MOTION FOR APPOINTMENT OF RECEIVER

Moving Party: Plaintiff Hong Kong Gree Electric Appliance Sales Ltd.

Respondents: Defendants MJC Supply, LLC, MJC America, Ltd., Soleus East, Inc., Jimmy Loh, Charley Loh, Leping Loh and Simon Chu

POS: Moving, Opposing, and Reply OK per the court’s ex parte order

The Complaint herein alleges that between June 10 and 17, 2013, Defendants converted $28,622,320.81 from Plaintiff by signing seven checks on behalf of Plaintiff which were issued based on fabricated invoices issued to Plaintiff from Defendant MJC Supply Ltd. Plaintiff commenced this action on 6/25/13. The operative First Amended Complaint, filed on 7/19/13, asserts causes of action for:

1. Conversion
2. Conspiracy
3. Breach of Fiduciary Duty
4. Fraudulent Conveyance
5. Fraud
6. Negligent Misrepresentation
7. Constructive Fraud
8. Fraudulent Transfer (CC § 3439 et seq.)
9. Constructive Fraudulent Transfer (CC § 3439 et seq.)
10. Ultra Vires
11. Implied Covenant of Good Faith and Fair Dealing
12. Embezzlement
13. Injunctive Relief
14. Declaratory Relief

On 8/23/13, MJC America Holding Co., Inc. filed a derivative complaint on behalf of Gree USA Sales Ltd. against Dong Mingzhu and Jian Chen in case KC066270. On 8/29/13, KC066270 was consolidated with the instant matter. The operative First Amended Complaint, filed on 9/13/13, asserts a single cause of action for breach of fiduciary duty.

Plaintiff Hong Kong Gree Electric Appliance Sales Ltd. (“Gree Hong Kong” or “Plaintiff”), the 51% of owner of Gree USA Sales, Ltd. (“Gree USA”) seeks the appointment of a receiver to manage Gree USA’s affairs. Plaintiff contends that a receiver is necessary because disputes between Gree Hong Kong and MJC America Holding Co., Inc. (“MJC”), Gree USA’s 49% owner, have made it impossible for Gree USA to function as a viable business, and that as a result, Gree USA is now insolvent.

RECEIVERSHIP:

A receiver is an officer and representative of the court appointed to take possession of and preserve specified property that is the subject of pending litigation or to aid in the enforcement of a judgment. (An individual or bank, industrial bank or trust company authorized to engage in the trust business may be a receiver; see Fin.C. §§ 106, 600(b),(d),(e), 1500.) A receivership pending suit is a provisional, equitable remedy. Receivers may be used only where authorized by statute or where necessary to preserve the property rights of any party. (Miller v. Oliver (1917) 174 Cal. 407, 410; Turner v. Super.Ct. (Cooke) (1977) 72 Cal.App.3d 804, 811.)

The moving papers must allege facts establishing one of the statutory grounds for appointment of a receiver. (Miller v. Oliver (1917) 174 Cal. 407, 410.) Moreover, since a receivership is an equitable remedy, the equitable considerations in an injunction proceeding apply — i.e., there must be a showing of irreparable injury and inadequacy of other remedies. (Alhambra Shumway Mines, Inc. v. Alhambra Gold Mine Corp. (1953) 116 Cal.App.2d 869, 872.)

A receiver may be appointed in an action where property in which plaintiff has a “probable interest” is in danger of being lost, removed or injured. (CCP§ 564(b)(1).) A receiver may also be appointed where a corporation has been dissolved, is insolvent, or in danger of imminently becoming insolvent, or has “forfeited its corporate rights.” (CCP §§ 564(b)(5), (6), 565; and see Corps.C. §§ 1801(c), 1803.)

PLAINTIFF’S MOVING PAPERS:

A receiver is needed so that Gree USA can function as a viable business. It has bills to collect, creditors to pay, and taxes to prepare. A receiver will make these functions possible.

Gree USA now owes more than $75 million to its creditors and its interest obligations are compounding every day. (Motion, Chen Decl. ¶¶ 20-25.) A receiver is needed to evaluate invoices, pay any valid bills Gree USA can pay, and minimize the ongoing harm caused by the current status quo. Further, Gree USA’s customers owe Gree USA approximately $59 million. (Id. ¶ 19.) A receiver could accelerate collections and work in the best interest of Gree USA to collect the income it sorely needs. Finally, Defendants Jimmy and Charley Loh’s self-serving and fraudulent bookkeeping is on the verge of causing Gree USA to pay $1 million in taxes that it does not owe. (Id. ¶¶ 13-18.) The Lohs created fraudulent “offset” invoices, reflected as income in Gree USA’s books, that create the false impression that Gree USA was profitable in 2013. (Id. ¶¶ 11-13.) Because of the ongoing litigations and disputes between the parties, Gree USA has become insolvent. (Id., Andreu-Von Euw Decl., Exh. H, Loh Decl. ¶ 36.) Although MJC now opposes the appointment of a receiver, it was the one that originally suggested a receiver. (Id., Andreu-Von Euw Decl., Exhs. A-B.)

DEFENDANT’S OPPOSING PAPERS:

The motion should be denied because: (1) contrary to Hong Kong Gree’s baseless assertion that Gree USA cannot properly function, Gree USA continues to conduct business under the active management of MJC America and Jian Chen, Gree USA’s Chief Financial Officer and Hong Kong Gree’s representative, who have been working hand-in-hand to, among other things collect outstanding accounts receivable from Gree USA’s customers; (2) Gree USA is diligently working to collect outstanding accounts receivable from its customers, precluding any need for a receiver to help Gree USA collect its debts; (3) Gree USA has no pre-judgment interest obligations on any of the outstanding invoices at issue in this lawsuit; (4) Gree USA will not be required to pay any potential tax liability before March 17, 2014, because Jian Chen and Jimmy Loh recently agreed to file an extension for Gree USA’s 2013 tax returns until the conclusion of this action; and (5) Gree USA is not insolvent or in imminent danger of insolvency because, as the result of an offset of Gree USA’s accounts receivable in June 2013, Gree USA’s net worth is currently over $3 million.

Further, Plaintiff has not shown, and cannot show, irreparable harm because it has failed to offer any explanation regarding why it did not file this motion months ago, and it cannot point to a single harmful event that will occur if the motion is now denied.

PLAINTIFF’S REPLY PAPERS:

MJC’s opposition to Gree Hong Kong’s reasonable request for a receiver highlights the deadlock between Gree USA’s two owners: MJC and Gree Hong Kong. For example, MJC conveniently asserts that Gree USA does not need a receiver because “Gree USA continues to conduct business under the active management of MJC America Ltd.” That is the very reason that Gree USA needs a receiver. Gree USA is under the active management of MJC and has denied Gree USA’s majority owners the representation they are entitled to on the Board of Directors.

MJC’s related assertion that Gree Hong Kong “failed to offer any explanation regarding why it did not file this motion months ago” further highlights the deadlock between the parties. Gree Hong Kong did not expect to need judicial assistance because MJC feigned agreement to the appointment of a receiver and spent months negotiating the identity of that receiver.

MJC’s other arguments against a receiver also fails. There is no conflict between the appointment of a receiver and this litigation because the receiver would be asked to make decisions unrelated to the litigation and, in any event, the proposed order sets forth a procedure for either party to contest the receiver’s decision. Specifically, it requires the receiver to “give counsel for the parties in this action five (5) days’ notice [before making the payments to either party] in order to give them the opportunity to seek relief from this Court.” (See Proposed Order.)

Further, Gree USA can afford a receiver because a receiver will save the company more money than a receiver costs. Moreover, Gree USA’s tax extension is only for six months, not long enough for this litigation to be resolved; and the extension does not address Gree USA’s other business problems. Finally, MJC’s millions of dollars in improper offsets do not remedy Gree USA’s insolvency, which has been acknowledged by MJC’s principles.

THE COURT’S FINDINGS:

Under the circumstances of this case, i.e., disputes between the principal owners of Gree USA, it appears that it would be in the best interest of Gree USA to have a receiver, a third party neutral, to conduct the day-to-day business of Gree USA. Plaintiff has submitted evidence demonstrating that because of the ongoing litigations and disputes between the parties, Gree USA is not functioning as a viable business, and that Gree USA has become insolvent or is in danger of imminently becoming insolvent. (See Motion, Chen Decl.; Andreu-Von Euw Decl., Exh. H, Loh Decl. ¶ 36.) The evidence also demonstrates that MJC previously agreed that a receiver was necessary, but that the parties were unable to agree on the identity of the receiver. (Id., Andreu-Von Euw Decl., Exhs. C-E.)

APPOINTMENT OF A RECEIVER:

At the hearing on the application for appointment or confirmation of the receiver, each party may suggest in writing one or more persons for appointment or substitution as receiver, stating the reasons. Notwithstanding these suggestions, a party may object to the appointment or confirmation of a receiver. (CRC 3.1177.)

Gree Hong Kong proposes James Wong to be appointed as receiver. The court will hear from Defendants regarding their proposal at the hearing.

BOND:

Two separate bonds may be required:

Plaintiff’s bond (discretionary): Unlike ex parte appointments, there is no statutory requirement for a bond where a receiver is appointed on noticed motion. However, the court clearly has power to require a bond, and is likely to do so where the appointment, if erroneous, would damage the defendant.

Receiver’s bond: A receiver is required to post a bond before he or she enters upon performance of his or her duties. (CCP § 567.)

The court will also hear from the parties regarding the amount of the bond(s).