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Dinesh J. Sheth, Individually, and Grinders International, Inc., An v. Sab Tool Supply Company

April 10, 2013

DINESH J. SHETH, INDIVIDUALLY, AND GRINDERS INTERNATIONAL, INC., AN ILLINOIS CORPORATION, PLAINTIFFS AND COUNTERDEFENDANTS- APPELLANTS AND CROSS-APPELLEES,
v.
SAB TOOL SUPPLY COMPANY, AN ILLINOIS CORPORATION, D/B/A Y.G. TOOL (USA) COMPANY; Y.G.-1 COMPANY, , LTD., A COMPANY; Y.G.-1 INDUSTRIES INDIA
PRIVATE, LTD., AN INDIAN COMPANY; REGAL CUTTING TOOLS, INC., AN ILLINOIS CORPORATION; AND HOKEUN SONG, INDIVIDUALLY,
DEFENDANTS AND COUNTERPLAINTIFFS- APPELLEES AND CROSS-APPELLANTS.



Appeal from the Circuit Court of Cook County No. 07 L 2679 Honorable James McCarthy Korean Judge Presiding.

The opinion of the court was delivered by: Justice Hyman

JUSTICE HYMAN delivered the judgment of the court, with opinion. Justices Sterba and Pierce concurred in the judgment and opinion.

OPINION

¶ 1 The parties to this appeal were involved in the trade of used manufacturing machines and, before their relationship fell apart, they did about $30 million in business and described each other as brothers. The plaintiffs are Grinders International, Inc., and its principal Dinesh Sheth. Defendants are a group of related companies, Y.G.-1 Company, Ltd., SAB Tool Supply Co., Y.G.-1 Industries India Private Ltd., and Regal Cutting Tools, Inc., and an individual, Hokeun Song (Song). Y.G.-1 Company (YG-1 Korea) is a Korean company and is the sole shareholder of Y.G.-1 Industries India Private Ltd. (YG-1 India), an Indian corporation. Super Tools Company, Ltd. (Super Tools) is a Korean company and a shareholder of Regal Cutting Tools, Inc. (RCT), an Illinois corporation. SAB Tool Supply Co. (SAB Tool) is an Illinois corporation owned entirely by defendant Song.

¶ 2 Plaintiffs appeal (i) the dismissal of count I of their second amended complaint, and (ii) the results of a joint bench and jury trial. Defendants cross-appeal (i) the trial results, (ii) the admissibility of plaintiffs' expert's testimony, (iii) the order denying their motion for prejudgment interest and additur, and (iv) the order granting plaintiffs leave to file a fourth amended complaint at the conclusion of the trial testimony but before the final arguments.

¶ 3 For the reasons stated below, we largely affirm and reverse only as to the trial court's denial of prejudgment interest.

¶ 4 BACKGROUND

¶ 5 The facts, as developed at trial, are as follows. Grinders' president, Sheth, an engineer by training, began dealing in used manufacturing machinery in 1980, and started Grinders in 1992. Song started YG-1 Korea in 1981. He currently owns 44% of the company, and is its chief executive officer. Sheth and Song met in 1999 and started doing business together. Grinders and YG-1 Korea and its subsidiaries conducted between 200 and 250 transactions between 2000 and 2006. Sheth testified that his commission on sales to defendants ranged from 0% to 10%. Song testified that Sheth's commission ranged from 3% to 10%, depending on the size of the deal. In December 2002, YG-1 Korea formed a subsidiary company in China called New Century Tool.

¶ 6 I. Grinders' Sales to YG-1 India

¶ 7 Narendra Mittal began working for defendant YG-1 India in 2002 as a promoter-director, building YG-1 India from the ground up. He later became managing director and then executive director. YG-1 India was almost entirely owned by YG-1 Korea, and began operating as a manufacturing company in November 2003.

¶ 8 Grinders began selling manufacturing machines to YG-1 India in late 2003, and Sheth joined YG-1 India as a director. Also at this time, Jayesh Joshi started working as an accounts manager at the company, and within three months he became a director. Joshi's responsibilities included verifying incoming shipments of machinery against invoices and issuing payments for those machines.

¶ 9 Sheth testified that he informed Song that, due to Indian import regulations, used machines Grinders purchased in the United States would have to be reconditioned and rewired before being shipped to India. Sheth testified that Song agreed to fix reconditioning costs at the price of the machine, so that reconditioning costs would not exceed the machines' base price. Song denied making this agreement. Plaintiffs charged YG-1 India for the reconditioning and YG-1 Korea for the machine itself. On December 19, 2003, Mittal sent Sheth an email asking, "Please do not mention that the reconditioning of the machine has been done in the past else we have to quantify the expenses of reconditioning and work out the depreciated value from the year of reconditioning." Sheth testified that he did not list any reconditioning costs on most invoices to YG-1 India to avoid additional custom duties at the Indian border. Sheth testified that YG-1 Korea accepted this arrangement at a YG-1 India board meeting. Song denied the arrangement.

¶ 10 From 2003 to 2005, YG-1 India ordered around 160 machines from Grinders for its factories. YG-1 India paid Grinders about $120,000. Mittal testified that, at the direction of YG-1 Korea, other invoices were not paid. In 2005, Yunkyun Yu, an employee of YG-1 Korea, began overseeing YG-1 India, which was operating at a loss. YG-1 India's financial records showed that it owed money to Grinders. After examining YG-1 India's invoices and invoices paid by YG-1 Korea, Yu concluded that all the equipment Grinders sent to YG-1 India had already been paid for by YG-1 Korea, and that some of shipments to YG-1 India were unauthorized. The invoices for the same equipment billed to both YG-1 India and YG-1 Korea did not refer to the cost of reconditioning the equipment. Yu believed that YG-1 India did not owe Grinders any money. On July 14, 2006, Yu sent a letter of confirmation to Sheth, asking Sheth to confirm that YG-1 India owed Grinders $478,113 for six unpaid invoices, and to transfer all rights to payment under those invoices to SAB Tool. Sheth refused to sign the letter of confirmation.

¶ 11 Mittal estimated that, in November 2006, YG-1 India owed Grinders over $1 million for unpaid machinery invoices. Joshi confirmed that amount. Sheth testified that YG-1 India owed Grinders exactly $1,082,039.84 in unpaid invoices. But Grinders' end-of-year balance sheet for 2005 reflected only $394,154 in accounts receivable, and the end-of-year balance sheet for 2006 reflected $15,000 in accounts receivable. Sheth stated that he removed money owed from YG-1 India from his books for tax purposes. After Sheth filed this suit, Grinders' books reflected an account receivable from YG-1 India.

¶ 12 II. The Besly Transaction

¶ 13 James Deeds served as president and owner of the Besly Products Corporation (Besly), an Illinois company that manufactured cutting tools. In 2004, Deeds decided to sell his company's assets. On August 17, 2005, Sheth informed Song that Besly was interested in selling its cutting tools division. The next day, Sheth informed Song that the asking price for the entire division was $6.7 million, and that the price was $1.2 million more than the cost of the machines alone. Sheth testified that he and Song spoke over the phone on August 17 or 18, and that Song offered to purchase Besly's cutting tools division for $6.5 million. Sheth further testified that Song said, "If you buy it for [$]6.6, you lose money. If you buy [$]6.4, you will get [$]100,000. So it is all your decision. I will pay you [$]6.5." Song denied stating this.

¶ 14 Contrary to Sheth's testimony, he wrote to Song on August 18, 2005, in part, "Mr. Song, I know your goal is to buy for $5.0 million and I will try my best possible to come closer to that figure." Five days later, Sheth again wrote Song, telling him that Besly's asking price was $5.732 million for the machines, inventory, and trademark, or $4.5 million for the machines alone. The next day, Sheth informed Song that he had further negotiated the price down to $5.1 million and was confident he could reduce it further to $5 million. Sheth added,

"Regarding my commission, please advice [sic] on whether it should be billed in the original invoice or sent separately so that we avoid any confusion in accounting at your end.

The entire transaction in USA with seller will be carried out by Grinders International Inc. This will safeguard us in case of any legal disputes if it ever arises. * * *

I have not prepared any invoice since I do not know under what name you wish to purchase. It will be better if an official purchase order is placed with Grinders International, so we can make proper transaction. Kindly furnish the information so that I can send the invoice. I suggest that in order to avoid any complication like we previously had by listing each and every item on the invoice, it would be recommended that we write

'Complete tape manufacturing plant size range _____ to _____ with all equipment attached to all machines' and the price or $5,000,000[.]

I request you to wire transfer $500,000 at the earliest so that I can sign the papers. I have already given my verbal commitment to the seller."

¶ 15 On August 25, 2005, Sheth sent YG-1 Korea "an invoice detailing standard terms, which I have agreed with the seller of the company. I request you to kinldy [sic] study and let me know if you need any additional paper work from my end. I have agreed to make the deposit payment by August 31, 2005." The invoice attached to the August 25, 2005 correspondence stated, in relevant part, as follows:

DESCRIPTION AMOUNT

A complete tap manufacturing facility consisting of $5,000,000 approximately 300 machines of various types, engineering know-how, inventory and tradename.

Approximate dismantelling, packing and preparing for $200,000 shipping 3% commission to Grinder International $150,000 Sheth testified that Song asked him to intentionally misrepresent the payment breakdown on this invoice to hide the nature of the transaction from Song's employees. Song denied this. Sheth further testified that Song wished to purchase Besly's raw materials, inventory, and work in progress for himself through SAB Tools. Song denied this as well, claiming that YG-1 Korea already owned those assets after the sale.

¶ 16 Grinders and YG-1 Korea executed a purchase agreement, dated August 27, 2005, for all of Besly's assets at $5 million. Sheth indicated that he "would be signing a similar agreement between Grinder and Besly." YG-1 Korea requested some amendments to the purchase agreement, including making New Century Tool the buyer instead of itself. On August 30, 2005, YG-1 Korea wired $500,000 to Grinders.

¶ 17 At some point, Sheth negotiated his own purchase price down to $3.95 million. Deeds testified that Sheth requested that Deeds not discuss the purchase price with anyone. On August 31, 2005, Besly and Grinders executed a purchase agreement for most of Besly's assets for $3.95 million. On September 6, 2005, YG-1 Korea asked Sheth for a copy of the purchase agreement between Besly and Grinders. Sheth testified that he sent YG-1 Korea a copy of the purchase agreement, and on the same day, he sent an email marked "confidential" to Song. Sheth wrote that, while the contract between Besly and Grinders was, on its face, for $3.95 million, this did not reflect the $50,000 broker fee, and a $1 million promissory note he had made to the sellers "to pay for Trade Name and Engineering" and to satisfy Besly's liability to its employees. Sheth represented that, if the transaction was not structured like this, the bank would take all of the sale proceeds and Besly would remain liable to its employees. Sheth admitted and Deeds confirmed that these representations were false. Sheth testified that Song asked him to misrepresent the Besly's purchase price to hide the nature of the transaction from YG-1 Korea.

¶ 18 In October 2005, Sheth and Song visited the Besly facilities so that Song could assess the condition of Besly's assets. On October 25, 2005, Song sent an email to Sheth, stating that the purchase agreement between New Century Tool and Grinders would be voided and replaced by an agreement between YG-1 Korea and Grinders: "Signed agreements you had already sent to NCT [New Century Tool] will be torn away because we changed the payment mechanic. Instead, we will send the draft for your signature; that is, agreement between GI [Grinders] and YG[-1 Korea] soon."

¶ 19 On October 28, 2005, YG-1 Korea wired $3.5 million to Grinders, and another $1 million on November 1, 2005. Song attended the closing of the Besly transaction. The parties structured the transaction as a back-to-back purchase and sale. Grinders paid Besly $3.95 million.

¶ 20 After the closing, Song decided to ship Besly's machines to China and transferred other Besly assets in a new company called Besly Cutting Tools, Inc. (BCT), which Song owns. Song made Sheth president of BCT and Yang its chief financial officer. BCT's balance sheet of November 2005 reflects a $1.292 million "officer loan" from Song. Yang testified that amount reflects inventory, raw materials, and work in progress from the Besly transaction, not a cash loan. Sheth testified that BCT purchased these assets from Grinders separate from the back-to-back Besly transaction. Song testified that all of Besly's assets were included in the $5 million purchase price.

¶ 21 According to Sheth, Song orally agreed that BCT would purchase Grinders' raw materials, inventory, and works in progress for $1.293 million. Sheth told the accountant to put the loan on Besly's books, and on November 30, 2005, sent BCT an invoice from Grinders in the amount of $1.293 million for "Finished goods, Semifinished goods, Raw material (steel), Some tooling, Warking [sic] progress, Grinding wheels." BCT's balance sheet from November 30, 2005 reflects $1.293 million worth of inventory, but does not show any debt owed Grinders. Nor do Grinders' financial records from that time show any sales to BCT or Song for $1.293 million.

¶ 22 On November 13, 2005, Sheth wrote Song, requesting a purchase order for the Besly transaction. Sheth testified that a purchase order was necessary to clear customs, while Song testified that the purchase order was for shipping purposes only and did not form the basis of the parties' agreement. On November 14, 2005, YG-1 Korea issued a purchase order to Grinder for "Ex-works Besly factory," totaling $5 million and listing 13 pages of various machines and parts. The purchase order did not include Besly's raw materials, inventory, and works in progress.

¶ 23 On December 6, 2005, Song wrote to Sheth asking Sheth to send an offer from BCT to New Century Tools for the purchase of the raw materials and grinding wheels from the Besly transaction. Sheth responded that the purchase should be from Grinders, not BCT. Song responded: "if you want to do transaction between New Century Tool and Grinders International, you can do it only if all invoice amount should be used for payment related with machinery (to New Century Tool from Besly) related cost such as packing." On December 9, 2005, Grinders issued a purchase order to New Century Tool for a shipment of raw materials and grinding wheels from the Besly transaction. The invoice price was $230,834.22. New Century Tool paid this invoice. Song testified that he paid Grinders a commission of $250,000, applied to services done for shipping.

¶ 24 In July 2006, Sheth resigned as BCT's president due to health problems.

¶ 25 III. The Regal-Beloit Transaction

¶ 26 The Regal-Beloit Corporation primarily manufactured motors and generators. In 2005, Scott Schneier was a group vice president for the mechanical group at Regal-Beloit, where he oversaw the cutting tools division. That division manufactured high-speed rotary tools and had factories in Loris, South Carolina, and South Beloit, Illinois. In 2005, Regal-Beloit decided to sell the cutting tools division and solicited offers from various companies, including Grinders.

¶ 27 On December 6, 2005, Sheth emailed Song seeking authority to negotiate with Regal-Beloit on YG-1 Korea's behalf. The next day, Song authorized Sheth to represent YG-1 Korea in the negotiation. Sheth testified that Song agreed to pay him a 10% commission on the final transaction price. Song denied making an agreement for plaintiffs' commission.

¶ 28 Sheth appraised Regal-Beloit's machines and reached an appraisal value of $18 million. Regal-Beloit's initial asking price was $16 million. After some discussion, Sheth negotiated the price down to about $10.7 million. Sheth performed the due diligence on the acquisition, including providing YG-1 Korea with financial documents, touring Regal-Beloit's factory with Song, and helping to secure $3 million in financing. Sheth also advised Song regarding environmental matters related to the real estate. Song hired Isaac Yang to conduct an asset evaluation of the cutting tools division. Yang testified that when he and Sheth met, Sheth indicated that he was working on the Regal-Beloit transaction for free. Song confirmed this in his testimony. Sheth also retained attorneys to represent YG-1 Korea in the negotiations.

¶ 29 On February 16, 2006, YG-1 Korea sent a letter of intent to Regal-Beloit with a preliminary purchase price of $10.7 million and an initial closing date of March 31, 2006. Song believed the price was too high. Thereafter, Song and his brother, Hosang, negotiated with Schneier directly, and Sheth's was less involved. Song offered to pay $7 million, and Schneier countered with $8.85 million. Regal-Beloit and YG-1 Korea eventually agreed on a price of $7.3 million, with YG-1 Korea taking on some of Regal-Beloit's liabilities, including certain warranties, environmental risks, and employee insurance.

¶ 30 Sheth claims he put forward the idea of creating two companies to act as buyers for the cutting tools division's real estate after the transaction. Song made Yang the owner of these companies. The parties structured the transaction so that defendant RCT acquired the non-real estate assets. The Regal-Beloit transaction closed in May 2006. The closing documents did not give Sheth any commission, and Sheth did not keep track of the number of hours he worked on the transaction. Song testified that had Sheth signed the letter of confirmation regarding Grinders' claims against YG-1 India, he would have paid Sheth $30,000 in commission on the Regal-Beloit transaction.

¶ 31 IV. Loans between SAB Tool and Grinders

¶ 32 Heather Lee has been the president of defendant SAB Tool since 1998, which is a wholesaler of cutting tools. Lee testified that, at the direction of Song, who owns the company, SAB Tool loaned money to Grinders, as evidenced by loan agreements signed by Lee and Sheth. Sheth testified that SAB Tools and Grinders loaned money to each other. Lee agreed that SAB Tools loaned money to Grinders, but denied that Grinders ever loaned money to SAB Tools.

¶ 33 In June 2004, Grinders wired $50,000 to SAB Tool. Lee testified that the transfer was repayment for a loan previously made to Grinders. In January 2005, Grinders wired $80,017 to a bank account at Foster Bank, where SAB Tool has an account. But Lee testified that the second transfer was not to SAB Tool's account. Lee kept a balance sheet for loans to Grinders, which reflected $285,000 in loans and $225,000 in repayments between 2000 and 2008. On the other hand, Sheth's balance sheet showed that Grinders made $415,017 in loans to SAB Tool, and that SAB Tool repaid $285,000.

¶ 34 V. Egelston's Expert Testimony

ΒΆ 35 Amy Egelston, a certified public accountant and certified fraud examiner, testified as plaintiffs' expert. Egelston examined financial documents, deposition testimony, discovery, and interviewed Sheth. She testified that defendants owed Grinders about $2.39 million and ...


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