Opinion
05 Civ. 3766 (NRB).
August 9, 2006
MEMORANDUM AND ORDER
Shanghai Join Buy Co., Ltd. ("Shanghai" or "plaintiff") filed this diversity action on April 13, 2005 against defendants Chun Pao Leng a/k/a Pilot Leng ("Leng"), Leng's wife, Sung Pang ("Pang"), and three of Leng's corporations: PSTEX Group, Inc. ("PSTEX"), Pacific Sourcing, Corp. ("Pacific"), and Khaki Sports, Inc. ("Khaki") (collectively, "defendants"). Plaintiff seeks to hold all defendants liable for an unsatisfied judgment entered by this Court for breach of contract on November 3, 2004 against PSTEX in the amount of $2,940,118.85. Pursuant to Fed.R.Civ.P. 56, plaintiff now moves for partial summary judgment on its claim to pierce PSTEX's corporate veil and hold Leng personally liable for the judgment already awarded against PSTEX. Leng has appeared pro se, submitting only an affidavit in response to this motion. For the reasons set forth below, plaintiff's motion is granted.
See Shanghai Join Buy Co., Ltd. v. PSTEX Group, Inc., 04 Civ. 4449 (NRB), 2004 WL 2471432 (S.D.N.Y. Nov. 1, 2004) ("Shanghai I").
BACKGROUND
Except where indicated, there are no genuine issues regarding the following facts. Because Leng has not contradicted plaintiff's submissions, the facts in this section are drawn from those facts in plaintiff's Memorandum of Law in Support of Plaintiff's Motion for Partial Summary Judgment ("Pl. Mem.") and its accompanying appendices ("Pl. App."), and plaintiff's Statement Pursuant to Local Rule 56.1 ("R. 56.1 Stmt.") and its accompanying exhibits ("Pl. Ex."), which are supported by evidence in the record.
This Court has previously issued an opinion in a breach of contract case involving the same parties and the same underlying facts. See Shanghai I. Consequently, we assume familiarity with this earlier opinion and focus only on facts relevant to the motion before us.
Defendant Leng at all relevant times has been the sole owner, officer, director and shareholder of PSTEX, a women's knitwear clothing manufacturing and sales company incorporated in New York, which currently is in the process of being dissolved. Pl. Ex. E at 13-15; Pl. Ex. J at 21, 28-30. Plaintiff asserts that Leng alone made all managerial decisions for PSTEX. Pl. Ex. E at 29-30. Leng also was sole owner, officer, director and shareholder of Pacific and Khaki, two other similarly oriented New York corporations, before he sold them in 2004 to satisfy an overseas debt. Pl. Ex. E at 45-48, 82-84; Pl. Ex. J at 51-53, 63-68. Indeed, all three companies shared a common office space. Although Leng claims that PSTEX board and shareholder meetings were held, he was unable to produce minutes for any such meetings. Additionally, there are discrepancies between PSTEX's financial statements and Leng's testimony regarding the existing number of shares of PSTEX stock.
Plaintiff alleges that in the lawsuit Z-Tex, Inc., et ano v. PSTEX Group, Inc., et al., Supreme Court of New York, New York County, Index No. 601009-00, "Leng signed and submitted a sworn affidavit dated July 10, 2002 that disavowed having any ownership in PSTEX." Pl. Mem. at 3. However, at his deposition in this action, Leng averred that those statements were false. Pl. Ex. J at 39. It therefore is undisputed that Leng at all times has been the sole stockholder of PSTEX.
In response to this assertion, Leng contends that he was "responsible for implementing the will of the corporation." Def. Aff. ¶ 9. While this comment does not directly address Leng's managerial authority over PSTEX, Leng also does not offer any evidence that anyone else was in a managerial position at PSTEX. Therefore, it remains undisputed that only Leng made managerial decisions for PSTEX.
Though corporate documents list Pacific as being incorporated in the state of Delaware, Pacific is in fact a New York corporation. See Pl. Ex. J at 61-62; Pl. Ex. P at 1; Pl. Ex. Q at 1-2.
PSTEX leased an office at 1410 Broadway, Unit 1205, New York, New York. Leng testified that Pacific held its annual board meetings on the twelfth floor of that location, and that Khaki held its annual board meetings in Unit 1205. Pl. Ex. O; Pl. Ex. J at 59, 66.
Leng claims that his attorney took minutes at corporate board of directors meetings but that he could not produce the minutes because he was unable to retrieve them from his attorney. Def. Aff. ¶ 9. Given the other evidence presented to this Court to decide the motion at hand, the issue of whether board meetings were or were not actually held is not decisive.
PSTEX's financial statements dated December 31, 2001 list ten outstanding shares of PSTEX stock. However, Leng testified that two hundred stock shares were authorized, all of which were issued to him on April 15, 2001. Pl. Ex. L at 3; Pl. Ex. X; Pl. Ex. J at 28-35.
The record is replete with evidence about the capitalization of PSTEX. Though Leng testified that PSTEX did "$28 million a year" in business, Pl. Ex. E at 233, PSTEX was capitalized in 2001 with $500,000. Id. at 21. Moreover, PSTEX's only bank accounts at the end of 2003, when PSTEX agreed to pay Shanghai for its outstanding debt, indicate year-end balances of $384.10 at ICBC Bank and $12.98 at Chase Manhattan Bank. Pl. Ex. G; Pl. Ex. H.
Shanghai presents many undisputed explanations for PSTEX's level of capitalization, which it describes as inadequate. First, Leng did not have a personal bank account and instead withdrew funds from PSTEX's corporate accounts for his personal use. R. 56.1 Stmt. ¶ 20; Pl. Ex. E. at 163-65. On numerous occasions, Leng borrowed funds from PSTEX and his other corporations in the form of interest-free loans which he never repaid. For example, PSTEX's financial statements for 2001 contain a note representing a $71,069 loan "extended to shareholders," a designation that only refers to Leng, and specifying that "[t]hese loans bear no interest." Pl. Ex. L at 7. PSTEX's bookkeeping records also contain multiple entries for money "DUE FROM-Pilot." Pl. Ex. I. In fact, Leng admitted that he borrowed at least $66,000 from PSTEX which was never repaid. Pl. Ex. J at 132-3. However, records indicate that the amount borrowed was much larger. PSTEX made payments to Leng's attorney for personal legal services that totaled over $43,000, Pl. Ex. J at 131-32, and issued checks to Leng, checks to cash, and cash payments designated as loans to Leng that totaled several hundred thousand dollars. See Pl. Apps. B, C. Leng does not have a written agreement with PSTEX that allows for personal loans. See Pl. Ex. E. at 87-89; Pl. Ex. J at 105-06.
Leng uses the pseudonym "Pilot."
Additional records show substantial personal loans from Pacific to Leng. A balance sheet for Pacific dated December 31, 2003 indicates that Leng owed Pacific $261,664.88, the sum of: $100,000 "due from shareholder," $45,921.32 "due from Pilot," and $115,743.56 also "due from Pilot" but entered under an "other assets" category. Pl. Ex. T.
In addition to issuing PSTEX corporate funds directly to himself, Leng also dispersed funds for other uses unrelated to PSTEX's business. PSTEX funds were put toward payments to his wife Pang, car lease payments for Leng's personal car, charitable donations, and a personal loan to Leng's friend. Furthermore, Shanghai alleges that PSTEX's bank statements document large, unexplained transfers of funds out of PSTEX's accounts in the months leading up to Leng's December 2003 written agreement to satisfy PSTEX's debt to plaintiff. These transfers are not recorded in PSTEX's corporate ledger, and total over $200,000. See Pl. Mem. at 7.
Though Pang never worked for PSTEX, she received payments from PSTEX totaling $87,424.60, approximately half of which was issued in 2003. See Pl. App. D.
PSTEX paid at least $38,421 toward the lease on Leng's car. See Pl. App. E.
PSTEX donated a total of $44,750 to charity. Of this amount, $25,000 was donated to Leng's Chinese Temple two months before Leng agreed in writing to honor Shanghai's judgment against PSTEX. Pl. Ex. J at 137-38.
On September 26, 2003, PSTEX issued a payment of $19,369 to San Chin Yom, Leng's personal friend. Pl. Ex. J at pp. 138-39.
Leng did not explain these transfers and accounting discrepancies in his reply to plaintiff's motion.
Further contributing to the state of PSTEX's capitalization, Leng moved assets freely among his three corporations. For example, in 2002 and 2003, PSTEX loaned Pacific a total of $163,680. See Pl. App. F. Like Leng's personal borrowing, at least some portion of these inter-corporation loans were interest-free. Pl. Ex. L at 7. The corporate records for all three companies contain inconsistent entries for these payments and loans among the companies.
For example, Khaki's balance sheet for 2003 indicates that PSTEX owed Khaki $458,842.74, see Pl. Ex. U at 1, while PSTEX's balance sheet for the same period indicates that PSTEX owed Khaki only $264,060.29 and also owed Pacific $1,996,016.70. See Pl. Ex. S.
In addition to loans among the companies, the financial practices of Leng's businesses make it difficult to distinguish among the corporations. For example, in 2002 Leng prepared financial statements for PSTEX that characterized Pacific as a "wholly owned subsidiary" of PSTEX when the companies actually were not consolidated. See Pl. Ex. R at 6; Pl. Ex. J at 90. In addition, Pacific and Khaki paid PSTEX's debts when PSTEX's accounts were frozen in 2002 and 2003 due to a personal judgment against Leng. Leng testified at his depositions that he would arrange for Pacific to collect money owed to PSTEX and then pay PSTEX's debts with that money. Pl. Ex. E at 223-24; Pl. Ex. J at 95-97. Furthermore, Leng testified that PSTEX paid his salary for services performed as executive officer of all three corporations. Pl. Ex. J at 178-79.
Leng was deposed on December 10, 2004 as part of the enforcement proceeding following the judgment in the earlier action against PSTEX. Leng was deposed again on October 20, 2005 as part of the instant action.
Leng also stated that when PSTEX had insufficient funds to pay its American Express bill of $102,121.78, Leng himself paid the debt from his personal funds. Def. Aff. ¶ 13.
Procedural History
On June 14, 2004, Shanghai filed its first complaint against PSTEX in this Court, alleging breach of contract. On August 25, 2004, Shanghai filed a motion for summary judgment, which this Court granted on November 1, 2004. Subsequently judgment was entered for Shanghai in the amount of $2,940,118.85.
Shanghai filed a second complaint against PSTEX on April 13, 2005 with Leng, Pang, Pacific, and Khaki as additional defendants. The complaint contains three counts and corresponding requests for relief. Count One alleges that plaintiff should be allowed to pierce the corporate veil and hold Leng and each of the defendant corporations jointly and severally liable for the judgment against PSTEX because Leng abused the corporate form and PSTEX essentially was his alter ego. Count Two asserts that plaintiff should be allowed to collect the judgment against PSTEX from Pang, Pacific, and Khaki because they received fraudulent conveyances from PSTEX. Count Three asserts that plaintiff should be allowed to collect reasonable attorney's fees from the recipients.
On February 9, 2006 Shanghai made the instant motion for partial summary judgment on its request to pierce the corporate veil of PSTEX.
DISCUSSION
I. Standard of Review
A motion for summary judgment must be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); see also Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). The trial court's duty "is confined at this point to issue-finding; it does not extend to issue-resolution."Gallo v. Prudential Residential Servs. Ltd. P'ship, 22 F.3d 1219, 1224 (2d Cir. 1994).
In deciding a motion for summary judgment, the evidence submitted must be viewed in the light most favorable to the nonmoving party. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). Even if parties dispute material facts, summary judgment must be granted "unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party." Golden Pacific Bancorp. v. F.D.I.C., 375 F.3d 196, 200 (2d Cir. 2004) (quoting Anderson, 477 U.S. at 249) (internal quotation marks omitted); see also Anderson, 477 U.S. at 248 ("Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment."). In addition, once the moving party has made a sufficient showing that there is not a material issue of fact, the burden shifts to the nonmoving party to produce "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e). "The non-moving party may not rely on mere conclusory allegations nor speculation, but instead must offer some hard evidence showing that its version of the events is not wholly fanciful." Golden Pacific Bancorp., 375 F.3d at 200 (quoting D'Amico v. City of New York, 132 F.3d 145, 149 (2d Cir. 1998)).
II. Piercing the Corporate Veil
Under New York law, courts find that "when a corporation is used by an individual to accomplish his own and not the corporation's business, such a controlling shareholder may be held liable for the corporation's commercial dealings as well as for its negligent acts." William Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir. 1991) (citing Walkovszky v. Carlton, 18 N.Y.2d 414, 417, 276 N.Y.S.2d 585, 587 (N.Y. 1966)). The analysis of whether to pierce the veil is highly fact-specific and therefore not formulated in a definite test. See Morris v. New York State Dep't of Taxation Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 810-11 (N.Y. 1993). In fact, disregarding corporate independence is a remedy that "differs with the circumstances of each case."American Protein Corp. v. AB Volvo, 844 F.2d 56, 60 (2d Cir. 1988). Generally, however, a party seeking to pierce a corporate veil must make a two-part showing: (1) "that the owner exercised complete domination over the corporation with respect to the transaction at issue;" and (2) "that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil." American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997) (citing Morris, 82 N.Y.2d at 141, 603 N.Y.S.2d at 811); Thrift Drug, Inc. v. Universal Prescription Administrators, 131 F.3d 95, 97 (2d Cir. 1997). The corporate veil will be pierced only when the corporate form has been used "to achieve fraud, or when the corporation has been so dominated by an individual or another corporation . . . and its separate identity so disregarded, that it primarily transacted the dominator's business rather than its own and can be called the other's alter ego." Bridgestone/Firestone v. Recovery Credit Servs., 98 F.3d 13, 17-18 (2d Cir. 1996) (quoting Gartner v. Snyder, 607 F.2d 582, 586 (2d Cir. 1979)) (internal quotation marks omitted).
Since this is a diversity action, the Court applies the choice of law rules of the forum state of New York. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496-97 (1941);Lazard Freres Co. v. Protective Life Ins. Co., 108 F.3d 1531, 1538-39 (2d Cir. 1997). New York choice of law principles set forth that the law of the state of incorporation governs attempts to pierce the corporate veil. See Fletcher v. Atex, Inc., 68 F.3d 1451, 1456 (2d Cir. 1995). PSTEX was incorporated under New York law and therefore the Court applies New York law in deciding whether to pierce the corporate veil.
In determining whether the first requirement of the two-part showing has been met, courts consider a list of factors that indicate whether a defendant corporation was dominated:
(1) [T]he absence of formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporations as if it were its own.Passalacqua, 933 F.2d at 139.
Applying the Passalacqua factors, it is evident that Leng completely dominated PSTEX and that its separate identity was disregarded. With regard to the first Passalacqua factor, Leng ran PSTEX without any concern for business formalities, as clearly illustrated by incomplete corporate records fraught with inconsistencies and the absence of any records or minutes of corporate meetings. As to the second factor, Leng's constant movement of funds out of PSTEX's accounts led to inadequate capitalization. With respect to the third factor, though some PSTEX funds allocated to Leng are unexplained, it is undeniable that payments toward Leng's car, to Leng's wife Pang, and to Leng's Chinese temple are funds "taken out of the corporation for personal rather than corporate purposes." Id. Concerning the fourth factor, Leng was fully responsible for the corporation as sole owner, officer, and director of PSTEX, which also enabled him to utilize PSTEX funds personally. As for the fifth factor, Leng's three corporations shared a common office space. In addition, relating to the seventh Passalacqua factor, Leng managed his three businesses such that they lost any semblance of corporate independence and did not engage in arms length transactions. PSTEX, Pacific and Khaki repeatedly issued such large loans to each other that it is difficult to establish the extent to which each corporation actually was capitalized. As such, the three corporations were not treated as independent profit centers, which is the focus of the eighth Passalacqua factor. This situation was further exacerbated when, as is the concern of the ninth Passalacqua factor, Leng arranged for Pacific and Khaki to collect funds for PSTEX and then pay PSTEX's debts in 2002 and 2003.
Leng attempts to justify these loans, stating in part that "I was an executive officer of PSTex, and I worked awfully hard to keep the company afloat," Def. Aff. ¶ 12, and that "there were lengthy periods of time when I worked without salary." Def. Aff. ¶ 13. We note that had this money been taken as salary, it would have been taxed.
We note that Leng offers no evidence in his response which contradicts the evidence submitted by Shanghai. While Leng often attempts to justify his business practices, ultimately he is unable to mitigate the strength of the evidence proving his complete domination. In short, in the absence of evidentiary support for his conclusory arguments that PSTEX adhered to corporate formalities, see Def. Aff. ¶ 9, his "statements are not sufficient to satisfy [his] burden of coming forward with evidence directed to specific facts showing that there is a genuine issue for trial." West-Fair Elec. Contractors v. Aetna Cas. Sur. Co., 78 F.3d 61, 63 (2d Cir. 1996) (internal quotation marks and citation omitted). In sum, the testamentary and documentary evidence put forth by Shanghai is sufficient to show that Leng completely controlled PSTEX and treated the corporation as his alter ego.
For example, Leng attempts to argue that documentation in PSTEX's accounting ledger of loans made to Leng "clearly show[s] that all formalities were strictly adhered to." Def. Aff. ¶ 11. This argument is unavailing, as documentation does not nullify the underlying abuse.
We also find that Shanghai has satisfied the second requirement of the bipartite test necessary to pierce the corporate veil, "that the owner, through [his] domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against [the party seeking to pierce the corporate veil] such that a court in equity will intervene." Morris, 82 N.Y.2d at 142, 603 N.Y.S.2d at 811. Shanghai argues that Leng used his control over PSTEX to perpetrate a wrong against Shanghai by draining PSTEX of its corporate assets so that it could not satisfy its contractual obligation to Shanghai and the later judgment that resulted when PSTEX breached that contractual obligation. Corporate records document large amounts of money exiting PSTEX accounts from April 2001 until June 2004, a time during which Leng clearly was aware of his financial obligation to Shanghai. As described above, some of these transfers of funds went unexplained on the corporate ledger. Moreover, Leng's excuses for PSTEX's unsatisfied obligation are irrelevant. Leng argues that the overriding cause of PSTEX's financial failure was the bankruptcy of an outside company that owed PSTEX a large sum of money. However, it is clear from PSTEX's accounting records that prior to Leng's improper withdrawals, PSTEX had sufficient funds at least to make a good faith effort to repay Shanghai. "Under New York law, the diversion of funds to make a corporation judgmentproof constitutes a wrong for the purposes of determining whether the corporate veil should be pierced." JSC Foreign Econ. Ass'n Technostroyexport v. Int'l Dev. and Trade Servs., Inc., et al., 386 F. Supp. 2d 461, 476 (S.D.N.Y. 2005) (citing Godwin Realty Assocs. v. CATV Enters., Inc., 275 A.D.2d 269, 270, 712 N.Y.S.2d 39, 41 (N.Y. 2000). Therefore, Leng's complete control of PSTEX did in fact result in harm toward Shanghai.
See Def. Aff. ¶ 14.
Accordingly, we find that Shanghai has made a sufficient showing that (1) Leng completely dominated PSTEX, and (2) that this complete domination resulted in a wrong toward Shanghai. Therefore, as a matter of law we find that it is appropriate to pierce the corporate veil of PSTEX and hold Leng personally responsible for the judgment against PSTEX.