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DYNABEST INC. v. YAO

March 26, 1991

DYNABEST INC., DYNABEST (HONG KONG) LTD., and DALVEY PRODUCTS SUPPLY LTD., Plaintiffs,
v.
JEFF YAO, MIDAS-LIN CO., LTD., and MIDAS-LIN CHICAGO, LTD., Defendants



The opinion of the court was delivered by: BUA

 NICHOLAS J. BUA, UNITED STATES DISTRICT JUDGE

 FACTS

 Since this is a motion to dismiss, the court must accept all well-pleaded allegations as true. Morgan v. Bank of Waukegan, 804 F.2d 970, 973 (7th Cir. 1986). Plaintiffs' complaint reads like the plot from a novel of corporate intrigue. Plaintiffs are related corporations engaged in the world-wide sale of consumer goods, e.g., fireplace tools, barbecue grills, and indoor/outdoor furniture. Dynabest is a Taiwan corporation with its principal place of business in Taipei, Taiwan. Dynabest exports these consumer goods. Dynabest H.K. is a Hong Kong corporation with its principal place of business in Hong Kong. Dynabest H.K. manufactures and exports these goods. Dalvey is a Taiwan corporation with its principal place of business in Taipei, Taiwan. Dalvey also manufactures and exports these types of consumer goods.

 Defendant Yao is a permanent resident of Illinois and a citizen of Taiwan. Yao originally worked for TGC America Corporation of Illinois ("TGC"), a company related to Dalvey. TGC sold consumer goods in the United States, goods acquired from Dalvey. In April 1987, TGC faced financial difficulties. A corporate decision was made to incorporate a new company, Dynabest (U.S.A.), Inc. ("Dynabest U.S.A."), to serve as Dalvey's outlet in the United States. Dynabest U.S.A. was to be a subsidiary of Dynabest H.K. At Yao's urging, Dynabest H.K. and Dalvey chose Yao to head the subsidiary. In September 1987, articles of incorporation for Dynabest U.S.A. were signed by Tom Mok, on behalf of Dynabest H.K., and sent to Yao for filing. Before filing, however, Yao crossed out Mok's signature and substituted his own. Dynabest was incorporated in Illinois, but, unbeknownst to Dynabest H.K., Yao became the sole incorporator. Yao then appropriated all shares of stock issued in Dynabest U.S.A.

 Believing the subsidiary to be wholly owned by Dynabest H.K., plaintiffs entrusted the operation of Dynabest U.S.A. to Yao. Dalvey transferred TGC inventory and office equipment at a discount to Dynabest U.S.A. As a result of repeated requests by Yao, Dynabest H.K. and Dalvey made several capital contributions. Dynabest H.K. made seven separate capital contributions totalling $ 45,221.71. In addition, Dynabest H.K. provided Yao and Dynabest U.S.A. with $ 2500 in salary checks. Dalvey made one capital contribution of $ 22,625. Dalvey also contributed inventory worth $ 27,179.93 to Dynabest U.S.A. Plaintiffs allege that they never received full payment for the inventory nor have they recovered their capital contributions.

 Yao represented to third parties that Dynabest U.S.A. was a subsidiary of Dynabest H.K. After time passed, Dynabest H.K. and Dalvey became suspicious when they failed to receive stock certificates for Dynabest U.S.A. In April, 1988, Dynabest informed Service Merchandise, a Dalvey customer, that Yao was no longer an agent of Dynabest U.S.A. Service Merchandise was asked to make payments for merchandise directly to BancBoston, which had been engaged as Dynabest's payment agent, instead of Dynabest U.S.A. On May 12, 1988, Yao sent a letter to BancBoston promising to reimburse BancBoston if payment were sent to Dynabest U.S.A. In reliance on that promise, Service Merchandise paid Dynabest U.S.A. $ 145,899. Dynabest, though, has never received payment.

 Yao executed dissolution papers for Dynabest U.S.A. on October 31, 1988. The dissolution occurred without the knowledge or consent of either Dynabest H.K. or Dalvey.

 Based on these facts, plaintiffs bring state and federal claims. In Count I, Dynabest outlines a breach of contract action against Yao. In Counts II and III, Dynabest H.K. alleges that Yao breached his fiduciary duty. It also claims, in Count IV, that Yao engaged in conversion. In Count V, all plaintiffs claim that Yao, M-L, and Midas intentionally interfered with prospective business relationships. In Count VI, Dynabest H.K. and Dalvey claim unjust enrichment and constructive trust against all defendants.

 The remaining counts are the subject of defendants' motion to dismiss. Count VII charges Yao with common law fraud. Yao claims that this count should be dismissed for failure to plead with particularity. Both Yao and Midas ask that Counts VIII-X be dismissed. In these RICO counts, plaintiffs claim that defendants Yao, M-L and Midas engaged in a pattern of racketeering activity. The complaint alleges that they participated in schemes to defraud through use of the mails and/or wires. The mail and wire fraud claims are premised on misrepresentations regarding the incorporation of Dynabest U.S.A., the issuance of stock, the Service Merchandise-BancBoston transaction, the transfer of inventory, the payment of capital contributions, the incorporation of Midas, the payment for goods ordered from M-L, and the dissolution of Dynabest U.S.A. It is alleged that defendants used the income from this racketeering activity to acquire and maintain an interest in Dynabest U.S.A. and/or Midas. Additionally, it is claimed that they acquired and maintained an interest in Dynabest U.S.A. and/or Midas through a pattern of racketeering activity. It is also alleged that defendants conducted and participated in the affairs of Dynabest U.S.A. and/or Midas through a pattern of racketeering activity.

 Yao has responded by submitting an amended counterclaim. His counterclaim alleges that plaintiff Dalvey intentionally interfered with Yao's prospective economic advantages. Plaintiff ...


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