MercAsia USA, LTD v. Zhu et al
Filing
192
OPINION AND ORDER: The Court DENIES MercAsia's motion to seal 173 and GRANTS MercAsia's motion for leave to amend and supplement its first amended complaint 174 . The Court DIRECTS the Clerk to unseal docket entries 174, 174- 1, and 17 4-2 as well as docket entries 175 and 175-1. Docket entries 175-2, 175-3, and 175-4 will remain sealed for the time being and will be unsealed if neither party files a new motion to seal within fourteen (14) days of the date of this order. The Court further DIRECTS the Clerk to file MercAsia's attached First Supplemental Complaint as a separate docket entry (DE 174-1). Signed by Chief Judge Jon E DeGuilio on 3/24/2022. (rmf)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
SOUTH BEND DIVISION
MERCASIA USA LTD,
Plaintiff,
v.
Case No. 3:17-CV-718 JD
3BTECH, INC.,
Defendant.
OPINION AND ORDER
Plaintiff MercAsia USA has moved the Court for leave to amend and supplement its first
amended complaint to add former defendant Jianqing “Johnny” Zhu back into the proceedings as
a co-defendant with current Defendant 3BTech, Inc. (DE 174.) The Court previously dismissed
Mr. Zhu from the case after it found that MercAsia’s amended complaint did not contain
sufficient allegations to pierce 3BTech’s corporate veil and proceed against Mr. Zhu as an
individual. (DE 46.) MercAsia claims that it has now compiled enough information through
discovery to warrant placing Mr. Zhu back into the lawsuit in his individual capacity. MercAsia
has additionally moved to seal its filings related to its motion to amend and supplement. For the
following reasons, the Court denies MercAsia’s motion to seal and grants MercAsia’s request for
leave to file its supplemental complaint.
I. Factual Background
This lawsuit at its core is based on MercAsia’s allegations that 3BTech is fraudulently
infringing on a patent licensed to MercAsia. But in the approximately three and a half years this
case has been pending, most of the parties’ time and effort has been put not into the merits of the
claims but instead into a long and contentious discovery process. While there are still several
motions pending tied to discovery disputes, MercAsia’s motion to file its supplemental
complaint indicates the parties may now be ready to finally advance this case to a consideration
of the merits of the underlying claims and bring the lawsuit closer to a resolution.
Plaintiff MercAsia is an Illinois corporation that markets a “one-touch, luxury wine
aerator” product that makes use of patented technology licensed to MercAsia. (DE 27 at 1, 3.)
Defendant 3BTech is an Indiana corporation that has allegedly marketed its own wine aerator,
called the Waerator, that uses the same patented technology licensed to MercAsia and has
attempted to steer consumers away from MercAsia’s product in favor of its own. 3BTech
allegedly uses a number of other corporate identities to sell and service the Waerator product,
including corporate entities named Better Choice Online and Warranty Pro. An additional
corporate entity, Zake IP Holdings, LLC, allegedly holds the trademark for the Waerator. Each
of these entities is allegedly connected to 3BTech and is allegedly controlled to some extent by
Mr. Zhu, who is 3BTech’s president. Mr. Zhu has also allegedly been involved in creating and
operating several other corporate entities in Indiana, some of which MercAsia believes have also
played a role in fraudulently infringing on its aerator technology patent. (Id. at 2.)
When MercAsia originally brought this lawsuit, it named both 3BTech and Mr. Zhu as
defendants. But Mr. Zhu quickly moved to dismiss the claims against him because he argued that
MercAsia had failed to allege facts that would justify piercing 3BTech’s corporate veil and
holding him individually liable for the patent infringement and misrepresentations. The Court
agreed with Mr. Zhu and dismissed the claims against him in a 2017 order. (DE 46.) The case
then proceeded with 3BTech as the sole defendant.
As already mentioned, progress in this case has been slow since that time. Both MercAsia
and 3BTech have traded numerous filings during discovery alleging bad faith litigation tactics,
2
misrepresentations, and failures to comply with discovery requirements. MercAsia filed two
different motions to compel discovery (DE 66; DE 106) because it alleged 3BTech was not
providing timely or sufficient responses. (DE 66; DE 106.) MercAsia also resorted to third-party
discovery involving, among others, Mr. Zhu and Zake Holdings. (DE 175 at 3–4.) The Court has
granted MercAsia’s first motion to compel in full and MercAsia’s second motion to compel in
part. (DE 146.) While the discovery process has been arduous, MercAsia alleges the process
allowed it to compile previously unavailable information about 3BTech, Mr. Zhu, and the other
related corporate entities that justifies a supplemental complaint placing Mr. Zhu back into the
case as a defendant based on a veil piercing theory. Part of that information is MercAsia’s
discovery on July 27, 2021, that Mr. Zhu was allegedly actively lying, through 3BTech’s
counsel, about not having been served during the discovery process in an effort to undermine
MercAsia’s ability to obtain full discovery. (DE 174-1 ¶ 9; DE 175-3; DE 175-4.) It was after
MercAsia received that July 27 correspondence from Mr. Zhu that MercAsia decided it had
gleaned enough information to seek to supplement its complaint and bring Mr. Zhu back into the
case in his individual capacity.
MercAsia filed its motion for leave to amend and supplement its complaint on August 27,
2021. It contemporaneously moved to seal the motion and the documents that accompanied and
supported it. (DE 173; DE 174.) The filing came approximately thirteen months after the prior
July 30, 2020, deadline the Court had set in its scheduling order for MercAsia to make any
amendments to its complaint. (DE 59 at 3.) The filing also came while fact discovery was still
ongoing, as the Court had extended the deadline for fact discovery to October 18, 2021. (DE
183.)
II. Discussion
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The two motions this order covers, while related, require different analyses and the
application of different standards. The Court thus foregoes a separate standard of review section
in favor of a specific discussion of the applicable standards for each motion at the time the
motion is discussed below. The Court first addresses MercAsia’s motion to seal and then moves
to address MercAsia’s motion to file a supplemental complaint.
A. Motion to Seal
MercAsia filed its motion to seal seeking permission to seal six documents: (1)
MercAsia’s Motion to Amend and Supplement the First Amended Complaint; (2) MercAsia’s
Proposed First Supplemental Complaint; (3) MercAsia’s Brief in Support of Its Motion to
Amend and Supplement; (4) the Declaration of Brian F. McMahon in support of the motion; and
(5) all exhibits attached to the McMahon Declaration. (DE 173 at 1.) MercAsia explained that
counsel had not yet conferred about the need to seal the documents at the time MercAsia moved
to seal but that MercAsia filed anyway out of “an abundance of caution and as a courtesy” to
3BTech and its principals. (Id.) MercAsia only provided broad reasons for why a seal might be
necessary, stating that some of the information contained in the filings was produced during the
discovery process “under an expectation of confidentiality” and that some of the allegations
included in the filings “if made public, could injure the reputation of 3BTech and/or its
principals.” (Id. at 1–2.)
3BTech never responded to the motion. It later made clear that it viewed its lack of a
response as its indication that it agreed with MercAsia’s motion. (DE 180.) But MercAsia
viewed 3BTech’s non-response as a failure by 3BTech “to take any steps to preserve the
confidential nature of any information” contained in the documents. (DE 179 at 2). Thus, before
3BTech had clarified what it had intended with its lack of response, MercAsia filed a “reply” to
4
its own motion in which it sought to withdraw the motion because of 3BTech’s failure to take
action. (Id.) MercAsia cited no authority in its reply to justify it treating 3BTech’s lack of a
response as a failure to protect confidential information. (DE 179.) And 3BTech subsequently
argued that because its lack of response was meant to indicate agreement, it would be unfair to
interpret its failure to respond as a failure to protect confidential information. (DE 180 at 2.) The
Court notes the parties’ debate about how 3BTech’s lack of a response should be construed, but
the Court need not resolve that debate or determine whether MercAsia properly moved to
withdraw its motion because the Court would deny MercAsia’s motion anyway.
A party seeking to seal documents has the burden of specifically demonstrating to a court
why an order to seal is appropriate. When information is filed with a court, it may “influence or
underpin the judicial decision” and thus should be “open to public inspection unless” the
information “meets the definition of trade secrets or other categories of bona fide long-term
confidentiality.” Baxter Int’l, Inc. v. Abbott Labs., 297 F.3d 544, 545 (7th Cir. 2002). A motion
to seal thus has “no prospect of success” unless it analyzes “in detail, document by document, the
propriety of secrecy, providing reasons and legal citations.” Id. at 548. It is also not enough if
litigants simply argue that the contents of filings are private or should be kept confidential. See
Union Oil Co. of Cal. v. Leavell, 220 F.3d 562, 567–68 (7th Cir. 2000) (“Many a litigant would
prefer that the subject of the case . . . be kept from the curious (including its business rivals and
customers), but the tradition that litigation is open to the public is of very long standing.”);
Citizens First Nat’l Bank of Princeton v. Cincinnati Ins. Co., 178 F.3d 943, 945–46 (7th Cir.
1999) (warning courts not to allow parties “to seal whatever they want” and urging “a neutral
balancing of the relevant interests” connected to any good-cause determination presented by a
motion to seal).
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MercAsia never pointed to any caselaw that supported sealing the specific documents and
never specifically explained why the contents of any of the documents warranted a seal. (DE
173; DE 179; DE 180.) That shortcoming prevents the Court from granting MercAsia’s motion
at the outset. See Baxter, 297 F.3d at 545. But that result is also clear from even a cursory review
of most of the documents themselves. The first three documents MercAsia asked the Court to
seal, MercAsia’s motion to supplement its complaint, the proposed supplemental complaint
itself, and MercAsia’s brief in support of its motion, are all either pleadings or briefing that
should be available to the public. Each document is simply an argumentative filing before the
Court and, while each may reference issues that 3BTech might wish were not being alleged,
contain arguments and allegations that are integral to the judicial resolution of the issues in this
case. See Union Oil, 220 F.3d at 567–68; see also Baxter, 297 F.3d at 545–46. Similarly, the
Court finds nothing in Mr. McMahon’s declaration attached to MercAsia’s brief in support of its
motion that discloses information or references issues that may be subject to seal based on
Baxter standards. (DE 173; DE 180); 297 F.3d at 545–46; see also In re Specht, 622 F.3d 697,
701 (7th Cir. 2010).
It is also unclear to the Court why the remaining documents, the exhibits attached to Mr.
McMahon’s declaration, would need to be filed under seal. They are simply examples of
discovery attempts also discussed in the parties’ briefing. Without any specific articulated basis
to seal the documents, the Court denies MercAsia’s motion with regard to these documents as
well. See Baxter, 297 F.3d at 545–46. However, the Court notes that the documents making up
the attachments do appear to have come from the discovery process between the parties, a
process MercAsia broadly argued the parties participated in with an understanding of
confidentiality. (DE 173 at 1; DE 175-2; DE 175-3). Thus, the Court, out of an abundance of
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caution, will leave the documents filed as attachments to Mr. McMahon’s declaration sealed for
the time being. If either party believes the documents should remain sealed, that party must file a
new motion to seal the documents within fourteen days of the date of this order. The new motion
must explain with required specificity why the documents qualify for under-seal filing given the
Seventh Circuit’s standards. See Malibu Media, LLC v. Harrison, 2014 WL 127604, at *3 (S.D.
Ind. Dec. 31, 2014). If no motion is filed after fourteen days, the Court will unseal the
documents.
B. Leave to Supplement and Amend Complaint
Having dealt with the motion to seal, the Court moves to considering MercAsia’s motion
for leave to file its proposed supplemental complaint. Because MercAsia made its request at the
end of August 2021, approximately thirteen months after the July 30, 2020, deadline by which it
was allowed to amend its pleadings under the Court’s scheduling order, MercAsia must
independently demonstrate why its complaint and the Court’s prior scheduling order should be
amended at this later date. Under Federal Rule of Civil Procedure 15(d), a “court may, on just
terms, permit a party to serve a supplemental pleading setting out any transaction, occurrence, or
event that happened after the date of the pleading to be supplemented.” Saratoga Potato Chips
Co. v. Classic Foods, Inc., 2014 WL 2930495, at *2 (N.D. Ind. June 27, 2014). Leave to
supplement the pleadings should be granted “when there is no apparent reason for denying leave
such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to
cure deficiencies by amendments previously allowed,” or “undue prejudice to the opposing
party.” Id. (citing Foman v. Davis, 371 U.S. 178, 182 (1962); Ind. Funeral Dirs. Ins. Trust v.
Trustmark Ins. Corp., 347 F.3d 652, 655 (7th Cir. 2003)). Further a party must show it has “good
cause” to amend a court’s prior scheduling order. Fed. R. Civ. P. 16(b)(4); Pringle v. Garcia,
7
2013 WL 1911483, at *2 (N.D. Ind. May 8, 2013). A district court has “substantial discretion” to
either permit or deny a motion to file a supplemental pleading. Chicago Reg’l Council of
Carpenters v. Vill. of Schaumburg, 644 F.3d 353, 356 (7th Cir. 2011).
MercAsia argued that it has met those requirements to justify filing its supplemental
complaint, but 3BTech opposed MercAsia’s motion for three reasons. First, 3BTech argued that
MercAsia could not demonstrate “good cause” because MercAsia had not been diligent in
bringing its new motion. (DE 178 at 2.) Second, 3BTech argued that MercAsia’s supplemental
complaint would be futile because it still fails to properly allege that Mr. Zhu could be
individually liable under a veil piercing theory. (Id. at 5–9.) And third, 3BTech argued that
allowing MercAsia’s proposed supplemental complaint would result in undue prejudice to both
itself and Mr. Zhu. (Id. at 9–10.)
1. Good Cause
The Court takes each argument in turn, starting with whether MercAsia has shown good
cause. The good cause standard that guides a court’s decision “primarily considers the diligence
of the party seeking amendment.” Trustmark Ins. Co. v. Gen & Cologne Life Re of Am., 424 F.3d
542, 553 (7th Cir. 2005). Moving parties must “show that despite their diligence the time table
could not have reasonably been met.” Tschantz v. McCann, 160 F.R.D. 568, 571 (N.D. Ind.
1995).
MercAsia pointed to five pieces of evidence it uncovered through discovery after the
prior scheduling order’s July 2020 deadline to amend as well as “Mr. Zhu’s continued apparent
reticence to honor his discovery obligations” despite MercAsia’s extensive efforts as the basis
for finding that it has proceeded diligently. (DE 175 at 5–6.) The five pieces of evidence
MercAsia discovered after the prior July 2020 scheduling order deadline include a 3BTech offer
8
of settlement from April 2021 that represented 3BTech was expecting to file for bankruptcy
protection, MercAsia’s commercial purchase of a Waerator product in April 2021 following
notification of the settlement offer describing the likelihood of bankruptcy, discovery materials
revealing an additional corporation MercAsia believes is involved in the infringing activity that
forms the basis of this case, 3BTech financial documents from 3BTech’s outside accountant, and
“[f]acially inconsistent 3BTech Annual Meeting Minutes.” (Id.) These documents, along with
Mr. Zhu’s ongoing individual involvement in the litigation by at times fraudulently directing
3BTech’s discovery and other decisions could not have been known before the prior July 2020
amendment deadline and only came to light because of MercAsia’s “persistence in discovery,”
MercAsia argued. (DE 175 at 7–9.)
3BTech countered by arguing that MercAsia’s discoveries were not actually new and did
not showcase diligence. 3BTech’s argument rested on the fact that all of the materials MercAsia
obtained through discovery and cited as the basis for its reinvigorated veil piercing theory were
known to MercAsia by the end of April 2021 at the latest. Despite that, 3BTech argued,
MercAsia waited until the end of August 2021 to file its motion to amend and supplement. (DE
178 at 2–4.) 3BTech provided several cases supporting the proposition that a party that waits too
long to file after having all of the information necessary to file cannot be found to have exercised
the required diligence to meet the good cause standard. (DE 178 at 3–4) (citing Alioto v. Town of
Lisbon, 651 F.3d 715 (7th Cir. 2011) (holding that a party that waits “more than two months to
file . . . after he had all the information he needed to file the motion” could not show good
cause); Eastern Minerals & Chems. Co. v. Mahan, 225 F.3d 330, 340 (3d Cir. 2000); Johnson v.
Mammoth Recreations, Inc., 975 F.2d 604 (9th Cir. 1992)). But importantly, 3BTech did not
challenge any of MercAsia’s arguments that 3BTech improperly made the discovery process in
9
this lawsuit drag on or that Mr. Zhu played a role in 3BTech’s lack of compliance with
MercAsia’s attempts to obtain full discovery. (DE 178 at 2–4.)
The Court’s consideration of the facts and arguments from both parties suggests that
MercAsia was properly diligent. 3BTech is right that MercAsia had the last of the documents on
which it relied in moving to file a supplemental complaint by April 2021, four months before it
actually filed, but those documents were not all that MercAsia claims to have relied on.
MercAsia also clearly stated it relied on 3BTech’s alleged continued obstructive conduct in the
discovery process and Mr. Zhu’s individual role in that conduct that became clear on July 27,
2021, when Mr. Zhu allegedly falsely claimed that MercAsia had never served him with a
discovery request. (DE 175-2; DE 175-3; DE 175-4; DE 181 at 3–5.) It was only at that time,
according to MercAsia, that it conclusively determined Mr. Zhu was engaging in activity that
justified veil piercing and realized that any further efforts to build evidence for a supplemental
complaint would be “conclusively futile.” (DE 181 at 1–3.) 3BTech does not dispute that Mr.
Zhu waited until the end of July 2021 to make that disclosure and it did not present any argument
to rebut that the time it took MercAsia to move to file its supplemental complaint is most
accurately measured from July 27, 2021, given MercAsia’s clear reliance on Mr. Zhu’s response
from that date instead of April 2021.
The approximately one month MercAsia took from the time of Mr. Zhu’s response to the
filing of its motion does not constitute undue delay and does not show a lack of diligence or bad
faith, particularly because fact discovery was still ongoing. One month is far shorter than any of
the timelines in the cases 3BTech cited in opposition to a finding of good cause. And the fact that
the filing came before the end of fact discovery makes this case further distinguishable from any
case that 3BTech cited in opposition. See Alioto, 651 F.3d 715; Edmonson v. Desmond, 551 F.
10
App’x 280 (7th Cir. 2014); Johnson, 975 F.2d 604; Eastern Minerals, 225 F.3d 330.
Additionally, the Court notes that there is ample evidence of MercAsia’s substantial diligence in
the lengthy discovery process this lawsuit has seen given evidence of MercAsia having served
numerous third-party discovery requests and having filed two motions to compel on 3BTech to
ensure it was able to continue to collect relevant information that 3BTech was, at best, reluctant
to provide. (DE 146; DE 181 at 3.) Based on that collective evidence, the Court finds that
MercAsia had good cause to file its supplemental complaint at the time that it did.
2. Futility
Having found MercAsia has shown good cause to file, the Court next moves to determine
whether 3BTech is correct that allowing MercAsia to amend would be futile. 3BTech argued that
MercAsia’s supplemental motion is futile because MercAsia’s new allegations are still
insufficient to justify piercing the corporate veil and thus would lead to MercAsia’s claims
against Mr. Zhu individually being dismissed if Mr. Zhu were to file a new motion to dismiss.
(DE 178 at 6, 11.) Therefore, the Court looks to the new allegations in MercAsia’s proposed
supplemental complaint to determine whether they are sufficient to potentially justify veil
piercing and could survive a motion to dismiss.
In determining whether to pierce the corporate veil, courts typically apply the law of the
state of incorporation. Secon Serv. Sys. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 413 (7th
Cir. 1988); Chapel Ridge Invs., LLC v. Petland Leaseholding Co., 2013 WL 6331095, at *2
(N.D. Ind. Dec. 4, 2013). 3BTech is incorporated in Indiana, so the Court looks to Indiana’s
standard for piercing the corporate veil. In Indiana, “the burden on a party seeking to pierce the
corporate veil is severe.” Escobedo v. BHM Health Assocs., Inc., 818 N.E.2d 930, 933 (Ind.
2004). Indiana permits the corporate veil to be pierced “only where (1) the corporate form is so
11
ignored, controlled, or manipulated that it is merely the instrumentality of another, and (2) the
misuse of the corporate form constitutes a fraud or promotes injustice.” Id. at 934–35. Indiana
courts have identified a number of “guideposts” that can be considered in determining whether
those elements are met, including:
(1) undercapitalization; (2) absence of corporate records; (3) fraudulent
representation by corporation shareholders or directors; (4) use of the corporation
to promote fraud, injustice, or illegal activities; (5) payment by the corporation of
individual obligations; (6) commingling of assets and affairs; (7) failure to observe
required corporate formalities; or (8) other shareholder acts or conduct ignoring,
controlling, or manipulating the corporate form.
LDT Keller Farms, LLC v. Brigitte Holmes Livestock Co., 722 F. Supp. 2d 1015, 1031–32 (N.D.
Ind. 2010) (quoting Cmty. Care Ctrs., Inc. v. Hamilton, 774 N.E.2d 559, 564–65 (Ind. Ct. App.
2002). While the guideposts are not mandatory and need not all be satisfied to justify veil
piercing, they are helpful in reaching a decision. See Four Seasons Mfg., Inc. v. 1001 Coliseum,
LLC, 870 N.E.2d 494, 506 (Ind. Ct. App. 2007). Whether the party seeking to disregard
corporate existence has met its burden “is a highly fact-sensitive question.” CBR Event
Decorators, Inc. v. Gates, 962 N.E.2d 1276, 1282 (Ind. Ct. App. 2012).
A review of MercAsia’s proposed supplemental complaint in light of those standards
suggests to the Court that the supplemental complaint would not be futile. When faced with
MercAsia’s initial pleadings attempting to hold Mr. Zhu individually liable for 3BTech’s
fraudulent and infringing conduct, the Court dismissed MercAsia’s claims because MercAsia had
not alleged facts to establish many of the guideposts and did not allege that the fraudulent or
unjust conduct at issue in the lawsuit was tied to misuse of the corporate form. (DE 46 at 6–7.)
MercAsia has changed that in its supplemental complaint. (DE 174-1 ¶ 34.)
First, MercAsia clearly alleges that Mr. Zhu is controlling and manipulating 3BTech’s
corporate form, as well as the corporate forms of other entities with which he is involved, to
12
promote the fraud that gave rise to this lawsuit. The underlying fraud in this lawsuit is the
promotion of the Waerator product as a patented wine aerator in a way that infringes the patent
MercAsia holds for its own aerator product. (DE 174-1 ¶¶ 9–18.) MercAsia has specifically
alleged that Mr. Zhu is using 3BTech and other corporate entities he controls to pursue his own
interest in marketing the Waerator product and is manipulating the entities’ corporate forms “in
order to continue illicit sales of the Accused product, to minimize if not altogether avoid any
money judgment in this matter, and to otherwise improperly and prohibitively interfere with
MercAsia’s ongoing attempts to pursue its patent rights in this matter.” (DE 174-1 ¶ 34(a)(ii).) In
short, MercAsia is alleging that Mr. Zhu is using 3BTech as his corporate shield as he infringes
on MercAsia’s patent and has created and manipulated other corporate entities to ensure he can
escape individual liability, avoid paying any potential legal judgment, and continue infringing
even if 3BTech itself is barred from continuing to infringe. (Id.) The Court thus finds MercAsia
has alleged a causal connection between Mr. Zhu’s misuse of the corporate form and the
promotion of fraud and injustice in this case. See Escobedo, 818 N.E.2d at 933; Gates, 962
N.E.2d at 1282–83.
MercAsia has also alleged specific facts that support its veil piercing theory and fit into
the various categories Indiana courts have identified as guideposts for determining whether veil
piercing is warranted. See Escobedo, 818 N.E.2d at 933.
a. Undercapitalization
MercAsia alleges that Mr. Zhu has worked to deliberately undercapitalize 3BTech. (DE
174-1 ¶ 34(b).) “Capitalization is inadequate, as would support piercing the corporate veil, when
it is very small in relation to the nature of the entity’s business and the risks attendant to such
business.” Blackwell v. Superior Safe Rooms LLC, 174 N.E.3d 1082, 1096 (Ind. Ct. App. 2021),
13
transfer denied, 176 N.E.3d 443 (Ind. 2021). In support of its undercapitalization allegation,
MercAsia pointed to 3BTech’s proffered settlement communication on April 27, 2021, wherein
3BTech stated that it “expects to be filing for protection under the bankruptcy laws in the coming
months, as it has no sources of income, and few assets.” (DE 174-1 ¶ 34(b).) MercAsia
additionally cited to correspondence from 3BTech dated April 20, 2021, that confirmed that
3BTech “no longer has any assets to speak of.” (Id.) It then juxtaposed those statements with the
fact that 3BTech’s most recent tax returns from before those communication allegedly showed
3BTech had assets in excess of $26 million as well as the fact that MercAsia was still able to
purchase a Waerator device despite 3BTech having stated it has no sources of income. Those
allegations plausibly allege a potentially rapid decline in 3BTech’s assets, which could support
MercAsia’s overarching allegation that Mr. Zhu is manipulating 3BTech’s corporate form to
ensure Waerator devices continue to be marketed while avoiding potential legal liability.
b. Absence of corporate records
MercAsia also alleges that 3BTech fails to maintain adequate corporate records. (DE
174-1 ¶ 34(d).) The inadequacies, according to MercAsia, are apparent from Mr. Zhu’s alleged
intermingling of the business affairs of 3BTech and the other corporate entities he controls,
including generating sales records and communications that do not differentiate between each of
the entities’ products. They are also apparent, according to MercAsia, because 3BTech, under
Mr. Zhu’s control, fails to maintain a book of minutes for 3BTech’s annual board of directors
meetings. (DE 174-1 ¶ 34(d)(i)); see Cmty. Care Centers, Inc. v. Hamilton, 774 N.E.2d 559, 566
(Ind. Ct. App. 2002) (recognizing minutes from shareholder and board of directors meetings
must be kept as permanent records). Further, MercAsia alleged 3BTech does not maintain profit
and loss statements and completely lacks any internal accounting documents despite 3BTech and
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Mr. Zhu having indicated that 3BTech has a separate accounting department and at least thirtythree employees in its multi-million-dollar operation. (DE 174-1 ¶ 34(d)); see Community Care
Centers, 774 N.E.2d at 566 (“A corporation must also maintain appropriate accounting records”
and “financial statements furnished for the past three years under Indiana Code § 23-1-53-1”).
c. Fraudulent representation by corporation shareholders or directors
MercAsia alleges that Mr. Zhu has made fraudulent representations in his capacity as a
3BTech director. Specifically, it alleges inconsistencies in documents that Mr. Zhu executed for
3BTech that make it unclear who 3BTech’s directors actually are. MercAsia alleges the
inconsistent documents are an example of Mr. Zhu fraudulently trying to create evidence of
3BTech having annual director meetings when none actually occur. (DE 174-1 ¶ 34(f)(i).)
MercAsia additionally alleges that Mr. Zhu’s fraudulent activities as a director stretched into his
conduct during the course of this litigation when he, in his capacity as a 3BTech director, made
false statements about 3BTech’s inability to comply with some of MercAsia’s discovery
requests. (DE 174-1 ¶ 34(f)(ii).)
d. Use of the corporation to promote fraud, injustice, or illegal activities
The Court has already explored MercAsia’s allegations that would fit under this
guidepost earlier in the order. To recap, however, MercAsia has alleged that Mr. Zhu is trying to
use 3BTech and the other corporate entities he controls to: promote the false narrative to
potential customers that the Waerator product contains patented technology; direct business
away from MercAsia’s product that relies on truly patented technology; and avoid personal
liability for that conduct by playing a sort of shell game with the corporate entities he controls.
(DE 174-1 ¶ 34(a)(i)–(iv).)
15
e. Payment by the corporation of individual obligations
MercAsia also included allegations that Mr. Zhu “is using at least 3BTech, if not other
Zhu Entities, to pay off individual obligations.” (DE 174-1 ¶ 34(g).) MercAsia specifically
pointed to alleged evidence that Mr. Zhu directed 3BTech funds to another corporate entity as a
“loan” that was never properly recorded or paid back. (Id.) The “loan” was thus more of a grant,
according to MercAsia, and shows Mr. Zhu’s readiness to distribute assets between entities he
controls or to himself for personal use without adequate recordkeeping and under questionable
circumstances. (Id.)
f. Commingling of assets and affairs
MercAsia also alleges that Mr. Zhu commingles 3BTech’s assets and affairs with the
other corporate entities he controls. (DE 34(c).) “In order to be recognized as an entity separate
from its shareholders, a corporation should be operated as a distinct and separate business and
financial unit, with its own books, records, and bank accounts.” Community Care Centers, 774
N.E.2d at 569 (citing 1 William Meade Fletcher, Fletcher Cyclopedia of the Law of Private
Corporations § 41.50) (internal quotations omitted). “Indiana courts will not recognize
corporations as separate entities where evidence shows that several corporations are acting as
one.” Hipps v. Biglari Holdings, Inc., 136 N.E.3d 629, 638 (Ind. Ct. App. 2019). The alleged
commingling can be seen in part by the fact that MercAsia claims Mr. Zhu regularly conducts
3BTech business through multiple email accounts, the vast majority of which are either his own
personal accounts or accounts belonging to other corporate entities. (DE 174-1 ¶ 34(c)(ii).) The
commingled email accounts greatly impeded MercAsia’s ability to receive full discovery in this
lawsuit because it was often told that the information it was seeking was in emails outside of
16
3BTech’s control. (Id.) MercAsia further alleges, based on some 3BTech accounting records it
received, that 3BTech’s financial documents show commingling between at least three other
Zhu-controlled entities’ assets and potentially Mr. Zhu’s own accounts. (DE 174-1 ¶ 34(c)(iii).)
g. Failure to observe required corporate formalities
There are also allegations of failures by 3BTech, at the hands of Mr. Zhu, to observe
required corporate formalities. “Failure to observe corporate formalities includes such activities
as commencement of business without the issuance of shares, lack of shareholders’ or directors’
meetings, lack of signing of consents, and the making of decisions by shareholders as if they
were partners.” Community Care Centers, 774 N.E.2d at 569 (internal quotations omitted).
MercAsia alleges that 3BTech documents show “significant irregularities” in convening annual
shareholder meetings, including documents from 2017 that appear to establish that 3BTech held
its annual shareholder meeting two different times on the same day, that the meetings were held
without proper notice to shareholders, and that there was no waiver to justify the lack of notice.
(DE 174-1 ¶ 34(e).) MercAsia additionally alleges that “discovery improperly withheld from [it]
will show additional instances of Mr. Zhu and 3BTech failing to observe required corporate
formalities to promote fraud and injustice.” (Id.)
h. Other shareholder acts or conduct
Finally, MercAsia alleges other acts and conduct by Mr. Zhu in support of bringing Mr.
Zhu into the case in his individual capacity. Specifically, MercAsia pointed to a separate lawsuit
in which Mr. Zhu allegedly filed counterclaims against a prior counsel seeking relief in his
personal capacity and in his official capacity on behalf of 3BTech. MercAsia alleges that the
only entities that actually engaged the prior counsel were two other entities Mr. Zhu allegedly
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controls, not 3BTech. (DE 174-1 ¶ 34(h).) Thus, Mr. Zhu’s filing of a counterclaim in his
individual capacity and in his official capacity on behalf of 3BTech shows that Mr. Zhu readily
ignores the corporate form not only of 3BTech but also of the other corporate entities he controls
and views harm done to the corporate entities he controls as harm done to himself personally.
(Id.)
***
The allegations in MercAsia’s proposed supplemental complaint fit into the established
guidepost categories for veil piercing and suggest the supplemental complaint would not be futile
as 3BTech has argued. (DE 178 at 6, 11.) If it were presented with a motion to dismiss as
3BTech proposes, the Court would have to construe MercAsia’s supplemental complaint in the
light most favorable to MercAsia while accepting all of MercAsia’s factual allegations as true
and drawing all reasonable inferences in MercAsia’s favor. Reynolds v. CB Sports Bar, Inc., 623
F.3d 1143, 1146 (7th Cir. 2010). Nothing in 3BTech’s futility arguments suggests 3BTech would
succeed on such a motion and the Court thus cannot find allowing the supplemental complaint
would be futile.
3BTech largely premises its futility argument on disputing the accuracy of the allegations
MercAsia makes in its proposed supplemental complaint. (DE 178 at 6.) For example, 3BTech
responded to MercAsia’s allegations about Mr. Zhu commingling his personal assets with
3BTech’s assets by broadly stating, without any citation, that “MercAsia has no evidence” of
commingling and that “Mr. Zhu and 3BTech have separate bank accounts.” (DE 178 at 9.)
3BTech also offered broad denials of various other MercAsia allegations, stating that it “follows
corporate formalities,” that it “maintains formal business records,” that it “is not logical” that Mr.
Zhu would undercapitalize 3BTech simply to avoid liability in this lawsuit, and that it and Mr.
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Zhu are legally using alternate corporate entities to complete service work and hold intellectual
property for the Waerator product. (DE 178 at 7–9.) The Court acknowledges that each of these
arguments, assuming there are facts to support them, may be valid and ultimately defeat
MercAsia’s attempt to hold Mr. Zhu individually liable under a veil piercing theory. But those
arguments, which simply dispute the accuracy of MercAsia’s allegations, must be saved for, at
earliest, the summary judgment stage when the Court can more readily address the facts that each
side can bring to either support or defeat MercAsia’s claims. A disagreement with the allegations
or a feeling that the facts will eventually show them to ring hollow is not enough to succeed at
the motion to dismiss stage and show futility in this case. See Reynolds, 623 F.3d at 1146.
For now, the Court finds that MercAsia’s factual allegations already described in detail
above, when taken together, plausibly suggest that piercing the corporate veil and holding Mr.
Zhu individually liable in this lawsuit may be appropriate. The allegations sufficiently suggest
that the corporate form may be so ignored, controlled, or manipulated that it is merely the
instrumentality of Mr. Zhu and that Mr. Zhu’s personal misuse of the corporate form plausibly
has caused the perpetration of the fraud at the center of this case and would promote injustice by
allowing him to escape full liability for his conduct by hiding behind a corporate shield. See
Escobedo, 818 N.E.2d at 934–35. A renewed motion to dismiss the claims against Mr. Zhu as an
individual would be denied based on the strength of MercAsia’s allegations and the other reasons
described above in this order and itself would be futile. 3BTech’s arguments against MercAsia’s
allegations can be more fully considered at a later stage of these proceedings when the Court can
properly dig into the facts underlying the “highly fact-sensitive inquiry” that is an attempt to
pierce the corporate veil. See Four Seasons, 870 N.E.2d at 504.
3. Undue Prejudice
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Having resolved 3BTech’s futility argument in favor of allowing MercAsia to file the
supplemental complaint, the Court turns finally to 3BTech’s argument that it and Mr. Zhu would
be unduly prejudiced by MercAsia’s filing of the supplemental complaint. 3BTech contends that,
because fact discovery has now closed, neither it nor Mr. Zhu “would have any opportunity to
propound any discovery relating to the ‘corporate veil’ factual issues raised in the proposed”
supplemental complaint if MercAsia is allowed to file. (DE 178 at 9.) 3BTech stated that its
concern specifically stems from MercAsia’s allegations about activities related to the other
corporate entities with which Mr. Zhu is involved. (Id. at 10.)
3BTech’s prejudice argument falls short though. All of the “new” information MercAsia
pointed to in its supplemental complaint “is entirely in the exclusive possession, custody, and
control of Mr. Zhu and his companies” and was only brought to MercAsia’s attention because
3BTech, Mr. Zhu, or a third-party entity with which Mr. Zhu is involved produced that
information to MercAsia during discovery. (DE 181 at 8–9.) 3BTech and Mr. Zhu, who has kept
up a presence in this litigation despite no longer being named as an individual defendant (DE 46;
DE 89-2 ¶¶ 6–7; DE 150-1 ¶ 2), thus do not need to propound any formal discovery on MercAsia
or the other corporate entities under the circumstances because they either have the information
already or have ready access to it given Mr. Zhu’s involvement with the third-party corporate
entities. Additionally, any potential extra time it takes to gather that information will not be
unduly prejudicial to 3BTech or Mr. Zhu because there are no impending deadlines, like a trial
date, to meet and because the proceedings in the case have already been anything but prompt due
in large part to 3BTech and Mr. Zhu’s reluctance to fully participate in discovery. See Pierce v.
Sys. Transp., Inc., 2004 WL 2481038, at *4 (N.D. Ill. Nov. 2, 2004) (finding no undue prejudice
in part because the defendants had contributed to a lack of timeliness in the three-year-old case
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and because there was no trial date set). Based on those facts, the Court cannot find that 3BTech
and Mr. Zhu would be unduly prejudiced by MercAsia’s filing of its supplemental complaint.
III.
Conclusion
For the foregoing reasons, the Court DENIES MercAsia’s motion to seal (DE 173) and
GRANTS MercAsia’s motion for leave to amend and supplement its first amended complaint
(DE 174). The Court DIRECTS the Clerk to unseal docket entries 174, 174-1, and 174-2 as well
as docket entries 175 and 175-1. Docket entries 175-2, 175-3, and 175-4 will remain sealed for
the time being and will be unsealed if neither party files a new motion to seal within fourteen
(14) days of the date of this order. The Court further DIRECTS the Clerk to file MercAsia’s
attached First Supplemental Complaint as a separate docket entry (DE 174-1).
SO ORDERED.
ENTERED: March 24, 2022
/s/ JON E. DEGUILIO
Chief Judge
United States District Court
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