United States District Court, E.D. New York
OPINION AND ORDER
KUO United States Magistrate Judge
Dafeng Hengwei Textile Co., Ltd. (“Plaintiff”)
brought suit against corporate Defendants Aceco Industrial
& Commercial Corporation (“AIC”) and Aceco,
Inc. (“Aceco”) and individual Defendants David Z.
Liu (“Liu”) and Chan-Zhu Yu (“Yu”)
(together with Aceco and AIC, “Defendants”) in a
breach of contract action. (See Compl., Dkt. 1.) Plaintiff is
a Chinese corporation that manufactures textiles in the city
of Dafeng, China. From 2009 to 2012, it sold bedsheets to
Aceco, a company based in the United States. Aceco then
supplied the bedsheets to American retailers such as K-Mart.
(Tr. II at 79-81.)
in 2012, Aceco failed on multiple occasions to pay invoices
it owed to Plaintiff. Liu and Yu, on behalf of Aceco,
repeatedly promised Plaintiff that the invoices would be
paid, and based on these representations, Plaintiff continued
to ship its goods to Aceco customers. The last payment made
by Aceco to Plaintiff was on July 25, 2013. After 57 invoices
sent by Plaintiff to Aceco during 2012 and 2013 went unpaid,
Plaintiff brought this lawsuit on October 24, 2013.
extensive discovery, the parties cross-moved for summary
judgment. District Judge Margo K. Brodie denied
Defendants' motion and granted Plaintiff's motion
with regard to its breach-of-contract claim, holding that
Aceco and AIC owe Plaintiff $1, 977, 642.02, and dismissing
Defendants' counterclaims. In doing so, Judge Brodie
rejected Defendants' claim that payments made by Aceco to
Plaintiff in 2012 and 2013 satisfied the amounts due.
Defendants' counsel conceded at oral argument that these
payments were for previously incurred invoices,
leaving the 57 invoices at issue unpaid. On the question of
piercing the corporate veil, however, Judge Brodie denied
Plaintiff's Motion for Summary Judgment, finding genuine
issues of material fact.
parties consented to jurisdiction of the magistrate judge,
and a bench trial was held on June 13, 14, and 15 of 2016.
The sole issue at trial was whether Plaintiff can pierce the
corporate veil to collect the outstanding judgment directly
from Liu and Yu, Aceco's sole shareholders.
Findings of Fact 
Aceco, Inc. are New York corporations, incorporated in 1976
and 1989, respectively. According to Yu, Aceco owns AIC. (Tr.
I at 24.).
September 2012, Liu and Yu, who are married to each other,
have been the sole shareholders, directors, and officers of
Aceco. (Tr. I at 17.) Since 2013, they have also been
Aceco's only full-time employees. Yu is President, and
Liu is Vice-President for sales and quality control. (Tr. II
at 109.) By their own accounts, they control all of the
company's decisions, including what merchandise to
purchase, what payments to make to which vendors, and
bookkeeping. (Tr. I at 32- 33 & 37-38.) No evidence
was adduced at trial indicating any separate corporate
structure for AIC. Indeed, bank statements show that money
flowed freely between Aceco and AIC.
Yu testified that Aceco and AIC have no money and are unable
to pay not only the $1, 977, 642.02 judgment against Aceco
and AIC in this case, but also the judgment against Aceco in
another case in this district for $1, 066, 874.88, plus
disbursements, costs, and post-judgment
interest. Liu and Yu argue, however, that Aceco is
not technically insolvent because it has
“goodwill” and outstanding accounts receivable.
However, they concede that their self-valuation of
“goodwill” at two to three million dollars before
the lawsuit is no longer valid. (Tr. II at 9.) They have also
made no effort to collect any accounts receivable.
Money Paid by Aceco
at least 2009, money was transferred out of Aceco's bank
accounts to individuals and entities, with no legitimate
business purpose. Aceco made regular disbursements to pay off
personal loans taken out by Liu and Yu, as well as by their
friends. In addition, numerous payments went directly to
family and close friends, and to entities controlled by Yu
and Liu, their family and close friends. These payments
amount to hundreds of thousands of dollars, although the
exact total cannot be discerned because Defendants kept, or
at least produced during discovery and trial, records that
were incomplete and confusing.
Yu describe most of these payments from Aceco's funds as
repayment for the principal and interest on loans purportedly
made by these individuals or entities to Aceco. However, they
concede that there are no written loan agreements or
promissory notes supporting the existence of these alleged
loans. In the absence of such documentation, Liu and Yu rely
instead on a smattering of bank records, such as monthly
statements, checks, memo lines, and deposit slips. Some of
the fund transfers described at trial are discussed below.
Payments for Liu and Yu Personal Loan
2003, Liu and Yu took out a personal loan in the amount of
$498, 000.00. From January 2009 to January 2014, Aceco paid a
total of $217, 167.12 for the principal and interest on that
loan, of which $67, 642.08 was paid during the period when
Dafeng issued the 57 invoices which Aceco failed to pay
(i.e., July 10, 2012 to November 1, 2013).
(Pl.'s Exhs. 19, 19A.)
Yu were fully aware of these payments, but contend that Aceco
was paying back this loan because “Aceco is the one
that's utilizing, using the funds, the money.”
(Testimony of Liu: Tr. III at 68-69; Tr. II at 15.) However,
they produced no documentation of Aceco doing so. The only
documents they produced to support their contention that the
loan amount was given to Aceco for its use were a check dated
April 21, 2000 from Liu and Yu's joint bank account to
Aceco in the amount of $120, 000.00 (Defs.' Exh. D), and
two checks from Yu to Aceco, one dated September 27, 2012 for
$150, 000.00, and the other dated December 12, 2012 for $120,
000.00 (Defs.' Exh. G). These three checks were issued
several years before and after Liu and Yu took out the
personal loan, and in any event, they do not add up to $498,
000.00. Furthermore, in Aceco's tax return for 2012,
nothing close to this loan amount was listed as a shareholder
loan. Instead, amounts of $37, 500.00 and $46, 862.00 are
listed for shareholder loans at the beginning and end of
2012, respectively. (Pl.'s Exh. 8, Schedule L; Tr. III at
72-73.) By contrast, bank statements show that the
outstanding amount of the personal loan in July 2012 was
$295, 861.61, and in December 2012 was $281, 384.90.
(Pl.'s Exh. 19.) Liu and Yu failed to produce any
accounting of this alleged loan from them to Aceco, either
from their personal records or Aceco's corporate records.
Payments for Liu and Yu Home Equity Line of Credit
testified that he and Yu took out a personal home equity line
of credit (“HELOC”), although he could not
remember when they took out the HELOC, or even for what
amount. (Tr. II at 114, 127.) No documentation was introduced
at trial supporting the date, amount, or payment terms of the
claimed that he was paying approximately $400.00 or $420.00 a
month for interest on the HELOC, but he admitted, “If
I'm not around, if I'm on business, occasionally the
company would pay on our behalf, on my behalf.” (Tr.
III at 105.) Even when Liu himself made monthly interest
payments on the HELOC, Aceco would “reimburse”
him for those payments. (Tr. III at 106.) These payments were
“paid on so many occasions over so long a period”
that Liu could not even state how much Aceco paid. (Tr. III
tried to justify these payments from Aceco on the basis that
he and Yu gave the HELOC funds to Aceco. In support of this,
Liu presented a check in the amount of $168, 000.00 made out
to Aceco, signed by him, and dated October 20, 2008, along
with a deposit slip and receipt, both dated October 22, 2008.
(Defs.' Exh. C; Tr. II at 114-116.) The check does not
indicate from whose account the money is drawn, although Liu
claimed it was from the HELOC account. A handwritten notation
at the bottom of the photocopy of these three documents
states, “from Cici [Yu] & David's home equity
line loan to ACECO Inc.” However, the notation appears
to have been written after the fact, and is not credible
evidence justifying Aceco's repayment of the HELOC on
behalf of Liu and Yu.
Payments for Li and Tang Personal Loan
also made payments on a personal bank loan taken out by
former Aceco shareholder and employee Mo Dai Li and his wife
Qi-Kun Tang. (Li, along with Liu's brother, were the two
other original shareholders of Aceco.) Liu testified that he
was fully aware of these payments. (Tr. II at 15.) Li, who is
also a close personal friend of Liu and Yu, took out a
personal bank loan in 2003, together with Tang, in the amount
of $430, 000.00. (Tr. III at 122.) From January 2009 to
January 2014, Aceco paid $187, 513.39 for the principal and
interest on that loan, of which $58, 405.81 was paid from
July 10, 2012 to November 1, 2013. (Pl.'s Exhs. 20, 20A;
Tr. III at 121.) No documentation was presented in support of
Liu and Yu's contention that this loan was for the use of
Aceco. The sole evidence introduced at trial was a check
dated January 30, 2012 from Li and Tang's joint account
to Aceco in the amount of $80, 000.00. (Tr. II at 145;
Defs.' Exh. K, at Bates ...