SUPERIOR COURT OF CALIFORNIA

COUNTY OF SANTA CLARA

IN RE: NEWCO MATERIALS TECHNOLOGY, INC.

Case No. 18CV340037

TENTATIVE RULING RE: MOTION TO APPOINT RECEIVER

The above-entitled action comes on for hearing before the Honorable Thomas E. Kuhnle on April 19, 2019, at 11:00 a.m. in Department 5. The Court now issues its tentative ruling as follows:

I. INTRODUCTION
II.
On December 20, 2018, Newco Materials Technology, Inc. (“Newco”), a California corporation, filed a Petition for Judicial Supervision of Winding Up of Corporation (the “Petition”). The Petition asserts that on August 13, 2018, Newco filed a certificate with the California Secretary of State stating that Newco’s board of directors had elected to wind up its affairs and voluntarily dissolve. The Petition seeks court supervision of the winding up of Newco, and in conjunction with winding up, Newco now seeks appointment of a receiver.

III. APPLICABLE LAW
IV.
Newco filed the Petition pursuant to Corporations Code section 1904. Corporations Code sections 1803, 1805 and 1904 authorize appointment of a receiver. Appointment is authorized when “the court has reasonable grounds to believe that unless a receiver of the corporation is appointed the interests of the corporation and its shareholders will suffer pending the hearing and determination of the complaint. . . .” (Corps. Code § 1803.)

Appointment of a receiver, in turn, is governed by section 564 et seq. of the Code of Civil Procedure. Under some circumstances appointment of a receiver has been described as “harsh, time-consuming, expensive and potentially unjust. . . .” (Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial ¶ 9:743 (The Rutter Group 2018) p. 9(II) 86.) As noted above, however, the appointment of a receiver to wind up a corporation is mandated under certain circumstances. The challenge is to ensure the circumstances set forth under Corporations Code section 1803 are met, and that the duties of the receiver are sufficiently circumscribed so that only necessary costs are incurred.

V. DISCUSSION
VI.
The Court is familiar with the related shareholder derivative action. In that action the two respondents here – Howard Cho and Steve LaCombe (“Respondents”) – have alleged various claims against Kumkang Quartz Co., Ltd. (“Kumkang”), Quartz Materials Co., Ltd. (“Quartz”), Kumkang’s CEO Chang-Kil Kim, and Young-Yup Kim, a director of Newco and President of Newco Taiwan, a subsidiary wholly-owned by Newco. Kumkang and Quartz together own 70% of the shares in Newco, and Kumkang is a significant creditor of Newco. Newco’s four founders, including Respondents, collectively own 30% of Newco’s shares.

Newco argues that the clash between Mr. Cho and certain members of Newco’s board of directors necessitates appointment of a receiver. Newco further argues that appointing a receiver would avoid tainting the winding up process, since many of the key players may have actual or potential conflicts of interest. Kumkang, for example, is both a shareholder and a creditor. In arguing against winding up Newco, Respondents states, with passion, that winding up Newco would be Kumkang’s final act in pillaging Newco for the benefit of Kumkang, Quartz, and their shareholders and executives.

This environment is rendered even more challenging by the fact that neither Newco nor Newco Taiwan have prepared accountings for quite some time. While Respondents argue that Newco is thriving and should not be wound up, Kumkang alleges Newco is foundering. In the shareholder derivative action Kumkang has accused Mr. Cho of refusing to allow an inspection of Newco’s books and records to cast light on the status of Newco’s finances.

In light of the intractable conflicts between the parties, and to protect the assets of Newco, the Court ORDERS that a receiver be appointed. The Court is not prepared, however, to “decree a winding up and dissolution of the corporation” at this time. (Corps. Code § 1804.) Instead, as a first step, the receiver shall immediately review, verify, and/or prepare an accounting of Newco’s finances. The receiver shall have full access to Newco’s books, records, ledgers, receipts and accounts. If needed, the receiver may retain a certified accountant. After completing that work, which the Court is hopeful can be done by June 30, 2019, the receiver shall report back to the Court with recommendations on whether Newco should be wound up, and if so, what the next steps should be. If Newco is profitable, it may not serve the best interests of Newco, creditors, or shareholders to wind it up. If Newco is not profitable, it may be best to wind it up before additional losses are incurred. After reviewing the receiver’s accountings and recommendations, the parties will have the opportunity to brief whether or not the Court should order that Newco be wound up or, alternatively, whether the receiver should be relieved of his or her duties.

The Court further ORDERS that Newco personnel, including Mr. Cho, not interfere with the activities of the receiver. To ensure the receiver can complete his work, Newco personnel must cooperate with the receiver and provide him or her with any materials and/or information the receiver requests. The receiver shall immediately report to the Court any interference with the exercise of his or her powers. Violation of this order may be punished through contempt proceedings, which may result in fines and/or imprisonment.

The scope of the receiver’s accountings shall not extend to Newco Taiwan. The Court views Newco Taiwan as an asset of Newco, and understands an accounting for it is currently being prepared. If Newco is wound up, presumably Newco Taiwan will be sold to a highest bidder and the proceeds will be distributed to creditors and shareholders.

Newco shall pay the fees and expenses incurred by the receiver. If Newco has insufficient funds to make such payments, Kumkang and Quartz shall pay the receiver, subject to recoupment if Newco is liquidated and there are sufficient assets to repay shareholders.

Newco submitted the name and resume of Mohamed Poonja to serve as receiver. Mr. Poonja appears qualified to serve. Respondents did not object to Mr. Poonja. The Court is inclined to appoint Mr. Poonja as receiver. The Court ORDERS the parties to meet and confer to prepare a final appointment order that specifies: (1) Mr. Poonja’s hourly rate; (2) the rates of any other person who may perform work; (3) whether Mr. Poonja should be represented by an attorney for this appointment and if so, who the attorney should be; (4) the process through which the parties will review Mr. Poonja’s statements of services and submit any objections; (5) whether Mr. Poonja can and should purchase insurance for liabilities arising from his services; and (6) any other provisions the parties believe will be helpful or important for ensuring Mr. Poonja will serve the best interests of the parties, Newco and the Court. Kumkang and Quartz shall prepare a final draft of the appointment order and submit it to the Court on or before May 3, 2019, along with objections, if any, made by other parties.

The Court will prepare the final order if this tentative ruling is not contested.