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Shanghai Automation Instrument Co. Ltd. v. Kuei

November 19, 2001

SHANGHAI AUTOMATION INSTRUMENT CO. LTD. AND SHANGHAI MICROLINK ELECTRONIC CO., LTD., PLAINTIFFS,
v.
DENNIS KUEI, MATTHEW TSAI, AND MICROLINK DATA SYSTEM, INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Hamilton, District Judge

Chinese corporation moved for entry of default judgment in its conversion and fraud action against its joint venture partners. Adopting the report and recommendation of Chen, United States Magistrate Judge, the District Court, Hamilton, J., held that: (1) complaint stated claims against defaulting partner for conversion and breach of contract, and (2) no just reason existed for delaying entry of default judgment against defaulting partner, even though second partner had answered complaint. Motion granted.

ORDER ADOPTING MAGISTRATE JUDGE'S REPORT AND RECOMMENDATION

The court has reviewed Magistrate Judge Chen's November 2, 2001, Report and Recommendation Re: Plaintiff's Motion for Entry of default Judgment. No objections have been filed. The court finds the Report correct, well-reasoned and thorough, and adopts it in every respect. Accordingly, plaintiff's motion (Docket No. 47) is GRANTED. A separate judgment will be entered against defendants Dennis Kuei, Micro Link Systems, Inc., Microlink Data Systems, Inc., Cipher Instrument, Inc., and MIG, Inc. The remaining defendant, Matthew Tsai has filed a petition in bankruptcy and this matter is stayed as to him. IT IS SO ORDERED.

REPORT AND RECOMMENDATION RE: PLAINTIFFS' MOTION FOR ENTRY OF DEFAULT JUDGMENT (No. 47)

CHEN, United States Magistrate Judge

Before the Court is the motion by plaintiffs Shanghai Automation Instrument Co., Ltd. and Shanghai Microlink Electronic Co., Ltd. for entry of default judgment against Dennis Kuei, Microlink Data System, Inc., Micro Link Systems, Inc., Cipher Instrument, Inc., and Microlink International Group, Inc. For the below reasons, the Court recommends that this motion be granted and default judgment entered.

BACKGROUND

In May 1993, Shanghai Automation Instrument Co., Ltd. (hereinafter referred to "Shanghai Automation"), a company based in the People's Republic of China, orally agreed with Dennis Kuei, and Matthew Tsai, citizens and residents of the state of California, to enter into a joint venture (hereinafter referred to as the "Joint Venture"). (First Am. Compl. ¶ 15.) Shanghai Automation, Kuei and Tsai sought to assemble laptop computers in China for, inter alia, export to California. Id. Shanghai Automation contributed 75 percent of the initial costs of the Joint Venture and Kuei and Tsai contributed 25 percent. (First Am. Compl. ¶ 16.) Accordingly, Shanghai Automation was entitled to 75 percent of the profits of the Joint Venture, and Kuei and Tsai, the remaining 25 percent. Id.

On May 20, 1993, the parties reduced the oral agreement to enter the Joint Venture to a writing (hereinafter referred to *998 as the "JV Agreement."). (First Am. Compl. ¶ 18.) At the signing of the JV Agreement, Kuei and Tsai represented that they owned and/or controlled a company, Micro Link Systems, Inc. (hereinafter "Micro Link Systems"), and designated this company a party to the JV Agreement as well. Id.

Thereafter, the parties formed and registered in China, Shanghai Microlink Electronic Company, Ltd. (hereinafter referred to as "SMEC") to facilitate the goals of the Joint Venture. (First Am. Compl. ¶ 20.) Kuei was made Vice-Chairman of the Board of Directors of SMEC and Tsai, a director. (First Am. Compl. ¶ 24.)

With control of the daily operations of SMEC, Kuei and Tsai purchased laptop computer components exclusively from a Taiwanese corporation, Cypher Corporation (hereinafter referred to as "Cypher (Taiwan)"), manufactured the laptops in China and sold the laptops to Cipher Instrument, Inc. (hereinafter referred to as "Cipher (CA)"), a California corporation. (First Am. Compl. ¶¶ 25-26.) Unbeknownst to Shanghai Automation, these transactions were not arm's-length deals as Kuei and Tsai owned and controlled both Cypher (Taiwan) and Cipher (CA). Id. To further complicate matters, Kuei and Tsai directed SMEC to make payments to Microlink Data Systems, Inc. (hereinafter "Microlink Data"), a California corporation owned by Kuei and Tsai, for the laptop computer components purchased from Cypher (Taiwan). (First Am. Compl. ¶¶ 8, 13 and 25.) For the laptops sold to Cipher (CA), the Joint Venture received partial payment from Cipher (CA) and Microlink Data and from Tsai personally. (First Am. Compl. ¶ 26.)

In 1998, Kuei and Tsai entered into eight separate sales agreements for the Joint Venture's sale of 8,000 laptop computers to Cipher (CA). (First Am. Compl. ¶ 31.) At Kuei and Tsai's direction, the Joint Venture shipped 7,000 of the 8,000 laptops to Cipher (CA) and the remaining 1,000 to Solar Technology Limited, a Hong Kong corporation not alleged to be owned and controlled by defendants Kuei and Tsai. Id. Neither Cipher nor any other entity or individual made payment for the 7,000 laptops. Id.

On February 8, 1998, Kuei was arrested in China for alleged fraud in connection with a business venture and requested that Shanghai Automation make loans to Kuei in the total amount of $2,187,000.00. (First Am. Compl. ¶ 32.) Kuei represented to Shanghai Automation that, as long as he was in custody, he was not in a position to facilitate the repayment of the monies owed to the Joint Venture by "Microlink" *fn1 and Cipher (CA). Id. Shanghai Automation made personal loans to Kuei on July 12, August 6 and 9, October 8, 1999 and January 31, 2000, which he did not repay. Id.

Shanghai Automation also made loans, in the total amount of $1,190,000.00, to Kuei and Tsai based on their representations that they needed operating expenses for their "Microlink" companies. (First Am. Compl. ¶ 33.) Shanghai Automation made loans to Kuei and Tsai on October 16 and 17, 1996, July 16, 1997, February 24 and May 13, 1998, which were also not repaid. Id.

During the course of the Joint Venture, Kuei, Tsai and Shanghai Automation, as joint venturers, borrowed monies from the Commercial and Industrial Bank of China that were to be used for operating expenses for the Joint Venture. (First Am. Compl. ¶ 37.) These loans, in the amount *999 of $3,830,000.00, were guaranteed by Shanghai Automation. Id. The Joint Venture defaulted on these loans and Shanghai Automation currently faces liability as to these loans. Id.

On February 8, 2001, Shanghai Automation, on behalf of itself and SMEC, filed the Complaint herein against defendants Kuei, Tsai, Microlink Data, Micro Link Systems, Cipher (CA) and Microlink International Group, Inc., a California corporation purportedly owned and controlled by Kuei and Tsai (hereinafter referred to as "MIG, Inc."), alleging: conversion, fraud, intentional misrepresentation, fraudulent concealment, breach of fiduciary duty, breach of contract, unjust enrichment, breach of the implied covenant of good faith and fair dealing and tortious interference with contract. The Complaint was served on all defendants including all corporate entities who were served through the California Secretary of State as per Judge Hamilton's order.

On May 3, 2001, defendant Tsai, individually, filed an answer to the Complaint. The remaining defendants, however, failed to answer and on May 14, 2001, defaults were entered. Default was not entered against Tsai.

On June 1, 2001, in anticipation of this motion for entry of default judgment, eventually filed on July 6, 2001, Judge Hamilton referred this matter to the Court for a report and recommendation.

REPORT

Federal Rule of Civil Procedure 55(b)(2) permits the Court, following a defendant's default, to enter a final judgment in a case. There is no matter of right to the entry of a default judgment, and its entry is entirely within this Court's discretion. See Draper v. Coombs, 792 F.2d 915, 924 (9th Cir.1986); Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir.1980); Kloepping v. Fireman's Fund, No. C94-2684 TEH, 1996 WL 75314, *2 (N.D.Cal. Feb.13, 1996). This Court may find entry of a default judgment appropriate in consideration of, inter alia: [1] the sufficiency of the complaint and the merits of a plaintiff's substantive claims; [2] the possibility of prejudice if entry is denied; [3] the sum of money at stake; [4] the possibility of a dispute concerning material facts; [5] whether default was due to excusable neglect; and [6] the strong policy favoring decisions on the merits. See PepsiCo, Inc. v. Triunfo-Mex, Inc., 189 F.R.D. 431, 432 (C.D.Cal.1999) ("applying this discretionary standard, default judgments are more often granted than denied"), citing, Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir.1986); see also Board of Trustees of the Sheet Metal Workers v. Sawyer, No. C99-3225 VRW, 2000 WL 1006522, *1 (N.D.Cal. July 13, 2000).

The Court considered the pleadings and other papers filed with this motion for entry of default judgment as well as considered the arguments of counsel for the plaintiffs at hearings on the motion conducted on September 5 and 25, 2001. Defendants Kuei, Microlink Data, Micro Link Systems, Cipher (CA) and MIG, Inc. were served with both the Complaint and the current motion, yet failed to respond or enter any appearance in this case. (Basombrio Decl. ¶¶ 6-10, Ex. 5-9.)

The Complaint alleges, inter alia, that defendants Kuei, Microlink Data, Micro Link Systems, Cipher (CA) and MIG, Inc.: [1] wrongfully converted property; [2] intentionally misrepresented and intended to defraud Plaintiffs; [3] fraudulently concealed information from Plaintiffs; [4] breached fiduciary duties; [5] breached contracts; [6] unjustly enriched themselves; [7] breached the implied covenant of good faith and fair dealing; and [8] tortiously interfered with contracts. Some of the claims are brought on behalf *1000 of Shanghai Automation, while others are advanced on behalf of SMEC. Shanghai Automation seeks general and compensatory damages, in the amount of $25,507,000.00, general and compensatory damages on behalf of SMEC, in the amount of $6,100,000.00, and punitive damages, in the amount of $15,000,000.00.*fn2

Where, as here, a default has been entered, the factual allegations of the Complaint together with other competent evidence submitted must be taken as true. See TeleVideo Systems, Inc. v. Heidenthal, 826 F.2d 915, 917 (9th Cir.1987); Danning v. Lavine, 572 F.2d 1386, 1388 (9th Cir.1978). However, where less than all defendants have defaulted, the allegations are only true as to those defaulting defendants.

In a diversity case, absent a choice-of-law contractual provision and under California choice of law rules, the Court presumes California law to apply unless there exists a compelling reason to displace state law with the law of a foreign jurisdiction. See Browne v. McDonnell Douglas Corp., 504 F.Supp. 514, 517 (N.D.Cal.1980) (stating that a district court in California will apply California law, "unless it is shown that there is a compelling reason to displace forum law"); Hurtado v. Superior Court, 11 Cal.3d 574, 581, 114 Cal.Rptr. 106, 522 P.2d 666 (1974) (noting that generally a California court will apply California law unless a party invokes the law of a foreign jurisdiction). Given that the defendants are California citizens and corporations and the transactions were presumably centered in California, there is good reason to apply ...


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