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East West Stone, LLC, A California Limited Liability Company, et al v. Wei Shao

November 28, 2011

EAST WEST STONE, LLC, A CALIFORNIA LIMITED LIABILITY COMPANY, ET AL., PLAINTIFFS,
v.
WEI SHAO, ALSO KNOWN AS RAYMOND SHAO, AN INDIVIDUAL, ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Hon. Dana M. Sabraw United States District Judge

ORDER GRANTING IN PART AND DENYING IN PART DEFENDANT WEI SHAO'S MOTION TO DISMISS [Docket No. 19]

This case comes before the Court on Defendant Wei Shao's motion to dismiss. Plaintiff John Kennedy filed an opposition to the motion, and Defendant Shao filed a reply. For the reasons discussed below, the Court grants in part and denies in part Defendant's motion.

I. BACKGROUND

Plaintiff John Kennedy has been in the masonry business since 1985. In January 2005, one of Kennedy's former employees, Rob Pastor, introduced him to Defendant Wei Shao. Kennedy and Shao discussed the possibility of a joint venture involving the importation of stone from Eastern Asia for distribution to stone dealers and distributors in the United States.

In March 2005, Kennedy sent one of his managers to China with Shao to attend a stone show and stone quarry. Shao acted as a translator on the trip, during which the manager spent a great deal of time educating Shao on stone quality, type and appearance. Later that month, Kennedy purchased Chinese stone through Shao. The stone arrived in May and June 2005. Kennedy alleges some of the stone was marketable, but much of it was not. As a result, Kennedy traveled to China to meet with Shao.

During that trip, Kennedy and Shao traveled to stone quarries and stone producers, and Kennedy demonstrated to Shao what quality, types and colors of stone would be marketable in the United States. Kennedy received a second shipment of stone from Shao in September 2005, which was of much better quality than the first shipment. Kennedy and Shao continued discussing the possibility of a joint venture, and in early 2006 they began the process of forming East West Stone, LLC. ("EWS").

EWS was formally established on May 9, 2006, pursuant to an Operating Agreement ("EWS Operating Agreement"). (See First Am. Compl., Ex. 1.) The members of EWS were Kennedy, Shao and Rob Pastor. In December 2010, Kennedy bought Mr. Pastor's interest in the company, leaving only Kennedy and Shao as members.

According to Kennedy, Shao was to run the Chinese operations and purchase high quality stone for EWS at the best costs available from various producers in China. Payment for the stone was to be at cost through Defendant Keynor Asia & I/E Co., Ltd., a company owned and operated by Shao and his wife. Shao and Keynor would then ship the stone to EWS in California. Kennedy and Pastor would then sell the stone to dealers and distributors. Kennedy alleges that he and Shao agreed that Keynor would received a three percent commission on the cost of the stone to pay for administration, shipping and handling.

EWS began selling stone products in May 2006, and the business appeared to be taking off. However, Kennedy continued to receive a great deal of unmarketable, commercially worthless material from Shao. In January 2007, EWS opened a warehouse in China to better control quality. Shao was responsible for running the warehouse and monitoring the quality of the products shipped to California.

Nevertheless, Kennedy continued receiving poor quality materials from Shao. When Kennedy inquired about the poor quality and high costs of the warehouse, Shao offered numerous explanations. Because of the language barrier, Kennedy relied on Shao's explanations and information.

In March 2008, Kennedy went to China to meet with Shao regarding the continued problems with the quality of the products. Kennedy found the warehouse stocked with bad material, and when he asked Shao about the materials, Shao offered additional explanations.

Over the next two years, Shao and Keynor raised the prices on the stone products from China, but the quality of the products declined. Delivery time of shipments increased, and Shao began demanding full payment before he could ship any products. Shao also demanded an increase in the commission paid to Keynor, from three percent to five percent.

In March 2011, Kennedy made another trip to China to investigate Shao's operations. During that trip, he discovered that Shao's explanations of product quality, price, payment policies and shipping procedures were untrue. He also discovered that Shao had not been making timely payments to stone producers in China, but was instead holding on to the money for several months after the material was delivered.

As a result, Kennedy and EWS filed the present case against Shao and Keynor alleging claims for breach of fiduciary duty, fraud, breach of contract, unjust enrichment, violation of California Corporations Code ยง 17106, accounting, constructive trust and unfair competition. Plaintiffs filed a First Amended Complaint on September 9, 2011, alleging the same claims and explaining that Kennedy was pursuing most of those claims derivatively on behalf of EWS. In response to the First Amended Complaint, Shao filed the present ...


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