Jiaxing Globallion Import & Export Co.., Ltd v. Argington, Inc. et al

Filing 24

MEMORANDUM AND ORDER denying 11 Motion to Dismiss for Failure to State a Claim. The magistrate judge is respectfully requested to expedite discovery. At the parties' request, the magistrate judge shall arrange for mediation. A trial date shall be set by the magistrate judge in consultation with Courtroom Deputy June Lowe. The magistrate judge shall, with consent of the parties, select a civil jury of twelve. All in limine motions shall be heard on a date selected by the magistrat e judge. The parties shall file proposed jury charges, together with any appropriate supporting briefs, and exchange: (1) updated lists of pre-marked documents proposed for use at trial, together with copies of all documents; (2) updated lists of potential witnesses, together with summaries of proposed testimony; and (3) stipulations with respect to all undisputed facts. Copies shall be simultaneously filed and docketed. Ordered by Senior Judge Jack B. Weinstein, on 4/2/2012. (Barrett, C)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
MEMORANDUM & ORDER
JIAXING GLOBALLION IMPORT &
EXPORT CO., LTD., itself and as
assignee of SHANGHAI MAOJI
IMPORT & EXPORT CORPORATION
LIMITED, and JIAN FENG LIU,
individually and/or derivatively on behalf
of Argington, Inc.,

ll-CV-6291

t"Lk::1J
IN CLERK'S OFFICE
U.s. DISTHWT ('( 'RT ED.N.Y.

* APR 0 5 2012 *

BROOKLYN OFFICE

Plaintiffs,
-againstARGINGTON, INC., ANDREW F.
THORNTON, and JENNIFER L. ARGIE
a/kJa JENNIFER L. THORNTON,
Defendants.

/
JACK B. WEINSTEIN, Senior United States District Judge:

I.

Introduction

Plaintiffs sue Argington, Inc. ("Argington") and its owners and shareholders, Andrew F.
Thornton and Jennifer L. Argie (the "Individual Defendants"), for failure to pay on a contract.

See Comp!., Doc. Entry I, Dec. 23,2011 ("Comp!."). The individual defendants move to
dismiss the claims against them, arguing that plaintiffs have failed to plead sufficient facts to
pierce the corporate veil and hold them liable for the acts of Argington, Inc.
For the reasons set forth below, the motion is denied.
II.

Facts

Plaintiff Jianxing Globallion Import & Export Co., Ltd. ("JG") and Shanghai Maoji
Import & Export Corporation Limited ("SM") are Chinese corporations with their principle place
1

of business in China. Compl. ~~ 3-4. Liu, a Chinese citizen, is the president, general manager,
and controlling shareholder of JG. Id. ~~ 5-6.
Defendant Argington is a Missouri corporation with an office address in Kansas City,
Missouri that distributes children's furniture and children's furniture parts. Id. ~~ 7, 13.
Plaintiffs contend, however, that it maintains its principle place of business in Brooklyn, New
York, and conducted its business transactions here. Id. ~ 8. The corporation has never obtained
authorization by the Secretary of State to do business in New York. Id. ~ 40.
The Individual Defendants are natural persons who reside in Brooklyn, New York. Id. ~~
9-10.

In 2008, Argington contacted JG to supply its needs for these products. Id.

~

14. The

parties agreed that JG was to be paid within thirty days of the estimated time of arrival of the
goods in the U.S. Id.

~

15. Between April 2009 and August 2011, plaintiff JG manufactured and

delivered to Argington a total of twenty-eight shipments of children's furniture and children's
furniture parts for a total contract price of $898,240.78." Id.

~

$377,392.93, and refused to pay a balance of$520,847.85. Id.

12. Argington paid a total of
~~

17-18.

Argington continued to issue purchase orders to JG, which JG was unable to fulfill due to
quota restrictions. Id.

~

19. At Argington's request, JG processed these orders and forwarded

them to SM for shipment and delivery, since SM had the proper permits to do so. Id. Between
May 2009 and November 2011, JG manufactured and delivered to Argington through SM a total
of twenty-three shipments for a total contract price of$413,882.43. Id.

~

12. Argington paid a

total of$334,285.08, but refused to pay the balance of$79,597.35. Id. SM assigned all its
claims against Argington, Inc. to JG. Id.

~

20.

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JO also lost $19,597.45 in 2010 in the fonn ofa lost tax rebate from Chinese authorities
as a result of Argington's failure to pay. Id. '\[24. It expects to lose an additional tax rebate in
2011, although the amount of the loss is not yet clear. Id. '\[25. Argington is aware ofthis loss.

Id. '\[26.
After JO suspended its shipments to Argington and demanded that that company pay its
outstanding balance, Argington, through the Individual Defendants, offered to transfer thirty
percent of the common stock in the company and thirty percent of its profits to Liu in exchange
for an extension of time for Argington to pay its balances and the resumption of shipments. Id. '\[
29. The stock was transferred on September 17, 2010. Id. '\[30. At the hearing on the instant
motion, plaintiffs' attorney produced the stock certificates from the transfer. See Tr. ofHr'g,
Apr. 2, 2012. These certificates are deemed attached as Exhibit A.
The parties agreed that new shipments would be paid three months FOB Shanghai, and
10 resumed shipments. Compl. '\['\[31-32.
The Individual Defendants never pennitted Liu to fully participate as a shareholder.
They refused to produce income and expense statements, id. '\[33; refused to make any dividend
payments to him, id. '\[35; and refused to send him any notices of shareholders' meetings, id. '\[
36.
JO again suspended its shipments. Id. '\[37. The Individual Defendants then offered to
fonn a joint venture corporation in which Argington and Liu would have equal control. Id. '\[38.
They later reneged on this promise. Id. '\[39.
In support of their attempt to pierce the corporate veil and hold the Individual Defendants
liable, plaintiffs allege:
50. Thornton and Argie exercised their sole control and dominion over Argington
to engage in unjust and wrongful conduct against plaintiff JO.

3

51. Thornton and Argie failed to adhere to the formalities of corporate existence
of Argington in that it failed to keep adequate records relating to the governance
of its corporate affairs and accounting of its finances.
52. Argington was not adequately capitalized to engage in the business for which
it was formed and was undercapitalized with the intent of avoiding obligations as
a result of its ordinary business operations.
53. Thornton and Argie commingled their personal funds with Argington's funds,
stripped Argington of its assets for their personal use, caused Argington to
become a "shell" corporation, and used the "shell" corporation as a vehicle to
facilitate their wrongful and unjust acts against JG while avoiding their personal
liability.
[d. '\1'\150-53. To bolster their claim, plaintiffs note that, from the limited financial records

available, it appears that Argington's gross receipts were $1,898,015.38, and that the cost of
goods it purchased was approximately 50%. [d. '\134. Plaintiffs claim that the remaining
$900,000 disappeared into the pockets ofthe Individual Defendants. Pis.' Mem. of L. in Opp. to
Defs.' Mot. to Dismiss, Doc. Entry 16, Mar. 16, 2012.

III.

Motion to Dismiss Standard

Rule 12(b)(6) allows dismissal of claims when the pleadings fail "to state a claim upon
which relief can be granted." While plaintiffs are not required to put forward "detailed factual
allegations," a pleading that offers "labels and conclusions" or "a formulaic recitation of the
elements of a cause of action will not do." Bell Atlantic v. Twombly, 550 U.S. 544, 555 (2006).
In ruling on a 12(b)(6) motion, a court must accept all factual allegations in the complaint as true
and draw all reasonable inferences in plaintiff's favor. Hayden v. Paterson, 594 F.3d 150, 160
(2d Cir. 2010). "The issue is not whether a plaintiff will ultimately prevail but whether the
claimant is entitled to offer evidence to support the claims." Scheuer v. Rhodes, 416 U.S. 232,

4

236 (1974). A claim thus survives a motion to dismiss ifit is "plausible on its face." Twombly,
550 U.S. at 570.

IV.

Choice of Law

A federal court sitting in diversity applies the choice-of-law rules of the state in which it
sits. Klaxon Co. v. Stentor Elec. MIg. Co., 313 U. S. 487, 496 (1941); Fieger v. Pitney Bowes

Credit Corp., 251 F.3d 386, 393 (2d Cir. 2001). In New York, the "first step in any case
presenting a ... choice of law issue is to determine whether there is an actual conflict between
the laws of the jurisdictions involved." In re Allstate Ins. Co., 613 N.E.2d 936, 938 (N.Y. 1993).
Assuming that an actual conflict exists between the laws of jurisdictions with interests in having
their law applied to the case, New York's choice-of-law doctrine dictates that "the law ofthe
state of incorporation determines when the corporate form will be disregarded," Fletcher v. Atex,

Inc., 68 F.3d 1451, 1456 (2d Cir. 1995), as "the state of incorporation has the greater interest in
determining when and if that insulation is to be stripped away," Kalb, Voorhis & Co. v. Am. Fin.

Corp., 8 F.3d 130, 132 (2d Cir.1993).
Both parties concede that Missouri law applies to piercing. See, e.g., Tr. of Hr' g, Apr. 2,
2012.

V.

Plaintiffs' Have Sufficiently Pled Cause of Action Against Individual
Defendants

An attempt to pierce the corporate veil is "a separate and distinct cause of action" under
Missouri law. Irwin v. Bertelsmeyer, 730 S.W.2d 302, 304 (Mo.App. E.D. 1987). That state
recognizes "narrow circumstances in which the 'corporate veil' can be 'pierced' in order to hold
the corporation's owners liable for its debt." 66, Inc. v. Crestwood Commons Redevelopment

Corp., 998 S.W.2d 32, 40 (Mo. 1999). Plaintiffs must show:

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(1) Control, not mere majority or complete stock control, but complete
domination, not only of finances, but of policy and business practice in respect
to the transaction attacked so that the corporate entity as to this transaction
had at the time no separate mind, will or existence of its own; and
(2) Such control must have been used by the defendant to commit fraud or wrong,
to perpetrate the violation of a statutory or other positive legal duty, or
dishonest and unjust act in contravention of plaintiff's legal rights; and
(3) The aforesaid control and breach of duty must proximately cause the injury or
unjust loss complained of.

!d.; see also Collet v. American National Stores, Inc., 708 S.W.2d 273, 284 (Mo. App. 1986).

An allegation of actual fraud is not necessary for a court to hold shareholders liable for corporate
debts; the violation of statutory duties and undercapitalization are sufficient justification to pierce
the corporate veil. 66, Inc., 998 S.W.2d at 41; see also May Department Stores Co. v. Union
Electric Light & Power Co., 107 S.W.2d 41,55 (1937) (finding an improper purpose in a case
where a corporation was "operating it without sufficient funds to meet obligations to those who
must deal with it"). Undercapitalization is usually measured from the date of incorporation. 66,
Inc., 998 S.W.2d at 41.
In determining whether individual defendants exercised sufficient control over the
corporation to justify piercing the veil, courts have looked at whether they are "sole officers,
directors and shareholders" of the corporation; whether they "made all corporate decisions and
controlled ail corporate activities;" and whether the property from which the corporation operate
was owned by the individual defendants. See Edward D. Gevers Heating & Air Conditioning
Co. v. R. Webbe Corp., 885 S.W.2d 771,774 (Mo. App. 1994) (relying on these allegations in
denying defendants' motion to dismiss); see also McCormick v. Cupp, 106 S.W.3d 563, 568
(Mo. App. 2003) ("As only a half-owner of [the company], a non-majority shareholder,
[defendant] did not dominate (nay, could not have dominated) [the company]. Corporate
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domination by the defendant is necessary to pierce the corporate veiL"); Saidawi v. Giovanni's
Little Place, Inc., 987 S.W.2d 501, 505 (Mo. App. 1999) (holding plaintiff alleged sufficient

facts to state a claim for piercing the corporate veil where complaint alleged that the individual
defendant "was the majority stockholder as well as the treasurer and director of Defendant
Restaurant; that he treated it as his personal business without regard for the corporate form; that
he made all decisions as to the day-to-day operations of Defendant Restaurant; that he advanced
money personally to Defendant Restaurant and totally dominated and controlled it to the extent
that he became the alter ego of the corporation; that [the individual defendant] failed to
adequately capitalize the corporation; and that he used the corporate cloak of protection as a
subterfuge for the perpetration of fraud on Plaintiff').
Plaintiffs have pled sufficient facts to state a claim for piercing the corporate veil.
Facts alleged indicate that the Individual Defendants completely dominated Argington.
The Individual Defendants operate Argington out of a Brooklyn, New York address which
appears to be the Individual Defendants' residence. Prior to the sale of shares to Liu, defendants
were the sole owners and shareholders of the corporation. Even after the sale of shares,
defendants failed to accord Liu the rights of a shareholder. Argington's course of conduct with
Liu-namely, its failure to turn over records or inform him of shareholder meetings-indicates
that the company is not complying with corporate formalities. Plaintiffs further claim that the
Individual Defendants comingled their personal funds with Argington's funds and
undercapitalized the business.
Plaintiffs allege that defendants took these actions "with the intent of avoiding
obligations as a result of its ordinary business operations" and "to facilitate their wrongful and
unjust acts against JG while avoiding their personal liability." Compl. ~~ 67-68. These
7

allegations are sufficient to plead the requisite harm to them, and that the Individual Defendants'
conduct proximately caused that harm.
Defendants complain that plaintiffs have failed to adduce any evidence to support their
claims. See Defs. Jennifer 1. Argie and Andrew F. Thornton's Mem. in SUpp. of Mot. to
Dismiss the Compl. Against the Individual Defs., Doc. Entry 12, Mar. 2, 2012; Defs. Jennifer 1.
Argie and Andrew F. Thornton's Reply Mem. in SUpp. of Mot. to Dismiss the Compl. Against
the Individual Defs., Doc. Entry 22, Mar. 30, 2012. They argue that plaintiffs in other cases
alleging similar claims have alleged more facts in support of their claim. See Tr. ofHr'g, Apr. 2,
2012 (citing Osgood v. Midwest Parking Solutions, 4:07 CV 1365,2009 WL 4825192 (E.D. Mo.
Dec. 11, 2009)).
Unlike the plaintiffs in Osgood, however, plaintiffs in this case are not employees of the
corporation and have no insider knowledge of its internal workings. Given their limited
understanding of the actual operations of Argington, their allegations are sufficient to permit
discovery on this claim. See, e.g., Osgood v. Midwest Parking Solutions, 4:07 CV 1365, 2009
WL 4825192, at *2-4 (E.D. Mo. Dec. 11, 2009) (holding that allegations that an individual
defendant co-mingled corporate assets with personal assets; undercapitalized the corporation;
and "had operational control," "an ownership interest in," and "controlled all significant
operations of' the corporation had pled sufficient facts to survive a motion to dismiss).
VI.

Conclusion

Defendants' motion is denied. The magistrate judge is respectfully requested to expedite
discovery. At the parties' request, the magistrate judge shall arrange for mediation.
A trial date shall be set by the magistrate judge in consultation with Courtroom Deputy
June Lowe. The magistrate judge shall, with consent of the parties, select a civil jury of twelve.

8

All in limine motions shall be heard on a date selected by the magistrate judge. The
parties shall file proposed jury charges, together with any appropriate supporting briefs, and
exchange: (I) updated lists of pre-marked documents proposed for use at trial, together with
copies of all documents; (2) updated lists of potential witnesses, together with summaries of
proposed testimony; and (3) stipulations with respect to all undisputed facts. Copies shall be
simultaneously filed and docketed.

k B. Weinstein
enior United States District Judge
Dated: April 2, 2012
Brooklyn, New York

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EXHIBIT A

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bam230S, bam240o.