EDELSON v. CHEUNG

Filing 254

OPINION. Signed by Chief Judge Jose L. Linares on 5/14/2019. (sms)

NOT FOR PUBLICATION
UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

CIVIL ACTION NO. 13-5870 (JLL)

LEONARD EDELSON,

OPINION

Plaintiff,

v.
STEPHEN CHEUNG,
Defendant.

$

LINARES, Chief District Judge
Currently pending before the Court is the motion by the plaintiff, Leonard
Edelson, pursuant to Federal Rule of Civil Procedure 56 (hereinafter, “Rule 56”) for

summary judgment in his favor on his claims for breach of contract (hereinafter, “the
Breach Of Contract Claim”), unjust enrichment (hereinafter, “the Unjust Enrichment
Claim”), breach of the covenant of good faith and fair dealing (hereinafter, “the Breach
Of Good Faith Claim”), fraud (hereinafter, “the Fraud Claim”), and fraudulent transfer
(hereinafter, “the fraudulent Transfer Claim”). (ECF No. 233.) Also pending before the
Court is the cross-motion by the defendant, Stephen Cheung, pursuant to Rule 56 for

summary judgment in his favor as to all of Edelson’s aforementioned Claims. (ECF No.
244.)

The Court heard oral argument on the motion and the cross-motion. (ECF No.
252.) For the following reasons: (1) summary judgment is entered in favor of Cheung as
the
to the Breach Of Contract Claim, the Unjust Enrichment Claim, and the first part of
ent is
Fraud Claim (hereinafter, ‘the First Part Of The Fraud Claim”); (2) summary judgm
the
denied to both parties as to the Breach Of Good Faith Claim and the second part of
Fraud Claim (hereinafter, “the Second Part Of The Fraud Claim”), which may now
proceed to trial; and (3) the Fraudulent Transfer Claim is dismissed as being withdrawn.’

The following substantive papers were filed under these designated Electronic Case
filing docket entries in relation to the motion and cross-motion for summary judgment:
233:
233-I:
233-2:
244:
245:

246:
247 247-4:
248 248-10:
249:
—

—

249-1:
249-2:
252:

Edelson’s notice of motion
Edelson’s brief in support of the motion
Edelson’s statement of undisputed material facts
Cheung’s notice of cross-motion
Cheung’s brief in support of the cross-motion and in opposition
to Edelson’s motion
Cheung’s statement of undisputed material facts
Cheung’s affirmation and supporting exhibits
Cheung’s declaration and supporting exhibits
Edelson’s brief in reply and in opposition to Cheung’s crossmotion
Edelson’s reply declaration
Edelson’s response to Cheung’s statement of undisputed
material facts
Transcript of the oral argument conducted by the Court.

Furthermore, the Court reviewed the initial complaint (ECF No. 1), the first
amended complaint and the supporting exhibits (ECf No. 41 through ECf No. 41-4), and
the second amended complaint and the supporting exhibits (ECF No. 184 through ECF
No. 184-4). The Court will cite to these documents in its discussion in this Opinion.

I.

BACKGROUND

The Court presumes that the parties are familiar with the factual context and the
extensive procedural history of this action, and thus only the facts that are necessary to
resolving the motion and cross-motion will be provided here. (See ECF Nos. 83, 24
(September 2015 Opinion and Order denying Edelson’s motion for a preliminary
injunction); ECF Nos. 157, 158 (January 2017 Opinion and Order of the Magistrate
Judge granting Edelson’s motion for sanctions against Cheung in part); ECf Nos. 181,
182 (September 2017 Opinion and Order of the Magistrate Judge granting Edelson’s
motion to amend the complaint in part); ECf No. 201 (January 201$ Order denying
Edelson’s motion for entry of default judgment).)

A.

Facts
Since 1976, Edelson had owned a business that operated in New Jersey known as

Westchester Lace & Textiles, Inc. (hereinafter, “Westchester Lace”), which at one time
manufactured lace in its New Jersey factory and then sold the lace to garnient
manufacturers. (ECF No. 184 at 3.) In or around 2003 or 2004, Edelson fonTled a
business in Jiangrnen, China with three other people
Chiu

—

—

Cheung, Stephen Ma, and C.K.

known as Eastchester Lace & Textiles Ltd. (hereinafter, “EL-China”), which

would manufacture and be the sole supplier of the lace for Westchester Lace. (Id. at 4;
ECF No. 41-1 at 2, 4.) Edelson possessed a 50% ownership interest in EL-China,

3

whereas Ma, Chiu, and Cheung owned 16 2/3% each. (ECf No. 184 at 5; ECF No. 41-1
at2, 7.)
Ma, Chiu, and Cheung established EL-China in China as a corporation due to their
familiarity with business procedures in that country, with Cheung and a relative
(hereinafter, “Cheung’s Relative”) acting as the managers of EL-China. (ECF No. 184 at
4, 6; ECF No. 233-1 at 9.) In turn, Edelson provided EL-China with the following: (1)
his lace-manufacturing expertise; (2) Westchester Lace’s name, contacts, methods, and
lace designs; (3) over 133,000 pounds of yarn and several machines, parts, and pieces of
equipment; and (4) a consultant (hereinafter, “the Consultant”)

who Edelson paid over

$250,000 to relocate to China to set up the EL-China facilities, to hire EL-China’s
employees, and to provide training on the use of the lace-manufacturing machinery
because Ma, Chiu, and Cheung had no experience in the lace industry. (ECf No. 184 at
4—5; ECF No. 41-1 at 2; ECF No. 233-1 at 9.)
EL-China would provide the finished lace to Westchester Lace, which would in
turn sell the finished lace to Westchester Lace’s customers. (ECF No. 184 at 5-6; ECF

No. 41-1 at 2 (stating that “Westchester [Lace] shall have priority in purchasing lace from
[EL-China]”).) Edelson’s goal in participating in the establishment of EL-China was to
create a lace-manufacturing source for Westchester Lace, while simultaneously
maintaining some level of control over the manufacturing process itself. (ECF No. 233-i
at 9.)

4

In 2005, Cheung notified Edelson, Ma, and Chiu in a letter that the Bank of China
sought repayment of loans that EL-China had taken out, and that the bank had seized
several of EL-China’s machines that Cheung was forced to buy back at auction with his
own funds. (ECF No. 184 at 6; ECf No. 41-1 at 25, 27.) Cheung offered to manage
these financial issues and restore EL-China’s reputation if he were to be granted full
ownership of EL-China. (ECF No. 184 at 7; ECF No. 41-1 at 25.) As a result, Edelson,
Ma, and Chiu each signed a contract (hereinafter, “the 2005 Conveyance Contract”),
wherein they agreed to convey their interests in EL-China to Cheung, even though the
business arrangement between Westchester Lace and EL-China remained in place. (ECF
No. 184 at 7; ECF No. 41-1 at 29; see also ECf No. 233-2 at 7 (Edelson admitting that he
signed the 2005 Conveyance Contract without any future conditions).) Cheung then
transferred 10% of his interest in EL-China to one of his sons for the alleged purpose of
complying with a certain Chinese law, but he failed to advise Edelson of same. (ECF No.

184 at 10—11.)
In September 2006, Edelson and Cheung entered into a separate one-paragraph
agreement that allowed Edelson to exercise an option (hereinafter, “Edelson’s Option”)
for a 50% interest in EL-China (hereinafter, ‘the 2006 Option Agreement”). (ECF No.
184 at 9.) The 2006 Option Agreement stated the following in full:
Leonard Edelson has transferred machinery and yarn and consultant
services in excess of S600,000 to [EL-China]. In as much as [Cheung]
will own 100% of the shares after the company is reorganized, [Cheung]
agree[s] to give 50% interest in that company or a successor company to

Leonard Edelson at a date specified by him. He may exercise this option
at any time.
(ECF No. 248-4 at 2; see also ECF No. 158 at 1—2 (Opinion entered in January 2017
discussing same).) Edelson asserts that Cheung agreed to enter into the separate 2006
Option Agreement after Edelson expressed trepidation about having entered into the 2005
Conveyance Contract. (See ECF No. 233-2 at 7—9; see also ECF No. 245 at 7 (Cheung
pointing out that the 2006 Option Agreement was signed several months after the 2005
Conveyance Agreement was executed).) Edelson then continued to pay for the
Consultant to assist EL-China in its lace-manufacturing operations for several years.
(ECF No. 233-1 at 11.) The Court emphasizes at this juncture that the 2005 Conveyance
Contract was entered into without the benefit of Edelson’s Option being provided to
Edelson, and that Edelson’s Option came about later, i.e., in 2006, as a result of the 2006
Option Agreement. (ECF No. 252 at 16 (Edelson’s counsel acknowledging same at oral
argument).)
from 2006 through the middle of 2013, Cheung and Cheung’s Relative managed
EL-China and drew salaries therefrom. (ECF No. 184 at 12.) Throughout this time
period, Edelson continued to pay the Consultant for his consulting services to EL-China.
(ECF No. 41-2 at 28 (Edelson indicating in an e-mail exchange with Cheung from July
2013 that Edelson was still paying for the Consultant); see also ECF No. 233-1 at 11;
ECf No. 233-2 at 12.) Edelson also continued to purchase lace from EL-China, thereby
providing EL-China with revenue. (ECF No. 233-2 at 12.)
6

In March 2009, Cheung told Edelson that an outside investor sought to provide
additional funding to EL-China, but Edelson objected in the following written e-mail to
Cheung:
I was just thinking about this man that wants to invest in to [EL-China].
misc. parts and
starting yarn
I have invested all the machinery
[money] that I gave to Ma which he used for [EL-China],
equipment
$250,000 in salary which I have paid to [the Consultant] in order to set up
and teach [EL-China]. Now he wants a board that he believes he could
get to control and does not include me. Please advise if my understanding
that I am a partner in [EL-China] is incorrect so that as I said before I can
make the necessary arrangements to protect myself and Westchester
...

...,

...,

...,

...

[Lace].
(ECF No. 41-I at 33.)
Cheung responded to Edelson’s concerns with the following e-mail:
Not only you
Don’t worry about what was going on with that man
disagreed, I never agree to have him join [EL-China]. We had been
suffering a lot of BS and difficulties with [EL-China] and now we all
seeing the sun is rising. You are the only partner at [EL-China] and I am
sure in a short period (1 or 2 years), we will make up what we had
invested.
....

(ECF No.41-1 at 33.)
However, Edelson alleges that in 2012, Cheung surreptitiously began negotiating
the sale of EL-China to a person named Hang Chen without informing Edelson. (ECF
No. 184 at 13.) Furthermore, in April 2013, while Cheung was engaged in discussions
and
with Chen and without informing Edelson, Cheung established a business to sell lace
textiles named Eastchester Lace Corp. in New York (hereinafter, “EL-NY”) that would

7

directly compete with Westchester Lace. (ECF No. 41-2 at 6—9; ECF No. 233-1 at 12.)
Edelson alleges that Cheung hired Geremy Bernstein, who was an employee of
Westchester Lace, in order to assist EL-NY in starting up its operations. (ECF No. 184 at
13—14; see also ECF No. 41-2 at 33—34 (e-mail from Bernstein to Cheung from July 2013
indicating he had been hired by Cheung at some point previously); ECF No. 233-1 at 12,
14.)
In June 2013, Cheung forwarded to Edelson an e-mail from Cheung’s Relative,
which detailed the financial problems that were allegedly afflicting EL-China. (ECf No.
184 at 14; ECF No. 41-2 at 11—12; ECF No. 233-1 at 12.) Edelson responded by e-mail
that he wanted to meet with Cheung about these problems and the potential sale of ELChina, but Cheung either rebuffed these requests or indicated that he was actively in the
process of seeking a buyer for EL-China. (ECf No. 184 at 14—18; ECF No. 41-2 at 14,
19, 22.) In fact, in an e-mail dated June 17, 2013, Cheung advised Edelson that he was
meeting with a potential buyer and he asked Edelson, ‘What price would you suggest that
I should ask for?” (ECF No. 249-1 at 65.) Furthermore, Cheung e-mailed Edelson
several times between July 7, 2013 and July 15, 2013, and indicated that he was still
meeting with potential buyers of EL-China. (ECF No. 41-2 at 26, 28.) However, Cheung
actually sold EL-China on June 3, 2013 for $100,000 without informing Edelson. (ECF
No. 184 at 15; ECF No. 41-2 at 16; ECF No. 233-1 at 13; ECF No. 248-6 at 2.) The
Court notes that in none of the aforementioned communications between Cheung and

$

Edelson is there any indication that Edelson sought to exercise Edelson’s Option set forth
in the terms of the 2006 Option Agreement.
Edelson was still unaware that Bernstein had been hired by Cheung as of July 25,
2013, as Edelson e-rnailed Cheung on that date to “advise [Cheung] that Gererny resigned
from the company.” (ECF No. 41-2 at 35.) Rather than admit to Edelson at that point
that he had hired Bernstein, Cheung’s e-mail response was the following: “He is working
with other company?” (Id.)
Furthermore, at around this time, Chen at Cheung’s behest accelerated the dates
that Edelson’s payments for the manufactured lace were due to EL-China. Cheung then
proceeded to: (1) cut off Edelson’s supply of lace from EL-China; (2) seek to acquire
Westchester Lace’s customers; (3) advise Chen that he should no longer engage in any
business with Westchester Lace; (4) copy Westchester Lace’s lace patterns; (5) sell the
machinery that Edelson had provided for the benefit of EL-China; and (6) tell Chen to
refuse to take any further orders from Westchester Lace. (ECF No. 184 at 22—3 0; ECF
No. 41-2 at 37—38; see also, e.g.. ECf No. 41-4 at 5—6 (Cheung advising Bernstein in an
e-mail from January 2014 that Cheung would be advising certain customers of
Westchester Lace that EL-China was no longer in a business relationship with same);
ECF No. 249-1 at 89 (July 15, 2013 e-mail from Bernstein to Cheung advising Cheung to
hold off on “put[ting] the death blow on [Edelson]” until certain matters were finalized);
ECF No. 249-1 at 91 (July 23, 2013 email from Bernstein to Cheung advising Cheung

9

at
that Bernstein would now inform Edelson that he was quitting his employment
Westchester Lace, and suggesting Edelson “is going to be hit right between the eyes
in e-rnails to
tomorrow”); ECF No. 184-3 at 49—54 (Cheung directing Chen and Bernstein
seek to recover all outstanding debts owed by Westchester Lace to EL-China
in order
immediately, and to take new orders from Westchester Lace but to not ship them
customers);
to cut Edelson out by offering the finished lace products directly to Edelson’s
associated
ECf No. 184-3 at 17 (e-mail from October 2013 from Cheung advising those
) Chen
with EL-China, including Bernstein. to not fill any orders for Westchester Lace).
should
then e-mailed Westchester Lace’s customers directly to inform them that they
through
direct their orders to EL-China and that EL-China would no longer accept orders
Westchester Lace. (ECF No. 184 at 22—30; ECf No. 41-4 at 23—3 1.)
According to Edelson, Cheung was behaving in this manner in an effort to force
No.
Westchester Lace out of business for the benefit of EL-China and EL-NY. (ECf
and EL184-4 at 2—3 (January 21, 2014 e-rnails from Cheung to those connected to Chen
,
China that his goal was to take away all of Westchester Lace’s customers).) Indeed
ina of the
Cheung went so far as to eventually advise Chen and those connected to EL-Ch
hester Lace];
following: “PLEASE DO NOT SEND OUT ANY SHIPMENT FOR [Westc
ry 6,
NO MATTER THEY PAID OR NOT.” (ECF No. 184-4 at 9 (as stated in a februa
2014 e-mail).)

10

On August 1, 2013, Edelson learned that Bernstein was now working for EL-NY.
(ECF No. 184 at 19; ECF No. 41-2 at 47.) Edelson then sent an e-mail to Cheung to
advise that he (meaning Edelson) was now aware of this betrayal, and he further stated:
“Before I exel-cise that [2006 Option Agreement,] please send me tcertain documents].”
(ECf No. 41-2 at 47.) Edelson did not actually exercise Edelson’s Option at this time.
Edelson alleges that he indeed exercised Edelson’s Option under the 2006 Option
Agreement on or around August 9, 2013. (ECF No. 252 at 23.) Even if this were true,
however, this occurred more than two months after Cheung had already sold EL-China to
Chen, and thus it is undisputed that Edelson did not exercise Edelson’s Option before ELChina was sold. (Id. (Edelson’s counsel acknowledging the same during oraL argument).)
On August 21, 2013, Edelson acknowledged in an e-mail that Chen was the now
owner of EL-China. (ECF No. 41-3 at 16.) However, as of August 22, 2013, the
Consultant was still working for Cheung and Chen, even though Edelson was paying for
the Consultant’s services up to that point. (ECF No. 41-3 at 24 (August 22, 2013 e-mail
indicating that the Consultant advised someone connected to EL-China that Edelson was
intending to visit China soon).) In addition, in another e-mail exchange dated August 22,
2013 not involving Edelson, Chen and Cheung acknowledged that the lace
manufacturing machinery contributed by Edelson to EL-China had been sold without
Edelson’s knowledge, and that Edelson should be misled about that fact and told that the
machines had simply been moved elsewhere. (ECF No. 41-3 at 26—30.)

11

B.

C]aims
En October 2013, Edelson brought this action against only Cheung and asserted

only the Breach Of Contract Claim and Breach Of Good Faith Claim. (ECf No. 1.)
Edelson filed an amended complaint in April 2015, again naming only Cheung and
adding the Fraud Claim and the Unjust Enrichment Claim. (ECF No. 41.)
In the current second amended complaint, Edelson now asserts five causes of
action against Cheung. In the Breach Of Contract Claim, Edelson alleges that Cheung
breached the 2006 Option Agreement by refusing to comply with the obligation to
convey a 50% interest in EL-China under Edelson’s Option “when Edelson requested
such transfer.” (ECF No. 184 at 33.) Edelson also alleges that as consideration for that
Agreement, Edelson agreed to continue to engage in business with EL-China and to
continue to provide and pay for the Consultant. (Id.)
In the Breach Of Good faith Claim, Edelson alleges that Cheung transferred the
ownership of EL-China without Edelson’s prior knowledge or permission, “refus[ed] to
offer Edelson a right to purchase [EL-China] before purportedly selling it to another
entity,” directed those overseeing EL-China to stop dealing with Edelson and
Westchester Lace, and diverted sales that otherwise would have gone to Edelson and
Westchester Lace. (Id. at 34.)
In the Unjust Enrichment Claim, Edelson alleges that he transferred his ownership
interest in EL-China to Cheung based on Cheung’s representations that he could exercise

12

Edelson’s Option at any time as long as Edelson continued to (a) pay for the Consultant,
and (b) purchase lace products from EL-China through Westchester Lace. (Id. at 3 6—37.)
Edelson further alleges that Cheung has been unjustly enriched by his failure to
compensate Edelson for the benefits that Edelson conferred upon Cheung over the course
of their business relationship. (Id. at 37.)
In the Fraud Claim, Edelson’s allegations concern two separate matters. In the
First Part Of The Fraud Claim, Edelson alleges that Cheung transferred a 10% interest in
EL-China to one of Cheung’s sons, while simultaneously representing to Edelson that he
(meaning Cheung) remained the sole owner after Edelson, Ma, and Chiu transferred their
interests to Cheung. (Id. at 35.) In the Second Part Of The Fraud Claim, Edelson alleges
that Cheung sold EL-China to Chen without informing Edelson, sold the lacemanufacturing machinery that had been contributed by Edelson without telling him, and
withheld the date of sale and the circumstances thereunder, and that Cheung did all of this
with the express goal of”deceiv[ing] Edelson from seeking to exercise his option to
obtain 50% of [EL-China] or its successor.” (Id. at 35—36.).
In the Fraudulent Transfer Claim, Edelson alleges that Cheung transferred his
personal assets to various family members (hereinafter, “Family Members”) with the goal
of preventing Edelson from collecting on a potential judgment against Cheung. (Id. at
37—40.) As will be discussed herein, an assessment of the Fraudulent Transfer Claim is
no longer of any moment.

13

II.

DISCUSSION

It is not necessary for the Court to restate the standard for resolving cross-motions
for summary judgment that have been made pursuant to Rule 56, because that standard
has been already enunciated. See Fed. R. Civ. p. 56(a) (providing for an award of
summary judgment if there is no genuine dispute of material fact and the movant is
entitled to judgment as matter of law); see also Anderson v. Liberty Lobby, Inc., 477 U.s.
242, 247—48 (1986) (setting forth the general summary judgment standard); Plc/i/er v.
UNITE, 542 F.3d 380, 386 (3d Cir. 200$) (setting forth the standard for resolving crossmotions for summary judgment); Marciniak v. Prudential fin. Ins. Co. ofArn., 184 F.
App’x 266, 270 (3d Cir. 2006) (setting forth the same).

A.

The Earlier Preliminary Injunction Opinion
In an Opinion issued in 2015 at the initial stages of this litigation, the Court denied

Edelson’s motion for the entry of a preliminary injunction against Cheung (hereinafter,
“the Injunction Opinion”). (ECF No. $3.) In the Injunction Opinion, the Court found
that Edelson had not demonstrated a likelihood of success on the merits at that juncture.
(Id. at 13—14.) Cheung argues that the language from the Injunction Opinion is
controlling at this summary-judgment stage of the litigation. (See ECF No. 245 at 10
(Cheung arguing that in denying the preliminary injunction, “this court held that such
relief was unwarranted because plaintiff has not demonstrated a likelihood of success on

14

his breach of contract, breach of the covenant of good faith and fair dealing, unjust
enrichment and fraud claims”); see also Id. at 5 (arguing the same); ECE No. 252 at 53
(Cheung’s counsel arguing the same during oral argument for the motion and crossmotion for summary judgment).)
However, the Court’s early determination concerning the preliminary-injunction
motion from the Injunction Opinion has no bearing on the Court’s determination
concerning the pending motion and cross-motion for summaryjudgrnent. The Court
employs two completely different standards in addressing those kinds of motions. See
Bruni v. City ofPittsburgh, 824 f.3d 353, 361 n.l I (3d Cir. 2016) (holding that “the
standards governing a motion for a preliminary injunction and a motion for summary
judgment are entirely different”); Doebler ‘s Pa. Hybrids, Inc. v. Doebler, 442 F.3d 812,
820 (3d Cir. 2006) (holding that the manner in which a district court addresses a motion
for preliminary injunction “is irrelevant” to the manner in which a later-filed summary
judgment motion is addressed, as there is a “distinction between the standards for
summary judgment and preliminary injunction”). This is because the inferences and
conclusions that are drawn by a court in weighing the available evidence at a preliminary
stage in a case are inappropriate to use to determine the outcome of a subsequently-filed
summary-judgment motion after discovery has been conducted. See Doebter, 442 F.3d at
820 (holding that the inferences that “were previously made in ruling on [a] motion for
preliminary injunction cannot determine [a] Rule 56(c) motion”).

15

Those preliminary inferences and conclusions “should not be used to support
propositions that underpin the decision to grant [or deny] the motion for summary
judgment” based on whether there are genuine issues for trial. Id. at $20. Therefore, this
Court concludes that its findings in the Injunction Opinion do not control its
detennination here on the issue of an award of summary judgment.

B.

Answer Status
Edelson argues that Cheung should be barred from denying the factual allegations

asserted against him by Edelson in the second amended complaint, because Cheung’s
earlier answer was struck in January 2017 by the Magistrate Judge as a sanction for
Cheung’s failure to abide by discovery requests. (ECf No. 233-1 at 7, 24, 26, 28; see
also ECf No. 15$ at 10—11 (January 2017 Order striking Cheung’s earlier answer).) At
the time that Cheung’s earlier answer was struck, Edelson’s operative complaint, i.e., his
first amended complaint, only asserted claims against Cheung that entailed the Breach of
Contract Claim, the Unjust Enrichment Claim, the Breach of Good Faith Claim, and the
Fraud Claim. (ECF No. 41.)
However, after Cheung’s earlier answer was struck, Edelson filed a second
amended complaint under this action, in which Edetson: (1) realleged the aforementioned
four Claims; (2) added the Fraudulent Transfer Claim against Cheung, wherein Edelson
alleged that Cheung had fraudulently transferred his personal assets to the family
Members in order to put those assets out of Edelson’s reach for an eventual execution of

16

a potential judgment against Cheung; and (3) added frauduLent transfer claims against the
Family Members as well. (ECF No. 184; see also ECF No. 181 (September 2017
Opinion issued by the Magistrate Judge granting Edelson’s motion to amend his
allegations in part).) Cheung filed a new answer in response to that second amended
complaint. (ECF No. 193.)
The Court rejects Edelson’s argument on this issue, and holds that Cheung’s new
answer is now the operative answer. By filing the second amended complaint within the
contours of the instant action, Edelson opened the door to providing Cheung an
opportunity to file a new answer. See Massey v. Helman, 196 F.3d 727, 735 (7th Cir.
1999) (holding that an amended complaint opens the door for defendants to answer
*3 (N.D. Okia. July
anew); Pere- v. El Tequila, LLC, No. 12-588, 2015 WL 11144033, at
20, 2015) (holding that the filing of an amended complaint gave the defendants an
opportunity to file an amended answer, and chastising the defendants for not availing
themselves of that opportunity); Heck/er & Koch, Inc.

i.’.

German Sport Guns GmbH, 71

F. Supp. 3d 866, 878 (S.D. md. 2014) (holding that an amended answer supersedes a
previous answer); Christiansen v. Lincoln iVat ‘1 LiJ Ins. Co., No. 08-3948, 2010 WL
11515268, at *1 n.l (C.D. Cal. Aug. 3,2010) (denying plaintiffs motion to strike
defendant’s answer, as filing an amended complaint rendered the original answer
inoperative); Cowan’ u. City ofEau Claire. 571 F. Supp. 2d 1005, 1008 (W.D. Wisc.
2008) (holding that an original answer becomes moot upon the filing of an amended

17

complaint).
If Edelson desired that the striking of Cheung’s earlier answer should carry
separate lawsuit
forward, then the better course would have been for Edelson to bring a
fraudulent
against Cheung and the Family Members concerning the issue of the alleged
te action with
transfer of assets, and then for Edelson to move to consolidate that separa
in reaching
the instant action. But more importantly, the Court is guided and constrained
it is “prefer[able]
this holding by well-settled Third Circuit precedent that mandates that
that cases be decided on their merits.” United States

t.

$55,518.05 in US. Currency, 72$

18-1760,
f.2d 192, 194—95 (3d Cir.1984); see also Hildebrand v. Allegheny Cty., No.
policy favoring
2019 WL 1783540, at *3 (3d Cir. Apr. 24, 2019) (upholding the “strong
217 (3d Cir. 2003)
decisions on the merits”); McMullen v. Bay Shtp Mgnit., 335 F.3d 215,
).
(emphasizing the policy of favoring the resolution of litigation on the merits
ery sanctions,
Nonetheless, the Court in its discretion holds that all of the other discov
trate Judge
monetary sanctions, and adverse-inference charges imposed by the Magis
252 at 9—10
against Cheung shall remain in place. (ECf No. 157; see also ECF No.
summary
(discussing same at oral argument for the motion and cross-motion for
judgment).)
C.

Breach Of Contract Claim
1.

Whether a contract existed

Agreement.
Edelson alleges that Cheung breached the terms of the 2006 Option

18

(ECF No. 184 at 33.) However, for a valid contract to even exist, there must be: (1) an
offer to act or forebear made by the offeror; (2) an acceptance by the offeree of the offer;
and (3) consideration paid by the offeree to the offeror in exchange for the offeror’s
*3 (D.N.J.
performance. See Ta/ia v. Tires Flits, No. 10-4118,2011 WL 2293330, at
June 8, 2011). It is appropriate for the Court to determine whether a contract exists as a
matter of law. SeelI. Hass Co. v. Gilbane Bldg. Co., 881 F.2d 89,92 (3dCir. 1989)
(citations omitted).
Contrary to the arguments raised by Cheung (see generally ECF No. 245), the
Court finds that that the 2006 Option Agreement gave rise to a valid contract in that: (1)
Cheung offered Edelson an option to claim a 50% interest in EL-China, i.e., Edelson’s
Option, in order to allay Edelson’s concerns about the fact that Cheung now controlled
the source of Edelson’s livelihood, because it is apparent that Cheung wanted the
business relationship with Westchester Lace to continue; (2) Edelson accepted that offer,
because it is apparent that he desired to maintain an interest in EL-China, as he wanted to
have EL-China continue to produce lace for him for the benefit of Westchester Lace; and
(3) Edelson agreed to pay for the Consultant as consideration in exchange for Cheung’s
offer concerning Edelson’s Option, even though Cheung was now in control of EL
China, as Cheung needed that Consultant because Cheung was not experienced in the
area of lace manufacturing. (See ECf No. 233-1 at 26—27.) It is in line with common
sense for the Court to find that Edelson continued to pay for the Consultant because

19

Edelson still had a business interest in EL-China’s success and survival in the laceof the
manufacturing industry. Furthermore, the Court’s assessment of the presence
tent with
consideration given by Edelson underlying the 2006 Option Agreement is consis
t of
the expansive interpretation of the elements of a contract, including the elemen
Am. Inc.,
consideration, by the courts in New Jersey. See Mac Williams v. BP Prods. N
*5 (D.N.J. Nov. 23, 2010) (holding that a court
No. 09-1844, 2010 WL 4860629, at
and
should consider all of the relevant evidence that may assist in determining the intent
ement
meaning of a contract). Therefore, the continued existence of this business arrang
Agreement
was important and of value to both Cheung and Edelson, and the 2006 Option
comprised a contract.

2.

Whether there was a breach

Edelson argues that he exercised Edelson’s Option under the terms of the 2006
e said option
Option Agreement, and that Cheung’s failure to honor his demand to exercis
2013 e
constituted a breach. (ECF No. 233-1 at 28.) Edelson points to his August 1,
ent,]
mail to Cheung, wherein he stated: “Before I exercise that [2006 Option Agreem
please send me [certain documents].” (ECF No. 248-5 at 2.)
However, in viewing this evidence in the light most favorable to Edelson, the
n’s
Court finds that this statement does not indicate that Edelson was exercising Edelso
befbre he
Option at that time, as he indicates that he wanted to see certain documents
g the
decided whether to exercise that Option. (See ECF No. 245 at 8 (Cheung arguin

20

same); see also Id. at 17—18 (arguing the same).) Indeed, Edelson admitted in his own
deposition testimony that he never exercised the Option. (See ECf No. 247-3 at 6 1—62
(Edelson testifying that he had not exercised Edelson’s Option as of August 2013 because
he wanted to first detennine if EL-China had enough value at that point to make it worth
exercising the Option); see also ECF No. 194 at 3 (Edelson admitting in a declaration
filed on November 21, 2017 that Cheung sold EL-China “without allowing me to
exercise my option”).) Thus, Edelson never actually exercised his right under the 2006
Option Agreement. Furthermore, Edelson’s Option was no longer available to be
exercised against Cheung as of August 2013, as Cheung had sold EL-China to Chen two
months prior, which Edelson’s counsel acknowledged at oral argument herein. (ECF No.
252 at 23, 30—3 1.)
Therefore, the Court concludes that even though the 2006 Option Agreement
will
comprised a contract, Cheung did not breach that Agreement. As a result, the Court
award summary judgment in favor of Cheung and against Edelson as to the Breach Of
Contract Claim.

D.

Unjust Enrichment
Even though the Court has held that Cheung is entitled to summary judgment on

the Breach of Contract Claim, the Court has held nevertheless that the 2006 Option
Agreement between Edelson and Cheung comprised a contract. As a matter of law, an
unjust enrichment claim is unavailable when the relationship between the parties at issue

21

is founded upon a contract. See Cook v. Gen. Nutrition Coip., 749 F. App’x 126, 129 (3d
Cir. 2018) (holding the same); see also Estate of Gletherman e. HartfrdLif Ins. Co., 94
F. App’x 944, 947 (3d Cir. 2004) (holding that a claim for unjust enrichment is only
supportable when the parties’ rights are not governed by a contract); Urbino v. Ambit
*7 (D.N.J. July 24, 2015)
Energy Holdings, LLC, No. 14-5184, 2015 WL 4510201, at
(dismissing an unjust enrichment claim because a contract governed the relationship of
the parties).
Here, the relationship at issue between Edelson and Cheung is founded upon a
contract, i.e., the 2006 Option Agreement. As a result, the Unjust Enrichment Claim is
unavailable to Edelson here, and thus summary judgment is entered in favor of Cheung
and against Edelson on this Claim. Indeed, counsel for Edelson acknowledged this as a
potential determination at oral argument. (ECF No. 252 at 12.)

I.

Breach Of Good faith Claim
In a business relationship, subterfuges and evasions on the part of a defendant are

violative of the covenant of good faith and fair dealing, even if that defendant actor is of
the belief that such conduct was justified. See City ofAtt. City v. Zemurray St. Capital,
LLC, No. 14-5 169, 2017 WL 6638203, at *16 (D.N.J. Dec. 29, 2017) (holding the same).
Furthermore, in addition to presenting evidence that a defendant acted in bad faith, the
plaintiff must show that the alleged bad-faith conduct caused the plaintiff to suffer
damages by depriving the plaintiff of the benefit of a bargain that was intended by the

22

parties. See China Falcon Flying Ltd. v. Dassault Falcon Jet Corp., 329 F. Supp. 3d 56,
74 (D.N.J. 2018).
Edelson has demonstrated that the record is replete with evidence of examples of
bad-faith conduct on the part of Cheung that Edelson would not expect from someone
with whom he thought he had a symbiotic business relationship. (ECF No. 233-1 at 30—
31.) For instance, even though Cheung and Edelson were still
—

in Cheung’s own words

“partners” in the operation of EL-China, and even though EL-China was created and

supposed to be operated for the express purpose of providing lace to Westchester Lace,
Cheung allegedly sought to benefit himself to Edelson’s detriment by: (1) forming ELNY; (2) taking customers who were being served by Edelson and Westchester Lace in
order to benefit himself and EL-NY; (3) taking Edelson’s employee Bernstein from
Westchester Lace, and then conspiring with Bernstein to undermine Edelson; (4)
accelerating the payments owed by Westchester Lace to EL-China and then refusing to
sell lace to Westchester Lace; and (5) selling EL-China without first informing Edelson
and then hiding the sale from Edelson for some time. (ECF No. 252 at 23—24.)
Edelson presents triable issues of fact as to whether Cheung failed to act in good
faith to protect Edelson’s interests, and as to whether Cheung failed to abide by his
responsibility to do no harm to a person with whom he had a business arrangement, i.e.,
Edelson. See Irwin Katz & Assocs., Inc. v. Concepts in Health, Inc., No. 13-12 17, 2014
WL 6471486, at *1112 (D.N.J. Nov. 19, 2014) (finding there were triable issues of fact

23

on a breach of the covenant of good faith and fair dealing claim, where the plaintiff
demonstrated that he reasonably expected that he would eventually profit from the
defendant’s sale of a business in which the plaintiff maintained an interest, and that the
defendant acted in such a way as to deprive the plaintiff of that profit by withholding
certain information and by not correcting the plaintiffs misapprehension that he would
be entitled to compensation). However, Cheung has also raised genuine triable issues of
fact as to whether Edelson is entitled to any damages on the Breach of Good Faith Claim,
as Cheung argues that EL-China was not profitable and that the equipment contributed by
Edelson was outdated and bordered on being worthless. (See ECf No. 252 at 56.) Thus,
the Court will not grant summary judgment to either Edelson or Cheung on this Claim,
and will leave the Breach of Good Faith Claim to be resolved by a trier of fact.

F.

fraud

The heightened pleading standard for the elements of a cause of action to recover
damages for fraud are well-settled. See Fed. R. Civ. p. 9(b); see also frederico v. Home
Depot, 507 F.3d 188, 200 (3d Cir. 2007) (stating that a “plaintiff must plead or allege the
date, time and place of the alleged fraud or otherwise inject precision or some measure of
substantiation into a fraud allegation”); In re Burlington Coat factory Sec. Litig., 114
F.3d 1410, 1422 (3d Cir. 1997) (stating that a fraud claim must include “the ‘who, what,
when, where and how’ elements”). Nevertheless, it bears mentioning for the purposes of
this analysis that the elements of a fraud claim are: (1) a material misrepresentation of a

24

currently existing or past fact or omission of a material fact; (2) knowledge or belief by
the defendant of its falsity; (3) an intention that the plaintiff rely on the misrepresentation
or omission; (4) reasonable reliance by the plaintiff on the misrepresentation or omission;
and (5) resulting damages suffered by the plaintiff. See Lightning Ltthe, Inc. v. Witco
Coip.,4F.3d 1153, 1186 (3d Cir. 1993).
Edelson’s Fraud Claim is set forth in two parts. (ECF No. 252 at 40—45
(Edelson’s counsel acknowledging same at oral argument).) In the first Part Of The
fraud Claim, Edelson alleges that Cheung never told him that Cheung transferred a 10%
ownership interest in EL-China to Cheung’s son, and that Edelson entered into the 2006
Option Agreement with the impression that Cheung maintained 100% control. (ECf No.
233-1 at 3 1.) But that alleged misrepresentation is not material, as it would not have
prevented Edelson from exercising Edelson’s Option if he had done so in a timely
manner, as Cheung still had a 90% possessory interest in EL-China and thus Cheung
would have been able to relinquish to Edelson the equivalent of 50% of the total va/tie of
El-China out of his personal 90% interest. Indeed, Cheung argues this in his papers in
support of his cross-motion for summary judgment.. (ECF No. 245 at 23.) As a result,
the First Part Of The Fraud Claim does not meet the required “material” element. See
Lightning Lube, Inc., 4 F.3d at 1186. Thus, the Court finds that Cheung is entitled to
summary judgment in his favor against Edelson on the First Part Of The Fraud Claim.

25

g
However, Edelson alleges in the Second Part Of The fraud Claim that Cheun
not attempt to
behaved in a fraudulent and misleading manner in order to convince him to
or liquidated.
exercise Edelson’s Option until EL-China and all of its assets had been sold
as to the
(ECF No. 233-1 at 3 1—32.) The Court finds that triable issues of fact remain
to show
Second Part Of The Claim, because Edelson has put forth sufficient evidence
and that
that: (I) Cheung materially misrepresented the financial status of EL-China
that ELEdelson was still the only other “partner,” when Cheung was arguably aware
ina without
China was not financially sound, Cheung was actively seeking to sell EL-Ch
te
truly considering Edelson’s input, and Cheung was starting up EL-NY to compe
n were a
directly with Edelson; (2) Cheung knew that his representations to Edelso
because
charade; (3) Cheung intended to have Edelson rely on his misrepresentations
ina
Cheung needed Edelson to keep paying for the Consultant in order to keep EL-Ch
been in
operating; (4) Edelson reasonably relied on Cheung’s statements, as they had
form of lost
business together for several years; and (5) Edelson suffered damages in the
s that he
business to Westchester Lace, losing out on the value of equipment and supplie
t in swiping
transferred to EL-China, lost business opportunities due to Cheung’s conduc
Edelson’s customers, and loss of Edelson’s reputation in the lace industry.
on the
In addition, the Court concludes that Cheung has raised triable issues of fact
suffered any
Second Part Of The Fraud Claim, e.g., he refutes whether Edelson indeed
have
damages because the equipment was of little value and because Edelson must

26

finished
known that EL-China was not profitable due to the fact that it was bound to sell
ination
products to Westchester Lace at below-market prices, that require a final determ
ent on
by a trier of fact. Therefore, the motion and the cross-motion for summary judgm
the Second Part Of The Fraud Claim are denied.

G.

fraudulent Transfer Claim

Edelson alleged in the Fraudulent Transfer Claim that Cheung fraudulently
transferred his personal assets to Family Members in order to prevent Edelson from
collecting on any potential judgment against Cheung. (ECF No. 184 at 37—40.)
the
However, the transfer of those assets at issue have been reversed by Cheung, and
on the
separate claims that Edelson had brought against the Family Members were settled
record before the Magistrate Judge in August 2018. (ECF No. 232; see also ECF No.

on
243 (September 2018 Order embodying that settlement); ECF No. 233-1 at 7 (Edels
admitting that “Cheung [is]

.

.

.

the sole remaining defendant” in this action).) In

Claim
addition, Edelson’s counsel agreed at oral argument that the Fraudulent Transfer
should now be withdrawn. (ECF No. 252 at 7.) Therefore, the Court dismisses the
Fraudulent Transfer Claim.
III.

CONCLUSION

For the aforementioned reasons: (1) the Court grants summary judgment in favor

of the defendant, Stephen Cheung, on the Breach Of Contract Claim, the Unjust

27

Enrichment Claim, and the First Part Of The Fraud Claim; (2) denies summary judgment
to both parties on the Breach Of Good faith Claim and the Second Part Of The Fraud
Claim; and (3) dismisses the fraudutent Transfer Claim. An appropriate Order
accompanies this Opinion.

United States District Court

Dated: May /YY2O19

28