The motion was not fully submitted until late November.
The Present Motions
China National now moves to dismiss the action pursuant to Fed. R. Civ. P. 12(b)(2) for lack of personal jurisdiction. Plaintiffs oppose the motion and, in the alternative, seek to strike China National's jurisdictional defense and deem certain facts established as a discovery sanction pursuant to Fed. R. Civ. P. 37 on the ground that China National failed to comply with this Court's August 14, 1995 discovery order.
Plaintiffs, as noted, contend that the Court has jurisdiction over China National on the theory, among others, that China America and China National are alter egos. Since China America undeniably is present in New York, establishment of the alter ego theory would mandate the conclusion that China National also is present here and subject to jurisdiction under N.Y. CPLR § 301. Volkswagenwerk AG v. Beech Aircraft Corp., 751 F.2d 117, 120 (2d Cir. 1984). In consequence, plaintiffs set out to prove that China America in substance is simply a department of China National.
On March 24, 1995, plaintiffs served an amended Rule 34 request, item 27 of which sought production of "all correspondence, documents, communications between China National and China Silk America, Inc. relating to business in New York in 1988, 1989, 1990 and 1994 to the present." (Emphasis added) On May 25, 1995, Zhou Ji, manager of China National's Enterprise Administration Department and a lawyer, testified that China National had no such correspondence. (Ji Dep. 51, 10-11) With the exception of some circulars, notices and the like and, ultimately, certain loan agreements, it produced no written communications between itself and China America. (Barra Reply Aff. PP 8-9)
Discovery disputes concerning this and other matters ensued during the spring and summer of 1995, requiring the intervention of the Court. The specific issue of item 27 came before the Court on August 14, 1995, when plaintiffs' counsel castigated China National for allegedly withholding documents, arguing at length that it was inconceivable that there would be no correspondence between the parent and its New York subsidiary, which does over $ 2 million in sales. (Tr., Aug. 14, 1995, at 4-8) Counsel for China National took great umbrage at the accusation and flatly represented to the Court that there was "no question" that all documents sought by the March 24, 1995 request had been produced. (Id. at 9) In view of that representation as well as China National's statement that it had no objection "in principle," and without making any finding as to compliance or lack thereof, the Court directed China National to produce all documents sought by the request and to provide a sworn certification that it had done so. (Id. at 11-12; Order, Aug. 14, 1995) The sworn certification thereafter was provided. (Barra Aff. Ex. 1)
There can be no serious doubt that regular business correspondence between China National and China America exists and has not been produced. Plaintiffs manifestly are right in suggesting that it boggles the mind to suppose that it does not, particularly given the close relationship between the two companies that is revealed even by the incomplete record before the Court.
But common sense inference is not the sole basis for the conclusion that there is correspondence that has not been produced. There are other indicators, the most important of which is the fact that telephone records for 1994 ultimately produced by China America pursuant to subpoena reveal approximately fifty fax transmissions
from China America's New York fax machine to two fax machines at China National in Beijing. (Barra Reply Aff. P 10 & Ex. 5) Yet China National neither has produced the faxes nor explained their absence.
Hence, the faxes and almost certainly other correspondence have been withheld. The question is whether the withholding was proper.
The Court acknowledges that item 27, by virtue of the inclusion of the words "relating to business in New York," is not as broad or, perhaps, as clear as it might have been. At a minimum, however, it called for correspondence and other documents between China National and China America concerning business activities in New York, irrespective of by whom conducted. But the affidavit of China National's counsel demonstrates that the defendant placed a far more restrictive interpretation on item 27. Indeed, defendant's may have gone so far as taking the position that since, in China National's view, it does no business in New York, any correspondence with its New York-based subsidiary by definition does not "relate to business in New York."
Given its crabbed interpretation of the document request, it is not surprising that defendant produced no correspondence between itself and its New York-based company. The question is whether the interpretation and consequent withholding of documents is sanctionable. The Court concludes that it is on this record.
China National and its counsel were fully aware early in the litigation that the nature and quality of the relationship between China National and China America potentially was dispositive of the jurisdictional defense raised by China National. (E.g., Tr., June 7, 1995, at 11, 13, 17; Tr., Aug. 14, 1995, at 14-15, 17-19) Indeed, in ruling on an application by China America to quash a subpoena, the Court noted:
"The plaintiff is trying to prove that the defendant and China Silk [i.e., China America] are alter egos, that the corporate form had been and should be disregarded by the court and so on, and therefore it stands to reason that a good deal of material concerning the internal functioning of those companies, and indeed to some degree, financial relationships among them, may well be relevant to that point." (Tr., June 7, 1995, at 17)