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Liu v. Liu

December 23, 2009

YA-PING LIU, XIAO-HUA HU, AND DONG CHEOL SHIN, PLAINTIFFS-RESPONDENTS,
v.
CHANG-SHENG LIU AND STAR PACIFIC CORPORATION, DEFENDANTS-APPELLANTS, AND WANG-REN FEI, DEFENDANT, AND STAR PACIFIC CORPORATION, THIRD-PARTY PLAINTIFF,
v.
JING HU, THIRD-PARTY DEFENDANT.



On appeal from the Superior Court of New Jersey, Chancery Division, Bergen County, Docket No. C-397-06.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Submitted September 24, 2009

Before Judges Fuentes, Gilroy and Simonelli.

This action concerns a dispute among shareholders of Star Pacific Corporation (SPC), a closely held corporation of New Jersey. Defendants Chang-Sheng Liu (Chang Liu) and SPC appeal from the June 27, 2008 order that, among other things: 1) determined the respective ownership interests of Chang Liu and plaintiffs Ya-Ping Liu (Frank Liu), Xiao-Hua Hu (Emma Hu), and Dong Cheol Shin (Douglas Shin)*fn1 in SPC as 40%, 35%, 10%, and 15%, respectively; and 2) awarded plaintiffs consequential and punitive damages. We affirm the judgment of liability. We affirm the award of damages in part and remand in part for further proceedings consistent with this opinion.

I.

On November 14, 2006, plaintiffs filed a three-count complaint against defendants Chang Liu, Wang Fei and SPC. Count one alleged that Chang Liu and Wang Fei had wrongfully taken control of SPC "through illegal, improper, and corrupt means." Under that count plaintiffs sought: 1) an appointment of a custodian or provisional director to exercise the powers of SPC's board of directors and officers; 2) a declaration that Wang Fei does not possess an ownership interest in SPC; and 3) a judgment dissolving SPC and distributing the proceeds of its sale in accordance with the parties' ownership interests. Counts two and three alleged breaches of fiduciary duties by Chang Liu and Wang Fei owed to plaintiffs, and that defendants conspired to gain control of SPC by not only diluting plaintiffs' ownership interests in the corporation, but also dissipating the corporation's assets. Under those two counts, plaintiffs sought compensatory and punitive damages.

On December 8, 2006, SPC filed an answer and asserted a counterclaim against plaintiffs for: breach of a shareholder's agreement; breach of fiduciary duties as SPC's officers and directors; fraud and deceit; and Douglas Shin's intentional and negligent misrepresentations. SPC's answer also included a third-party complaint against Jing Hu, SPC's accountant.

Neither Chang Liu nor Wang Fei filed answers to the complaint. On January 17, 2007, the trial court entered an order directing that Chang Liu continue as President of SPC with the necessary "legal authority to act or transact business on behalf of SPC without interference from" the remaining shareholders, pending further order of court.

On January 23, 2008, the court transferred the Special Civil Part case of Advanta Bank Corp. v. Star Pacific Corp. and Ya[-]Ping Liu, (Docket No. DC-15567-07) to the Chancery Division, and consolidated that case with the Chancery action for trial. The consolidated matters were tried to the court on February 4, 5, 6, 11, and 12, 2008.

At commencement of the trial, the court dismissed plaintiffs' complaint against Wang Fei and SPC's third-party complaint against Jing Hu because neither party had been served. Although Chang Liu had not formally filed an answer, he appeared throughout the scheduled proceedings; therefore, the court deemed Chang Liu as having denied all allegations of the complaint and permitted him to appear at trial through counsel. Also at the start of trial, the court denied SPC's counsel's application to withdraw as attorney for the corporation, and the corporation consented to having judgment entered against it on plaintiffs' complaint and in the Advanta Bank collection matter.

SPC's counsel next informed the court that he would not be able to attend the balance of the trial because he needed to travel to China to attend to an ill relative. Accordingly, counsel requested that the court permit Chang Liu's attorney to prosecute SPC's counterclaim. At the start of the second day of trial, Chang Liu's attorney renewed the request to prosecute SPC's counterclaim, advising the court that SPC, through Chang Liu, had assigned the counterclaim to Chang Liu. Plaintiffs objected. Because the claim had "been in the case from the beginning," the court did not immediately dismiss the counterclaim, but rather permitted Chang Liu's attorney to prosecute the claim, advising that the court would rule on the merits of the application at the end of trial.*fn2

II.

The following individuals testified at trial. Thomas Hartzell, Advanta Bank Corporation's litigation coordinator, testified on behalf of the bank in support of its claim to collect on SPC's credit card account against Frank Liu who denied personal liability on the debt. As to the claims among the shareholders, Frank Liu, Emma Hu, and Douglas Shin testified on behalf of plaintiffs; Chang Liu testified on behalf of defendants. Because their facts differ, we recite the facts based on each witness's testimony.

Hartzell testified that SPC, the corporate credit card holder, and Frank Liu, the individual who signed the account on behalf of SPC, had defaulted on the credit card account, leaving a balance owed to the bank of $9,813.76, $7,799.81 for principal and accumulated interest; $1,949.95 in attorney fees; and $64 in court costs. According to Hartzell, Frank Liu individually guaranteed the debt, having signed the credit card account on behalf of SPC with the account contract providing in pertinent part: "The signing individual is personally liable for such amounts due even if the business of such other card members do not pay as agreed." Frank Liu testified that the monies borrowed on the credit card account went into the corporation.

Accordingly, he requested that the court enter judgment on the credit card account against SPC, and not against him personally.

Based on SPC having previously admitted liability and on the language of the account contract, the court entered judgment against SPC and Frank Liu jointly in the amount of $9,813.76. However, the court prohibited enforcement of that judgment against Frank Liu pending final disposition of the Chancery action, acknowledging whether Chang Liu was required to indemnify and hold Frank Liu harmless, in whole or in part, for that debt "remains to be seen as we go forward."

II-A.

Frank Liu testified as follows. SPC is a closely held corporation that engages in the business of importing and exporting rugs, carpets and other sundries. During its initial years of operation, SPC maintained an office in Hackensack and warehouses in Hackensack and Englewood.

Frank Liu incorporated SPC in April 2001, with only him and Chang Liu as shareholders. At time of incorporation, Frank Liu received 700 shares of stock, representing 35% of the authorized shares of SPC; Chang Liu received 800 shares of stock, representing 40% of the authorized shares of SPC. The remaining 25% of the authorized shares were retained for future investors. According to Frank Liu, at the time of incorporation, Chang Liu discussed the possibility of allowing Wang Fei to purchase an interest in the corporation. However, after they showed "the business proposal" to Wang Fei, he "backed off" and never made an investment in the corporation. The following year, Frank Liu learned that Wang Fei had loaned $40,000 to one of SPC's Chinese suppliers.

According to Frank Liu, he and Chang Liu were president and vice president of SPC, respectively; nonetheless, Frank Liu also acknowledged that during the years he had signed several documents identifying him as the vice president of the corporation. SPC opened banking accounts at Chase Bank, Wachovia Bank, and the Bank of China, with both he and Chang Liu having authority to draw checks on SPC's accounts.

In early 2002, Emma Hu became a shareholder in SPC, investing $200,000 in exchange for 10% of SPC's authorized shares.*fn3 After becoming a shareholder, Emma Hu sat on the Board of Directors, became the Hackensack office manager, and handled the shipping responsibilities, including custom clearances, and contacting shipping and trucking companies.

In March 2005, Frank Liu and Chang Liu decided to expand SPC and open up a branch in California. They asked Douglas Shin, an individual with whom SPC had done business, if he wanted to invest in SPC. Douglas Shin invested $300,000 in cash and inventory, and received 300 shares or a 15% interest in SPC. After joining SPC, Douglas Shin became the general manager of SPC's California office, and a member of the corporation's board of directors. In 2005, SPC also opened up a store in Florida (the Florida outlet), called SPC Rug & Linen Outlet, Inc., a corporation wholly owned by SPC.

On December 25, 2005, Frank Liu traveled to China to place orders and conduct inspections. Because this business trip was for approximately twenty days, Frank Liu made arrangements for Chang Liu to fill in as president until his return. Unfortunately, a problem arose in China preventing Frank Liu from leaving the country as scheduled. One of SPC's suppliers had sued SPC, and a Chinese court required Frank Liu to remain in China, pending resolution of the matter. According to Frank Liu, he and Chang Liu communicated by phone "almost every day" while he was detained in China. During those telephone conferences, Chang Liu advised Frank Liu of SPC's daily occurrences; and Frank Liu gave Chang Liu necessary instructions on behalf of the corporation.

In May 2006, third parties had stolen a delivery shipment valued at approximately $40,000, from SPC's California place of business. Chang Liu blamed Emma Hu, alleging that the loss occurred because Emma Hu had failed to follow company policies by permitting the shipment to be delivered to SPC's office after 3:00 p.m. when workers were not available to unload the shipment. After this incident, Chang Liu spoke with Frank Liu about terminating Emma Hu as office manager, but Frank Liu opposed the idea. Chang Liu brought up the subject again in September 2006, but again Frank Liu voiced his opposition.

Toward the end of September 2006 while still in China, Frank Liu received notice of a special shareholders' meeting from Chang Liu. Frank Liu requested that this meeting be delayed until his return because the lawsuit in China would soon be resolved, as his wife had raised the money to pay the supplier's claim against SPC. On October 13, 2006, Frank Liu returned to the United States.

On October 18, 2006, the shareholders' meeting was held at SPC's Hackensack office. In attendance at the meeting were Frank Liu; Gary Poplaski, Frank Liu's attorney; Emma Hu; Douglas Shin; Chang Liu; Bing Xu, Chang Liu's and SPC's attorney; and Wang Fei (via telephone). The notice of the meeting indicated three purposes: to discuss possible solutions to Frank Liu's situation in China; to consider and vote on new members for the Board of Directors; and to discuss other unspecified matters. The notice listed Wang Fei as a 20% shareholder of SPC. During this meeting Chang Liu produced a stock certificate that he had issued to Wang Fei on September 28, 2006, for 400 shares of SPC. Plaintiffs contested Wang Fei's status as a shareholder. According to Frank Liu, the shareholders did not pass any resolutions at that meeting.

Frank Liu testified that on October 19, 2006, Chang Liu presented to SPC's banks a copy of a "Certificate of Resolution" of the special meeting of the Board of Directors of SPC dated October 18, 2006, stating that the Board of Directors had removed Frank Liu as an officer of the corporation. Based on that certificate, the banks removed Frank Liu as a signor on SPC's accounts. The certificate referenced two resolutions, one of the special meetings of shareholders, and one of the special meetings of the Board of Directors. Frank Liu denied prior knowledge of these two resolutions, having only obtained a copy from Chase Bank.

According to Frank Liu, on March 26, 2007, Chang Liu; WaFei Zhao (Alfred Zhao), SPC's sales manager; and Zheng Li (Mike Li), the manager of SPC's Florida outlet, incorporated a competing business in Florida named Star Atlantic Corporation (SAC-FL). Frank Liu testified that SAC-FL listed the address of SPC's company apartment in Florida as its place of business. He also testified that representatives of SAC-FL attended a merchandise tradeshow in Las Vegas in August 2007, using SPC's New York checking account to pay SAC-FL's booth fees.

On October 29, 2007, SAC-FL was incorporated in New Jersey (SAC-NJ) and gave its address as 550 Industrial Road, Carlstadt, New Jersey. Frank Liu testified that in September 2007, although the Hackensack warehouse had been stripped of its inventory and assets, he had observed SPC's truck located outside SAC-NJ's Carlstadt office.

II-B.

Emma Hu testified as follows. Emma met Frank Liu and Chang Liu in 2001. After discussing the nature of SPC's business at Emma Hu's home, Chang Liu informed her that only he and Frank Liu were shareholders but that they did welcome new investors. According to Emma Hu, Chang Liu told her that he owned 40% of the corporation and Frank Liu owned 35%. On assurance of receiving a 10% ownership interest in the corporation, Emma Hu invested $200,000. In July 2002, SPC issued three stock certificates to Frank Liu, Chang Liu and herself, each certificate bearing two of their signatures.

In May 2002, Emma Hu commenced working as SPC's manager. In that position she worked primarily with Frank Liu, whom she considered the "chief officer in the company." As to Frank Liu's detainment in China, she confirmed that she communicated with him on a daily basis via e-mails, faxes and telephone calls. According to Emma Hu, Chang Liu interpreted her daily contacts with Frank Liu as "making secret reports on him." Because SPC was having a cash flow problem, it was not in a position to forward the necessary funds to China to satisfy its suppliers. Accordingly, Emma Hu worked with Frank Liu's wife to raise the necessary funds to pay the supplier. At the same time, according to Emma Hu, Chang Liu was trying to prove that the Chinese supplier had sold defective products to SPC to avoid payment. Emma Hu later ascertained that if Frank Liu had been held in China for more than one year, his "green card would [have] expire[d,] and he would never come back to the U.S."

On October 10, 2006, Emma Hu found on her desk a copy of the notice of the special meeting of shareholders signed by Chang Liu. The notice indicated that Wang Fei was a 20% shareholder, while Frank Liu was only a 25% shareholder. The notice also indicated that Emma Hu's interest was that of 5%, not 10%. Emma Hu attended the October 18, 2006 special meeting of shareholders, along with Frank Liu, Douglas Shin, and Chang Liu. Wang Fei attended the meeting via telephone after Chang Liu had called him. According to Emma Hu, the police were called to the meeting after Chang Liu threatened to kill her when she "firmly denied any knowledge of [Wang Fei's] existence as a 20 percent shareholder." When she left the meeting, the shareholders had not passed any resolutions. Nor did those present discuss the incident concerning the stolen container from the California office site.

Emma Hu also testified concerning her 2003 personal loan to Chang Liu. She stated that she lent Chang Liu $30,000 in separate advances, and Chang Liu acknowledged the loan by executing and delivering to her on October 21, 2003, a "loan receipt" stating: "I ...


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