Opinion
B293417
04-03-2020
P.T. DAYUP INDO, Plaintiff and Appellant, v. IMEX INDUSTRIES, INC., et al., Defendants and Respondents. IMEX INDUSTRIES, INC, Cross-complainant and Respondent, v. P.T. DAYUP INDO, Cross-defendant and Appellant.
Ropers, Majeski, Kohn & Bentley, Terry Anastassiou, Ernest E. Price, and Ivan L. Tjoe for Plaintiff, Cross-defendant and Appellant P.T. Dayup Indo. Bird, Marella, Boxer, Wolpert, Nessim, Drooks, Lincenberg & Rhow, Ekwan E. Rhow, Fanxi Wang and Kate S. Shin for Defendant, Cross-complainant and Respondent Imex Industries, Inc. and Defendants and Respondents Steve Hong and Andrew Hong.
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS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 This opinion has not been certified for publication or ordered published for purposes of rule 8.1115.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. BC569276) APPEAL from a judgment of the Superior Court of Los Angeles County, H. Chester Horn, Jr., Judge. Affirmed. Ropers, Majeski, Kohn & Bentley, Terry Anastassiou, Ernest E. Price, and Ivan L. Tjoe for Plaintiff, Cross-defendant and Appellant P.T. Dayup Indo. Bird, Marella, Boxer, Wolpert, Nessim, Drooks, Lincenberg & Rhow, Ekwan E. Rhow, Fanxi Wang and Kate S. Shin for Defendant, Cross-complainant and Respondent Imex Industries, Inc. and Defendants and Respondents Steve Hong and Andrew Hong.
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A jury awarded plaintiff and appellant P.T. Dayup Indo (Indo) more than $7.4 million in damages for breach of contract and fraud by defendant and respondent Imex Industries, Inc. (Imex). But the jury declined to find defendants and respondents Steve and Andrew Hong, who were Imex's principals, personally liable for fraud, and the trial court declined to apply the alter ego doctrine to make Steve Hong personally liable for the judgment against Imex. Indo challenges this decision and contends that Steve Hong should be personally liable under the alter ego and other doctrines. We affirm.
FACTS AND PROCEEDINGS BELOW
This case is the story of three men who worked closely together in the sporting goods industry for 25 years, but whose relationship broke down as the realities of their business changed. Y.G. Suk owned a company based in Seoul named Dayup Sports Corporation (Dayup Korea), which manufactured gloves for use in various sports. In the mid-1980's, Y.G. Suk met Steve Hong, who owned Imex, a sales and marketing company based in Southern California. The two began working together; Steve Hong marketed Y.G. Suk's factories to sporting goods companies in the United States, attempting to convince them to manufacture their gloves through Dayup Korea. The third central character in this case is U.C. Suk, the principal owner of Indo. In 1989, Y.G. Suk expanded Dayup Korea's operations by building a factory in Indonesia, which became Indo. He provided most of the start-up capital and placed his cousin U.C. Suk in charge.
The company later changed its name to Hole In One Golf Land Co., Ltd. and is listed as such in the complaint.
For the next two decades, the three men and their companies divided their work according to a system. Imex handled sales and marketing and maintained most of the direct relationships with sporting goods brands. Dayup Korea performed most of the research and design work for new gloves, and also produced the raw materials for gloves. The manufacturing of the gloves was divided: Indo handled the majority of the work, with Dayup Korea manufacturing the rest in factories it owned in China. Although the companies coordinated closely with one another, each maintained its own separate balance sheet, and the companies did not share profits and losses. Customers typically ordered gloves from Imex. Imex forwarded the purchase orders to Indo, and Indo ordered raw materials from Dayup Korea. Customers paid Imex, which took a commission and then paid Indo. Indo paid Dayup Korea for its materials.
The companies' most valuable customer by far was Nike, Inc. Nike began ordering from Imex in 1994, and by 2000, Nike accounted for a large majority of both Imex's and Indo's business. As early as the mid-2000's, Nike began communicating its discomfort with the group's business structure. In Nike's view, the requirement of sending purchase orders to Imex, which then forwarded the orders to Indo, added unnecessary complexity and expense. It also created a risk of disruption to Nike's supply chain if Imex failed to pay Indo, leaving Indo unable to continue manufacturing gloves. Until 2013, however, Imex, Indo, and Dayup Korea resisted Nike's suggestions and continued doing business as they always had done.
The relationship among the companies broke down during the summer of 2013. The parties disagree regarding the details of this time period. According to Indo, at a regular quarterly meeting in August 2013, Nike representatives told Jason Suk, the son of Indo's founder U.C. Suk, that Nike was mandating a factory-direct model for all of its suppliers. A Nike employee testified at a deposition that Nike's upper management issued a company-wide directive in 2013 to stop using sales agents. Indo had no choice but to cut Imex out of its role as sales and marketing agent.
Imex argues that Indo had been scheming to exclude Imex and Dayup Korea from the Nike business since late 2012, when U.C. Suk began agitating for Dayup Korea to transfer the title to the Indonesia factory to Indo. Prior to that point, Indo managed the factory and handled its profits and losses, but Dayup Korea owned the building. In January 2013, Dayup Korea transferred title to the factory to Indo. According to Imex, Indo threatened to withhold payments to Dayup Korea at a time when Dayup Korea was financially vulnerable, and made improper payments to two Dayup Korea employees who were involved in the decision to transfer the factory to Indo and later began working for Indo. With the title to the factory in its possession, Indo was then free to deal with Nike on its own. Imex suggests that Indo encouraged Nike to move to a factory-direct model, noting that prior to the quarterly Nike meeting, U.C. Suk sent an email to another client, Under Armour, in which Indo stated that it had already "decided to unleash the tie between [Indo] and Imex."
Dayup Korea sued Indo as part of this litigation, but it settled its claims before trial.
By October 2013, Imex had learned that Indo was planning to move forward without it. Andrew Hong, the second-in-command at Imex and the son of Steve Hong, called Jason Suk and accused Indo of attempting to exclude Imex from the Nike business. After a contentious conversation, the two agreed that Indo and Imex would "play fair and act professional with each other until whatever decision Nike makes at the end." Shortly afterward, Nike began placing a final series of 58 orders with Imex for approximately $6.5 million worth of gloves, to be delivered in the spring of 2014. Imex sent purchase orders to Indo, which began working on the gloves even as both sides attempted to woo Nike separately for future orders.
Imex faced an uphill battle in attempting to win Nike's future business. In 2012, Dayup Korea had closed the factories in China where Imex sometimes sent glove orders. This left Imex and Dayup Korea without access to a Nike-certified factory for manufacturing gloves. Imex proposed manufacturing gloves at a factory Dayup Korea owned in Cambodia, and went about seeking Nike certification for the factory.
Indo faced challenges of its own in satisfying Nike that it could handle all aspects of glove manufacturing in-house. Although Indo controlled the Nike-certified factory in Indonesia, the company had relatively little experience in sales and marketing, research and development, and sourcing raw materials. Indo argued that it could use two entities, known as MS Trading and Paksen, both owned by members of the Suk family, to handle these aspects of the business formerly controlled by Imex and Dayup Korea.
In the spring of 2014, Nike decided to do its future business with Indo, and by no later than late April, Imex knew that Nike would not certify the factory in Cambodia. Nike sent an email requesting that Imex and Indo "work together to define a mutually agreed upon transition date." Indo continued manufacturing the gloves Nike had ordered from Imex the previous fall, but grew concerned that Imex would not pay the amounts owed. In March, Imex sent an email promising payment. On May 12, 2014, Indo shipped the last order of gloves to Nike. The next day, Imex sent an email accusing Indo of "willful breach of contract" and stating that it had "been advised by legal counsel to refrain from any further action."
Less than two weeks later, Indo filed suit in federal court, accusing Imex of breach of contract, bad faith, and breach of fiduciary duty. The federal court dismissed the case for lack of jurisdiction, and Indo filed the same complaint in the trial court. Imex filed a cross-complaint against Indo, alleging causes of action for fraud, breach of fiduciary duty, and unfair competition.
In addition to Imex, Indo named Steve and Andrew Hong personally as defendants, as well as a company Andrew Hong owned called Genex Sports, Inc. (Genex). In November and December 2013, Imex transferred the accounts of several clients to Genex. In December 2016, Steve Hong paid Andrew Hong $1,200,000 in personal funds, which Andrew Hong then deposited with Genex. Steve Hong also attempted to shift half of a $12 million line of credit from Imex to Genex. The Hongs explained that Andrew Hong had originated the business with those clients several years ago, with the understanding that when Genex had established itself in the business, the accounts would be transferred to Genex. As for the direct payments and transfer of the line of credit, Steve Hong explained that he was simply trying to help his son with his business.
After Indo filed its suit, Imex paid approximately $1.5 million to Dayup Korea, and approximately $300,000 to other suppliers. Imex explained that these were funds that Indo owed for raw materials for the final Nike purchase orders. Imex also repaid approximately $2.5 million in bank loans that Steve Hong had personally guaranteed. Imex never paid Indo for the final set of purchase orders. Imex and Genex remained in business until 2017 but ultimately closed down, unable to remain profitable without Nike.
A jury found Imex liable for $6,422,181.90 in damages for breach of contract, plus $1,000,000 in additional damages for fraud and breach of fiduciary duty. The jury did not find either Steve or Andrew Hong personally liable on the allegation that they had acted with malice, oppression, or fraud. The jury also found in favor of Indo on Imex's cross-complaint.
Following the jury's verdict, the court considered the equitable issue of whether Steve Hong was personally liable as an alter ego of Imex. The court declined to find Steve Hong liable on this basis. The court initially found Steve Hong liable for the judgment against Imex on the basis that he testified that he had personally assumed Imex's liabilities. Steve Hong filed a motion asking the court to vacate the judgment against him on the ground that the judgment was based on a theory of successor liability, which Indo had not asserted at trial. The trial court agreed and reversed its prior decision as to Steve Hong.
DISCUSSION
Indo appeals the trial court's finding that Steve Hong was not personally liable for the judgment against Imex. Indo first contends that the trial court erred in refusing to hold Steve Hong liable as Imex's alter ego. Next, Indo contends that the court erred by declining to hold Steve Hong personally liable on a theory of successor liability. Finally, Indo contends that the court abused its discretion by refusing to hold Steve Hong personally liable on a theory of agency liability or as an additional judgment debtor under Code of Civil Procedure section 187. We find no merit in any of these contentions.
A. Alter Ego Liability
Indo contends that the trial court erred in refusing to impose alter ego liability on Steve Hong for the judgment against Imex. We disagree.
"Ordinarily, a corporation is regarded as a legal entity separate and distinct from its stockholders, officers and directors. Under the alter ego doctrine, however, where a corporation is used by an individual or individuals, or by another corporation, to perpetrate fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose, a court may disregard the corporate entity and treat the corporation's acts as if they were done by the persons actually controlling the corporation." (Communist Party v. 522 Valencia, Inc. (1995) 35 Cal.App.4th 980, 993 (Communist Party).)
The alter ego doctrine is based on equitable principles, and the trial court acts as fact finder. (Webber v. Inland Empire Investments, Inc. (1999) 74 Cal.App.4th 884, 908.) "Whether the evidence has established that the corporate veil should be ignored is primarily a question of fact which should not be disturbed when supported by substantial evidence." (Toho-Towa Co., Ltd. v. Morgan Creek Productions, Inc. (2013) 217 Cal.App.4th 1096, 1108 (Toho-Towa).) In other words, we may reverse only if we may say as a matter of law that Imex was the alter ego of Steve Hong.
"In general, the two requirements for applying the alter ego doctrine are that (1) there is such a unity of interest and ownership between the corporation and the individual or organization controlling it that their separate personalities no longer exist, and (2) failure to disregard the corporate entity would sanction a fraud or promote injustice." (Communist Party, supra, 35 Cal.App.4th at p. 993.) Indo argues that both requirements for alter ego liability were met. In particular, Indo argues that there was a unity of interest between Steve Hong and Imex because Steve Hong was the sole owner of Imex, he personally agreed to assume Imex's liabilities, and he diverted assets from Imex to Andrew Hong and to Genex.
We are not persuaded. Indo is correct that " ' "sole ownership of all of the stock in a corporation by one individual or the members of a family" ' " (Zoran Corp. v. Chen (2010) 185 Cal.App.4th 799, 811 (Zoran)) is a factor weighing in favor of alter ego liability, but it alone cannot justify the application of the doctrine. Instead, a party seeking to impose alter ego liability must ordinarily show that the sole owner of a corporation "failed to treat the corporation as a separate entity and instead continued to operate the business as a sole proprietorship." (Toho-Towa, supra, 217 Cal.App.4th at p. 1107.) Indo produced little evidence at trial that Steve Hong failed to treat Imex as a separate entity. There were a few instances where Steve Hong used his corporate credit card to pay for personal travel expenses, but these appear to have been occasional missteps suggesting carelessness, not wholesale disregard of the corporate form.
Nor did Steve Hong's trial testimony that he assumed the liabilities of Imex support imposing alter ego liability. During cross-examination, Indo's attorney asked about the status of Imex after it ceased doing business: "So, you assumed the assets and liabilities of Imex; correct, sir?" Steve Hong replied, "Yes." But this testimony took place in May 2018, a year after Imex ceased operations. Alter ego liability may be appropriate where an individual " ' "hold[s] out . . . that he is personally liable for the debts of the corporation." ' " (Zoran, supra, 185 Cal.App.4th at p. 811.) Indo presented no evidence that Steve Hong ever held himself out to Indo in this manner while Imex was still in business.
As to the transfers of assets from Imex to Genex, it is possible that these represented " ' "the diversion of assets from a corporation by or to a stockholder or other person or entity, to the detriment of creditors, or the manipulation of assets and liabilities between entities so as to concentrate the assets in one and the liabilities in another" ' " (Zoran, supra, 185 Cal.App.4th at p. 812), which might support the application of alter ego liability. But the trial court could have reasonably accepted the testimony of Steve and Andrew Hong that the client accounts were transferred from Imex to Genex as part of a prior agreement. According to this testimony, Andrew Hong had personally negotiated with these customers years earlier to convince them to do business with him, and he intended to service them within his own company, Genex. He allowed Imex to continue profiting from the accounts until Genex became strong enough to operate on its own. The $1.2 million in cash transfers came from Steve Hong personally, not from Imex. Steve Hong explained that he attempted to transfer $6 million in Imex's line of credit to Genex out of a desire to help his son establish his business. There is no evidence that this action materially weakened Imex's position—Imex's demise does not appear to have been caused by a lack of available credit.
Indo produced additional evidence that Imex, Genex, and the Hongs did not always maintain strict separation among themselves and their businesses—the companies operated from the same business address, and both of the Hongs often worked on behalf of both Imex and Genex. But to obtain a reversal on appeal, it is not enough for Indo to show that there was substantial evidence to support its preferred outcome. Instead, Indo must show that there was no substantial evidence to support the trial court's decision. The trial court concluded that "Indo has failed to show that the corporate form of Imex is so intertwined with Steve Hong that it is appropriate to disregard the corporate form and enter judgment against Hong personally." We cannot say as a matter of law that this conclusion was incorrect, and under this deferential standard of review applicable to this issue (see Toho-Towa, supra, 217 Cal.App.4th at p. 1108), we must affirm the trial court.
B. Successor Liability
The trial court initially found that Steve Hong was liable for Imex's judgment on a theory of successor liability. Steve Hong objected, and the trial court reversed its position, reasoning that Indo forfeited the issue by failing to plead and prove it at trial, and that in any case, Steve Hong was not a successor to Imex. Indo contends that the trial court was correct the first time, and that it erred by reversing itself.
We disagree. Indo's argument fails because Indo failed to plead and prove successor liability at trial. (Jacobs v. Coldwell Banker Residential Brokerage Co. (2017) 14 Cal.App.5th 438, 444-446 [no liability where defendant had no notice and opportunity to defend against the theory of liability].) Indo's argument also fails on the merits. "[S]uccessor liability is an equitable doctrine that applies when a purchasing corporation is merely a continuation of the selling corporation or the asset sale was fraudulently entered to escape debts and liabilities." (Brown Bark III, L.P. v. Haver (2013) 219 Cal.App.4th 809, 822.) The doctrine is not limited to corporations, but may apply even if the successor has a different legal status from the predecessor. (Cleveland v. Johnson (2012) 209 Cal.App.4th 1315, 1329.) We review the trial court's factual decisions on this issue for substantial evidence, and its interpretation of the law de novo. (See id. at pp. 1326-1328.) In this case, Steve Hong cannot be liable under a theory of successor liability because there is no evidence that he purchased assets from Imex, or that he continued Imex's prior business under his own name. Steve Hong testified that he took responsibility for Imex's debts, but this on its own is insufficient to make Steve Hong liable as a successor to Imex as long as he did not operate as a "continuation of the selling corporation." (Brown Bark III, L.P. v. Haver, supra, 219 Cal.App.4th at p. 822.)
C. Agency Liability
Indo contends that Steve Hong is liable for the judgment against Imex under what it describes as a theory of agency law, under which a corporate officer or director may be liable for his own tortious conduct committed when acting on behalf of the corporation. (See PMC, Inc. v. Kadisha (2000) 78 Cal.App.4th 1368, 1381 (PMC).) Indo argues that the trial court abused its discretion by failing to hold Steve Hong liable for the judgment on this basis.
Although "the rule imposing liability on an officer or director for participation in or authorization of tortious conduct has its roots in agency law" (PMC, supra, 78 Cal.App.4th at p. 1381), agency law does not provide a separate basis for liability distinct from tort law. It merely provides that an officer or director may not use his position as an agent of a corporation to escape liability for "personally direct[ing] or participat[ing] in . . . tortious conduct." (Frances T. v. Village Green Owners Assn. (1986) 42 Cal.3d 490, 504.) Like any other agent, a corporate officer or director is liable to a third party "[w]hen his acts are wrongful in their nature." (Civ. Code, § 2343.) Thus, "a corporate officer or director may be liable for an intentional tort" committed by the corporation at the officer or director's behest. (PMC, supra, 78 Cal.App.4th at p. 1372.)
Indo accused Steve Hong personally of one intentional tort, fraud. But the jury rejected Indo's argument. The special verdict form asked, "Do you find by clear and convincing evidence that Imex, Andrew Hong or Steve Hong acted intentionally with malice, oppression, or fraud?" The jury responded "yes," with respect to Imex, and "no," as to Andrew and Steve Hong. It imposed no punitive damages for fraud on any defendant. The jury's primary award of $6,422,181.90 was for damages "caused by Imex" and was apparently based on Imex's failure to perform on its contract with Indo, rather than any tort liability.
To hold Steve Hong personally liable would thus require overturning the jury's verdict. The trial court refused to do so and denied Indo's motion under Code of Civil Procedure section 663 to vacate the judgment. The court found that there was "no basis . . . to . . . make findings inconsistent with those made by the jury for the purpose[ ] of adding the Hongs to the judgment in this matter." We cannot say that the trial court erred in reaching this conclusion.
Indo argued for the first time in its reply brief on appeal that we should disregard the jury's finding regarding fraud because it was internally inconsistent: The jury could not reasonably find that Imex committed fraud, but that its sole shareholder and primary managers did not. Indo forfeited this argument by failing to raise it earlier. (See Neighbours v. Buzz Oates Enterprises (1990) 217 Cal.App.3d 325, 335, fn. 8 [" ' "points raised in the reply brief for the first time will not be considered, unless good reason is shown for failure to present them before" ' "].) Furthermore, even if we accept for the sake of argument that the jury's verdict was inconsistent, it does not follow that we must therefore find that Steve Hong is liable for fraud. It is equally possible to resolve the discrepancy in the opposite direction and conclude that none of the defendants were liable for fraud. Imex may have expected to be able to pay Indo back, but simply did not have enough money to do so.
D. Code of Civil Procedure section 187
Indo also contends that the trial court abused its discretion by failing to exercise its power under Code of Civil Procedure section 187 (section 187) to amend the judgment to include Steve Hong as a judgment debtor. Section 187 provides that when the trial court is exercising its jurisdiction, "if the course of proceeding be not specifically pointed out by this Code or the statute, any suitable process or mode of proceeding may be adopted which may appear most conformable to the spirit of this Code." (Ibid.) Courts have interpreted this statute as granting the trial court the authority to amend a judgment to add a new defendant. (Toho-Towa, supra, 217 Cal.App.4th at p. 1106.) Before exercising this authority and " 'thereby imposing liability on the new defendant without trial,' " two requirements must be met: " '(1) that the new party be the alter ego of the old party and (2) that the new party had controlled the litigation, thereby having had the opportunity to litigate, in order to satisfy due process concerns.' " (Ibid.) We review the trial court's decision on this issue for abuse of discretion. (Carolina Casualty Ins. Co. v. L.M. Ross Law Group, LLP (2012) 212 Cal.App.4th 1181, 1189 (Carolina Casualty).)
If a new defendant is not an alter ego of an existing defendant, courts have exercised their authority under section 187 only in rare instances, typically where the true defendant knowingly allowed the case to proceed under the wrong name. In Carr v. Barnabey's Hotel Corp. (1994) 23 Cal.App.4th 14, the plaintiff "sued the right party under the wrong name." (Id. at p. 20.) The defendant continued in the case all the way through trial without correcting the mistake, and several of the defendant's employees referred to the defendant by the incorrect name during trial. (Id. at p. 21.) The court held that the trial court properly exercised its authority under section 187 to substitute the correct name of the defendant in the judgment in place of the incorrect one. (Carr, supra, 23 Cal.App.4th at p. 23.) Similarly, in Carolina Casualty, the court upheld the trial court's exercise of authority under section 187 where the defendant misled the plaintiff and the trial court regarding the defendant's proper name. (Carolina Casualty, supra, 212 Cal.App.4th at pp. 1192-1193.)
As we have already seen, there was sufficient evidence to support the trial court's conclusion that Imex was not an alter ego of Steve Hong. And there is no evidence that anyone associated with the defendants misled Indo or the court about the identity or ownership status of Imex or any other defendant. The trial court did not abuse its discretion by refusing to exercise its authority under section 187 to add Steve Hong as a judgment debtor.
DISPOSITION
The judgment of the trial court is affirmed. Respondents are awarded their costs on appeal.
NOT TO BE PUBLISHED.
ROTHSCHILD, P. J. We concur:
CHANEY, J.
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.