Filed 9/15/20 Nantong Tongyu Drawnwork etc. v. Gao CA2/7
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
SECOND APPELLATE DISTRICT
DIVISION SEVEN
NANTONG TONGYU DRAWNWORK PRODUCTS CO. LTD et al.,
Plaintiffs and Respondents,
v.
LIQUI GAO et al.,
Defendants and Appellants.
B287171
(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 Zhang 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
2.
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.
3. Plaintiffs’ Claims
4.
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.
The second amended complaint alleged Gao, Derek and Eric were alter egos of Pacirim and had intentionally undercapitalized Pacirim by, among other things, transferring assets improperly from Pacirim to defeat the collection efforts of Pacirim’s creditors.
5. Evidence at Trial
6.
a. Breach of contract and alter ego claims
b.
Prior to trial the parties stipulated Pacirim had breached contracts with each plaintiff and collectively owed plaintiffs approximately $4.1 million. 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.
c. The fraudulent transfer of $1.4 million to Eric
d.
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, plaintiffs argued, 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. Defendants 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’s account 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.
7. The Trial Court’s Decision in Favor of Plaintiffs
8.
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 Property did 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, plus costs, prejudgment and post-judgment interest, against Eric.
DISCUSSION
The Trial Court Did Not Err by Denying the Motion for Judgment on the Pleadings
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 separateness between the individual defendants and the corporate entities resulted in the corporate entities serving as the alter-ego[s] for the individual defendant[s].” Pacirim was not named as a defendant but was included in the definition of “corporate entities.”
Belatedly recognizing in their reply brief that the original complaint had not named Pacirim as a defendant, defendants argued the automatic stay nonetheless barred the complaint because creditors do not have standing to sue a bankruptcy debtor’s alter ego while the bankruptcy stay is in effect. Defendants also argued the alleged fraudulently transferred assets were property of the bankruptcy estate and, therefore, plaintiffs did not have standing to assert that claim.
In opposition to the motion plaintiffs argued the bankruptcy stay did not apply to this action because the original complaint had not named Pacirim as a defendant. Regardless, plaintiffs contended, the stay was lifted on April 16, 2012, six days after the complaint was filed. Thus, any violation had been cured with the filing of the amended and second amended complaints, both filed after the bankruptcy stay had been lifted.
During argument the court admonished defendants’ attorney for the delay in filing the motion for judgment on the pleadings (almost five years after the complaint had been filed) and for reserving the bulk of defendants’ argument for their reply brief. The court took the matter under advisement and ultimately denied the motion.
e. Standard of review
f.
“‘A judgment on the pleadings in favor of the defendant is appropriate when the complaint fails to allege facts sufficient to state a cause of action. [Citation.] A motion for judgment on the pleadings is equivalent to a demurrer and is governed by the same de novo standard of review.’ [Citation.] ‘All properly pleaded, material facts are deemed true, but not contentions, deductions, or conclusions of fact or law. . . .’ [Citation.] Courts may consider judicially noticeable matters in the motion as well.” (People ex rel. Harris v. Pac Anchor Transportation, Inc. (2014) 59 Cal.4th 772, 777.)
g. Governing law
h.
“Upon the filing of a bankruptcy proceeding, federal bankruptcy law imposes an automatic stay on all state and federal proceedings outside the bankruptcy court against the debtor and the debtor’s property. (11 U.S.C. § 362(a)(1) & (a)(2); citation omitted.) . . . ‘The automatic stay is self-executing and is effective upon filing the bankruptcy petition. (See 11 U.S.C. § 362(a).)’ [Citation.] Section 362(a)(3), title 11 of the United States Code provides for an automatic stay of ‘any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.’” (Shaoxing County Huayue Import & Export v. Bhaumik (2011) 191 Cal.App.4th 1189, 1196 (Shaoxing).)
“The bankruptcy estate includes all of the debtor’s legal and equitable interests in property as of the commencement of the case. (11 U.S.C. § 541(a)(1).) The scope of section 541 is broad and ‘property’ includes causes of action.” (Haley v. Dow Lewis Motors, Inc. (1999) 72 Cal.App.4th 497, 503-504.) “‘Under the Bankruptcy Code the trustee stands in the shoes of the bankrupt corporation and has standing to bring any suit that the bankrupt corporation could have instituted had it not petitioned for bankruptcy.’” (Shaoxing, supra,191 Cal.App.4th at p. 1197.) On the other hand, “[a] bankruptcy trustee has no standing to sue third parties on behalf of the estate’s creditors, but may assert only claims held by the bankrupt entity.” (Ibid.) “‘When the trustee does have standing to assert a debtor’s claim, that standing is exclusive and divests all creditors of the power to bring the claim.’” (Ibid., citing Ahcom, Ltd. v. Smeding (9th Cir. 2010) 623 F.3d 1248, 1250.)
In determining whether a claim belongs to the debtor, which the trustee has standing to assert, or to a creditor, which the trustee is barred from asserting, “the focus of the inquiry is on whether the Trustee is seeking to redress injuries to the debtor itself caused by the defendants’ alleged conduct. [Citation.] If the debtor suffered an injury, the trustee has standing to pursue a claim seeking to rectify such injury. But, “[w]hen a third party has injured not the bankrupt corporation itself but a creditor of that corporation, the trustee in bankruptcy cannot bring suit against the third party.”’” (Shaoxing, supra, 191 Cal.App.4th at p. 1197.)
“‘[S]tate law determines whether a claim belongs to the trustee or to the creditor.’” (Shaoxing, supra, 191 Cal.App.4th at p. 1197; accord, Ahcom, Ltd. v. Smeding, supra, 623 F.3d at p. 1250.)
i. Pacirim’s bankruptcy did not prohibit plaintiffs’ complaint
j.
While the parties do not clearly distinguish between them, there are two separate components of bankruptcy law at issue here: whether plaintiffs’ causes of action were subject to the automatic stay, and whether the bankruptcy trustee had exclusive standing to bring the claims.
Regarding the first issue, defendants acknowledge the original complaint did not name Pacirim as a defendant. Nonetheless, defendants argue the automatic stay barred the complaint because the “original complaint is pled in such a way that Pacirim is meant to stand in the shoes of Defendants, so that their assets and activities are so intertwined that it is as if they are one and the same.” Defendants have not identified any authority for the proposition that an allegation an individual is an alter ego of a debtor must be treated as a claim against the debtor subject to the automatic stay. To the contrary, when a plaintiff alleges a bankrupt corporation breached a contract and seeks to hold individual defendants personally liable for the breach under an alter ego theory, there is no violation of the automatic stay. (Shaoxing, supra, 191 Cal.App.4th at p. 1199 [“[i]n this case, Shaoxing alleged Bhaumik was liable as ITC’s alter ego with respect to money that ITC owed for breach of contract and common counts. . . . We hold that . . . the action was not subject to the automatic stay of the bankruptcy proceedings”].) In this case, the original complaint does not allege plaintiffs had a contract with Pacirim, nor does it allege Pacirim breached an obligation to plaintiffs or is directly liable to them in any way. Accordingly, the automatic stay was not applicable to the breach of contract cause of action.
As to the second issue, as discussed, a bankruptcy trustee has exclusive standing to bring claims only when injury to the corporation has been alleged. Turning first to the breach of contract cause of action, the complaint did not allege Pacirim had been injured by the breach such that Pacirim would have a claim against the individual defendants. Accordingly, the breach of contract cause of action did not belong to the trustee, but rather was properly brought by plaintiffs.
The other causes of action alleged may have been the property of the bankruptcy trustee. Specifically, to the extent the fraudulent transfer claim sought to set aside transfers of Pacirim’s assets or recover Pacirim’s property, such a claim belonged exclusively to the chapter 7 bankruptcy trustee during the pendency of the bankruptcy case. (See Shaoxing, supra, 191 Cal.App.4th at p. 1199; Brenelli Amedeo, S.P.A. v. Bakara Furniture, Inc. (1994) 29 Cal.App.4th 1828, 1842.) However, the bankruptcy court closed the case on April 16, 2012, six days after the original complaint had been filed, thereby permitting plaintiffs’ lawsuit to proceed; and the first amended complaint was filed three months after that. Thus, even if some causes of action in the original complaint were theoretically subject to stay or dismissal during the first week of the litigation, by the time the defendants moved for judgment on the pleadings, plaintiffs’ breach of contract and fraudulent transfer causes of action were properly before the superior court. (Brenelli Amadeo, at p. 1843 [“any protection from the automatic stay from prepetition claims against the debtor or its property is terminated once property is no longer property of the bankruptcy estate and the case is closed”].) Indeed, defendants do not suggest there was any impropriety in amending the complaint to add Pacirim or causes of action seeking recovery of Pacirim’s fraudulently transferred assets after the bankruptcy proceedings ended and the automatic stay had been lifted. Accordingly, any lack of standing plaintiffs may have had was fully cured long before the motion for judgment on the pleadings.
9. Defendants’ Substantial Evidence Challenge Fails
10.
Standard of review
“‘“In general, in reviewing a judgment based upon a statement of decision following a bench trial, ‘any conflict in the evidence or reasonable inferences to be drawn from the facts will be resolved in support of the determination of the trial court decision. [Citations.]’ [Citation.] In a substantial evidence challenge to a judgment, the appellate court will ‘consider all of the evidence in the light most favorable to the prevailing party, giving it the benefit of every reasonable inference, and resolving conflicts in support of the [findings]. [Citations.]’ [Citation.] We may not reweigh the evidence and are bound by the trial court’s credibility determinations. [Citations.] Moreover, findings of fact are liberally construed to support the judgment.”’” (Tribeca Companies, LLC v. First American Title Ins. Co. (2015) 239 Cal.App.4th 1088, 1102; accord, Sav-On Drug Stores, Inc. v. Superior Court (2004) 34 Cal.4th 319, 334 [“‘questions as to the weight and sufficiency of the evidence, the construction to be put upon it, the inferences to be drawn therefrom, the credibility of witnesses . . . and the determination of [any] conflicts and inconsistencies in their testimony are matters for the trial court to resolve’”]; Western States Petroleum Assn. v. Superior Court (1995) 9 Cal.4th 559, 571 [“‘[w]hen two or more inferences can be reasonably deduced from the facts, the reviewing court is without power to substitute its deductions for those of the trial court’”]; Harry Carian Sales v. Agricultural Labor Relations Bd. (1985) 39 Cal.3d 209, 220 [“findings based on the credibility of witnesses will not be disturbed unless the testimony is ‘incredible or inherently improbable’”].)
It is an appellant’s affirmative burden to demonstrate the trial court’s findings were not supported by substantial evidence. (Garlock Sealing Technologies, LLC v. NAK Sealing Technologies Corp. (2007) 148 Cal.App.4th 937, 951; accord, Mani Brothers Real Estate Group v. City of Los Angeles (2007) 153 Cal.App.4th 1385, 1402 [“[a]s with all substantial evidence issues, an appellant challenging the evidence must lay out the evidence favorable to the other side and show why it is lacking. A reviewing court need not independently review the record to make up for an appellant’s failure to carry this burden”].)
We review the trial court’s statutory interpretations and legal conclusions de novo. (In re Tobacco II Cases (2009) 46 Cal.4th 298, 311 [questions of statutory interpretation are pure matters of law that we review de novo]; Smith v. Selma Community Hospital (2008) 164 Cal.App.4th 1478, 1515 [whether facts found by trial court are legally sufficient to support judgment subject to de novo review]; ASP Properties Group, L.P. v. Fard, Inc. (2005) 133 Cal.App.4th 1257, 1266 [“‘[t]o the extent the trial court drew conclusions of law based upon its findings of fact, we review those conclusions of law de novo’”].)
k. Governing law
l.
The California Uniform Fraudulent Transfer Act (UFTA) (Civ. Code, § 3439 et seq.) “permits defrauded creditors to reach property in the hands of a transferee.” (Mejia v. Reed (2003) 31 Cal.4th 657, 663; see Lo v. Lee (2018) 24 Cal.App.5th 1065, 1071.) “A fraudulent conveyance is a transfer by the debtor of property to a third person undertaken with the intent to prevent a creditor from reaching that interest to satisfy its claim.” (Yaesu Electronics Corp. v. Tamura (1994) 28 Cal.App.4th 8, 13.) The purpose of the fraudulent transfer statute is “‘to prevent debtors from placing property which legitimately should be available for the satisfaction of demands of creditors beyond their reach . . . .’” (Chichester v. Mason (1941) 43 Cal.App.2d 577, 584.)
The elements of a fraudulent conveyance are set forth in section 3439.04, subdivision (a): “A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation as follows: [¶] (1) With actual intent to hinder, delay, or defraud any creditor of the debtor. [¶] (2) Without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor either: [¶] (A) Was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction. [¶] (B) Intended to incur, or believed or reasonably should have believed that he or she would incur, debts beyond his or her ability to pay as they became due.” “[A] transfer is fraudulent if the provisions of either subdivision (a) or subdivision (b) are satisfied.” (Annod Corp. v. Hamilton & Samuels (2002) 100 Cal.App.4th 1286, 1294.) A creditor who has been damaged by a fraudulent transfer can set the transfer or the subsequent transfer aside or seek other appropriate relief under section 3439.07. (Monastra v. Konica Business Machines, U.S.A., Inc. (1996) 43 Cal.App.4th 1628, 1635-1636.)
Whether a transfer was fraudulent is a question of fact, and the burden is on the creditor to establish fraudulent intent by a preponderance of the evidence. (Annod Corp. v. Hamilton & Samuels, supra, 100 Cal.App.4th at pp. 1293-1294; Whitehouse v. Six Corp. (1995) 40 Cal.App.4th 527, 533.) Because intent is rarely susceptible of direct proof, “‘[p]roof of fraudulent intent often consists of “inferences from the circumstances surrounding the transaction.”’” (Annod Corp., at p. 1298.) Section 3439.04, subdivision (b), lists 11 factors courts may consider in determining the existence of actual intent to hinder, delay or defraud. However, “these factors do not create a mathematical formula to establish actual intent. There is no minimum number of factors that must be present before the scales tip in favor of [a] finding of actual intent to defraud. This list of factors is meant to provide guidance to the trial court, not to compel a finding one way or the other.” (Filip v. Bucurenciu (2005) 129 Cal.App.4th 825, 834.)
m. Defendants have not carried their burden to show the fraudulent transfer finding regarding the China property was not supported by substantial evidence
n.
Defendants argue the evidence was insufficient to support the court’s fraudulent transfer finding regarding the China property because there was no evidence any of the defendants, including Pacirim, possessed the requisite intent to hinder, delay or defraud at the time funds were transferred to Yakang and then Nantong in 2006. But the court found the 2008 transfer of the China property to Airui Zhang was fraudulent, not the 2006 fund transfers.
As the statement of decision explained, the only issue related to the China property disputed by defendants at trial was whether Pacirim had owned the property. Plaintiffs had not alleged the 2006 transfers were fraudulent. The trial court relied on evidence regarding the 2006 transfers only to establish Pacirim’s ownership of the property, a finding defendants do not challenge on appeal.
11. Defendants’ Remaining Arguments Have Been Forfeited
12.
Defendants raise several additional arguments in support of their contention the fraudulent transfer finding regarding the China property was error. They contend the court applied an incorrect standard of proof, the claim was barred by the statute of limitations and the equitable defenses of unclean hands and waiver barred plaintiffs’ recovery. None of these arguments was raised in the trial court. Accordingly, each is forfeited. (See Rubinstein v. Fakheri (2020) 49 Cal.App.5th 797, 808 [“[a]lthough Fakheri asserted the statute of limitations as an affirmative defense in his answer, he did not raise it at trial. We decline to consider an argument that Fakheri did not make below”]; Federal Deposit Ins. Corp. v. Dintino (2008) 167 Cal.App.4th 333, 355 [defense of unclean hands forfeited if not raised in trial court proceedings]; In re Riva M. (1991) 235 Cal.App.3d 403, 411 [failure to object to incorrect standard of proof in trial court results in forfeiture on appeal]; see also Sea & Sage Audubon Society, Inc. v. Planning Com. (1983) 34 Cal.3d 412, 417 [issues not raised in trial court cannot be raised for the first time on appeal].)
DISPOSITION
The amended judgment is affirmed. Plaintiffs are to recover their costs on appeal.
PERLUSS, P. J.
We concur:
SEGAL, J.
DILLON, J.*