

It is undisputed that in 2011 Eric received a gift of $1.4 million from his aunt, Airui Zhang. The funds were part of the proceeds from the sale of a building Airui Zhang owned in China (the China property). Plaintiffs' position at trial was that Pacirim had previously owned the China property and had transferred it to Airui Zhang in 2008 for no consideration in an effort to conceal Pacirim's assets from creditors. Thus, plaintiffsargued, the transfer to Airui Zhang was a fraudulent transfer of Pacirim's assets and the subsequent transfer of the sale proceeds to Eric was likewise fraudulent. Defendants⁴ denied Pacirim had owned the China property and maintained the gift to Eric could not be traced to Pacirim's assets.

Yun Chong Wang, the president and board chairman of Nantong Tongyu, testified that in 2006 Derek told him he wanted to purchase a property in China on behalf of Pacirim. As a favor Yun Chong Wang agreed to facilitate the currency exchange for the purchase by allowing Derek to transfer funds from Pacirim's United States bank account to Nantong Tongyu's bank account in China. Nantong Tongyu would then have the currency converted and would transfer the funds back to Pacirim. Chun Wang, the chief representative of Pacirim in China in 2006, explained it was necessary to use a conduit to exchange the currency because Pacirim did not have a bank account in China.

Accordingly, over the course of six months in 2006, Pacirim transferred more than $900,000 to Yakang International, a Hong Kong-based company owned by Derek. On December 4, 2006 Yakang transferred approximately $870,000 to Nantong Tongyu. Yun Chong Wang testified his accounting department had the money converted to Chinese currency and, within 10 days of the transfer from Yakang, Chun Wang and Derek's brother (who also worked for Pacirim in China at the time) went to Nantong Tongyu's office to retrieve the funds in the form of cashier's checks and cash. Chun Wang corroborated Yun Chong Wang'saccount and testified he used the funds obtained from Nantong Tongyu to purchase the China property on behalf of Pacirim.

Derek denied Pacirim had ever owned property in China. He acknowledged the 2006 payments from Pacirim to Yakang but stated those funds were not sent to Nantong Tongyu. He also confirmed the $870,000 transfer from Yakang to Nantong Tongyu but insisted the money was payment for textiles Yakang had purchased. Yun Chong Wang, on the other hand, testified Nantong Tongyu had never sold merchandise to Yakang.

Derek testified he had visited the China property in 2005 and considered purchasing it. He paid a $10,000 deposit toward the purchase but subsequently changed his mind. He said his brother later purchased the property. However, Derek authenticated a document he had drafted and signed dated October 18, 2008 that stated Pacirim had purchased the property on December 4, 2006 and had made all payments on it. The document stated title to the property was being transferred from Pacirim to Airui Zhang. While Derek acknowledged the contents of the document, he insisted Pacirim had never taken title to the property and the purpose of the document was to allow his brother to purchase the property.

4. The Trial Court's Decision in Favor of Plaintiffs

At the conclusion of the trial the court ruled in favor of plaintiffs. The court filed an 18-page statement of decision on October 31, 2017 (adopting plaintiffs' proposed statement of decision). The trial court found that Pacirim was an alter ego of Gao and Derek and, therefore, Gao and Derek were personally liable for Pacirim's breaches of contract.

Regarding the China property, the court stated, "The only issue Defendants controverted was that the China Real Propertydid not belong to Pacirim and, therefore, the [transfer of] funds derived from its sale . . . to Eric Zhang was not a fraudulent transfer. The Court found that the Plaintiffs met their burden of proof and that the China Real Property belonged to Pacirim and that the money from its sale, which was sent to Eric Zhang, was a fraudulent transfer."

The court appeared to base its decision in large part on Derek's lack of credibility, stating, "[T]he Court found the main defense witness, D. Zhang, to be untruthful and completely unreliable. As a result, the Court chose not to believe his testimony." Noting Derek had admitted to making multiple misrepresentations in his bankruptcy filings and tax returns and his trial testimony contradicted his deposition testimony and discovery responses, the court stated, "D. Zhang showed a complete disregard for the oath and for truthfulness in his written discovery responses and proved himself to be a self-serving, unreliable and deceitful witness."

Judgment was entered on October 31, 2017, and an amended judgment entered on November 7, 2017. The court awarded plaintiffs damages of approximately $4.1 million, plus costs, prejudgment and postjudgment interest, against Pacirim, Derek, Gao, 100% Pure, Landmark Tex and DE & Z. The court also awarded plaintiffs approximately $3.8 million,⁵ plus costs, prejudgment and post-judgment interest, against Eric.⁶

DISCUSSION

1. The Trial Court Did Not Err by Denying the Motion for Judgment on the Pleadings

a. Relevant proceedings

On February 2, 2017 defendants moved for judgment on the pleadings, arguing plaintiffs' initial complaint, filed in April 2012 while Pacirim's bankruptcy proceeding was ongoing, was in violation of the automatic stay imposed by federal bankruptcy law. (See 11 U.S.C. § 362(a).) The complaint had alleged seven causes of action against Gao, Derek, Eric, 100% Pure, Landmark and DE & Z, including breach of contract and fraudulent transfer. The complaint also alleged defendants had a unity of interest and ownership "such that any individuality and...