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Dafeng Hengwei Textile Co., Ltd. v. Aceco Industrial & Commercial Corp.

United States District Court, E.D. New York

March 30, 2017

ACECO INDUSTRIAL & COMMERCIAL CORPORATION, ACECO, INC., DAVID LIU a/k/a DAVID Z. LIU a/k/a ZUOWEI LIU, and CHAN-ZHU YU a/k/a CEE CEE YU, individually, and as agents of Aceco Industrial & Commercial Corporation and Aceco, Inc., Defendants.


          PEGGY KUO United States Magistrate Judge

         Plaintiff 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[1] at 79-81.)

         Beginning 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.

         After 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.

         The 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.


         I. Findings of Fact [2]

         A. Corporate Background

         AIC and Aceco, Inc. are New York corporations, incorporated in 1976 and 1989, respectively. According to Yu, Aceco owns AIC. (Tr. I at 24.).

         Since 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.[3] (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.

         Liu and 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.[4] 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.

         B. Money Paid by Aceco

         Since 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.

         Liu and 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.

         1. Payments for Liu and Yu Personal Loan

         In 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.)

         Liu and 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.

         2. Payments for Liu and Yu Home Equity Line of Credit

         Liu 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 alleged HELOC.

         Liu 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 at 107.)

         Liu 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.

         3. Payments for Li and Tang Personal Loan

         Aceco 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 ...

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