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A.L. Dougherty Real Estate Management Company, LLC v. Tsai

Court of Appeals of Illinois, First District

December 29, 2017

A.L. DOUGHERTY REAL ESTATE MANAGEMENT COMPANY, LLC, and PHYLLIS K. DOUGHERTY, Plaintiffs-Appellees,
v.
SU CHIN TSAI and CUBE GLOBAL, LLC, Defendants-Appellants.

         Appeal from the Circuit Court of Cook County No. 13 L 3920The Honorable Patrick Sherlock, Judge Presiding.

          PRESIDING JUSTICE PIERCE delivered the judgment of the court, with opinion. Justices Simon and Mikva concurred in the judgment and opinion.

          OPINION

          PIERCE JUSTICE

         ¶ 1 In 2011, plaintiffs obtained a default judgment against March Fasteners, Inc. (March), a company owned by Su Chin Tsai, for breaching a commercial lease (the underlying action). Plaintiffs subsequently learned that while the underlying action was pending, March agreed to sell certain assets to Cube Global, LLC, a company formed by Tsai's 16-year-old daughter. Plaintiffs initiated this action, alleging in relevant part that Cube Global was the alter ego of March, that Tsai and Cube Global were liable to plaintiffs for March's purported transfer of assets to Cube Global pursuant to section 5(a)(1) of the Uniform Fraudulent Transfer Act (Fraudulent Transfer Act) (740 ILCS 160/5(a)(1) (West 2012)), and that Tsai conspired with others to prevent plaintiffs from collecting on the default judgment obtained in the underlying action. Following a bench trial, the circuit court entered judgment in favor of plaintiffs.

         ¶ 2 On appeal, defendants argue that the circuit court erred because it (1) entered judgment in favor of plaintiffs on a non-existent "stand-alone" cause of action for alter ego liability, (2) misapplied the law of veil piercing, (3) admitted certain documents into evidence without an adequate foundation, (4) permitted plaintiffs' expert to testify at trial to an undisclosed opinion, and (5) denied defendants' request for an evidentiary hearing on plaintiffs' attorney fees petition. For the following reasons, we affirm.

         ¶ 3 BACKGROUND

         ¶ 4 In March 2002, March, a company in the business of importing and distributing metal fasteners, nuts, bolts, and screws to wholesale distributors, entered into a five-year commercial lease with plaintiffs to rent space in plaintiffs' Elk Grove Village warehouse, commencing on April 1, 2002, and ending May 31, 2007. Tsai executed the lease on behalf of March. March and plaintiffs later extended the Elk Grove Village warehouse lease through May 31, 2009.

         ¶ 5 On September 9, 2008, Tsai incorporated Matrix International, Inc., listing herself on the articles of incorporation as Matrix's sole incorporator and initial registered agent. Matrix's initial registered office was 2969 Burlington Avenue, Lisle, Illinois, which was Tsai's home address at the time. On October 3, 2008, Tsai, in her capacity as the president of Matrix, executed a real estate purchase agreement and closing statement for a building located at 1966 Quincy Court, Glendale Heights, Illinois (the Matrix building). On December 31, 2008, March moved out of the Elk Grove Village warehouse and into the Matrix building. March and Matrix executed a commercial lease agreement for a term ending on December 31, 2011. Tsai signed the lease on behalf of Matrix.

         ¶ 6 In April 2009, plaintiffs initiated the underlying action. March appeared through counsel but its counsel later withdrew, and no additional appearance was filed on behalf of March. On June 22, 2011, the circuit court entered a default judgment in favor of plaintiffs for $281, 462.32, plus attorney fees, costs, and postjudgment interest (the underlying judgment). Through supplemental proceedings, plaintiffs only collected $3264.02 in satisfaction of the underlying judgment, leaving a balance of $278, 198.30.

         ¶ 7 Meanwhile, on October 20, 2010, Cube Global was formed. Tsai's 16-year-old daughter Li-Yen Tu (Vicky) was listed on the articles of organization as Cube Global's organizer and registered agent, with Cube Global's principal place of business listed as 1966 Quincy Court, the address of the Matrix building. Tsai was Cube Global's sole manager from inception until sometime in 2012, when Yu-Chia Huang became a co-manager of Cube Global.[1]

         ¶ 8 On November 1, 2010, Tsai sent a letter to March's clients and vendors that stated:

"As our letterhead indicates, we have a new name. The business you knew as March Fasteners, Inc. is becoming Cube Global, LLC. This change will take effect on November 8, 2010.
There has been no change in management and we will be providing more products and services under the new company. We would appreciate it if you would bring this announcement to the attention of your accounts [receivable/payable] department and direct them accordingly."

         At trial, Tsai acknowledged that she failed to disclose these letters during pretrial discovery.

         ¶ 9 On November 5, 2010, Tsai executed a sales agreement on behalf of March in which March agreed to sell "certain assets" to Cube Global itemized in a 42-page exhibit to the sales agreement. On its face, the sales agreement indicated that Cube Global agreed to pay $400, 000 "(plus or minus 10%) for Inventory which is including [sic] packaging, outstanding, confirmed sales orders and sales software." Cube Global agreed to pay within 60 days after receiving March's assets.

         ¶ 10 Cube Global began operating on November 8, 2010. It operated out of the same space that March occupied on November 5, 2010. Tsai testified that March did not close its doors right away, and there was a period of time when March's employees worked for both March and Cube Global. Cube Global continued to use March's vendors and customer codes on its invoices. All of March's employees eventually became employees of Cube Global. Cube Global's employees worked from the same desks with the same phone numbers and used the same software that March had used. Cube Global executed a lease for the Matrix building, which commenced on January 1, 2011, and expired on March 31, 2014.

         ¶ 11 On April 17, 2013, plaintiffs initiated this action seeking to hold Tsai and Cube Global liable for the underlying judgment against March, and for March's transfer of its assets to Cube Global. Relevant to the issues on appeal, count II of the second amended complaint alleged that Cube Global was the alter ego of March because it had acquired and assumed all of March's assets, customers, business operations, and employees, and because it failed to maintain arms-length transactions with March, Matrix, and Tsai. Count II further asserted that "[a]dherence to the fiction of March and Cube Global's separate corporate existences would *** promote a substantial injustice, " and claimed that Cube Global was liable for the underlying judgment. In count III, plaintiffs alleged that both Cube Global and Tsai were liable to plaintiffs because March's transfer of substantially all of its assets to Cube Global was a fraudulent transfer under the section 5(a)(1) of the Act (740 ILCS 160/5(a)(1) (West 2012)). Count IV alleged that Tsai aided and abetted the fraudulent transfer, and count V alleged that Tsai conspired with Xiaoyu Fang, Yu-Chia Huang, and Tsai's children, Vicky, Li-Jen Tu (Alex), and Li-Heng Tu (Eric), to "orchestrate [an] elaborate fraudulent scheme" that prevented plaintiffs from recovering the underlying judgment from March.

         ¶ 12 At trial, plaintiffs sought to establish that March transferred its assets to Cube Global without receiving reasonably equivalent value in exchange. Plaintiffs called Michael Pakter, a certified public accountant, as an expert witness in the field of forensic accounting.[2] Pakter testified that on and after November 5, 2010, virtually all of March's assets were transferred to Cube Global, including inventory, accounts receivable, "all of the asset infrastructure, the business economic infrastructure of March, the employees, and assembled work force, the customer relationships, the vendor relationships, the leasehold interest, all of the goodwill, everything[.]" Pakter identified other assets that were transferred from March to Cube Global, including "pallets, furniture, fittings, computers, equipment, telephone equipment, the phone number, [and the] fax number. All of the infrastructure of March Fasteners was transferred over to Cube Global." Pakter testified that he had identified "hundreds of examples of orders placed, shipped and invoiced by March before November 5, 2010, to monies paid to and deposited by Cube Global on and after Monday, November 8, 2010." In total, Cube Global received $343, 084 from March's accounts receivable. He further testified that after November 8, 2010, when Cube Global began operating out of the Matrix building, March paid $99, 500 in rent due under the lease and no "reasonable equivalent value was given for the $99, 500 of rent that was paid" by March to Matrix. Defendants objected to Pakter's testimony regarding the rent, arguing that his opinion regarding the value of the rent was not disclosed in his pretrial written report. The circuit court overruled defendants' objection. Pakter concluded that "March did not receive reasonably equivalent value for receivables, rent, and good will and other assets." Pakter did not place a value on the good will or other assets transferred.

         ¶ 13 Plaintiffs' evidence sought to establish the web of connections between Tsai, March, Matrix, and Cube Global, as well Tsai's financial control over those entities. We recite only those facts necessary to understand our disposition here.

         ¶ 14 In 2007, Tsai was the sole owner, secretary, and treasurer of March. Starting in February 2008, Tsai was also March's president and sole director. Tsai was the sole authorized signatory on all of March's bank accounts.

         ¶ 15 Tsai testified at her deposition that she never held a position as an officer, director, or owner of Matrix. Matrix's 2009 and 2010 annual reports, however, listed Tsai as its registered agent, President, and Secretary. The 2010 report additionally listed Tsai as Matrix's director, and Tsai signed the 2010 report as Matrix's President. In December 2010, Tsai opened a bank account for Matrix at JPMorgan Chase Bank, N.A. (Chase), and she was the only authorized signatory on the account. Matrix's principal address remained 2969 Burlington Avenue, which was Tsai's home address at the time. From Matrix's inception through July 2013, Tsai signed every one of Matrix's checks drawn on the Chase account. In August 2012, Tsai added her son Eric as an additional authorized signatory on the Chase account. The Chase documentation reflected that Tsai added Eric as a signatory in her capacity as president, despite Matrix's 2011 report reflecting that Chun Hsein Wu was Matrix's president. In his 2015 deposition, Eric stated that he was not familiar with Matrix prior to his deposition. The evidence showed that Tsai made checks on the Matrix account to pay a water bill, homeowner's association dues, and a landscaping bill for her 2969 Burlington Avenue residence.

         ¶ 16 Plaintiffs' evidence established Tsai's involvement in the formation and capitalization of Cube Global, as well as her control over Cube Global's bank accounts. As stated above, on October 20, 2010, Tsai's 16-year-old daughter, Vicky, formed Cube Global listing herself as its organizer and registered agent with its principal place of business at the Matrix building. On November 2, 2010, Tsai opened a Cube Global business account at Chase with Tsai listed as Cube Global's manager and the only person authorized to sign checks or transact business on Cube Global's Chase account. On November 10, 2010, five days after the execution of the sales agreement between March and Cube Global, Eric (who was also 16-years-old at the time) issued a $100, 000 check from a personal checking account jointly held by him and his mother payable to Cube Global. Eric testified that the $100, 000 had been transferred to the joint account by Tsai, and that she directed him to issue the check to Cube Global because Xiaoyu Fang, who was Tsai's niece's husband, needed a loan. Tsai acknowledged that she transferred the $100, 000 to Eric so that Eric could loan the money to Fang, whom Tsai claimed was the one who requested Cube Global's formation in the first place. Eric did not receive a promissory note for the $100, 000 loan to Fang. On July 18, 2011, Eric issued another check for $18, 000 to Cube Global from the joint checking account. Days before the check was issued, Tsai transferred $18, 000 into the joint account from her personal checking account. In August 2012, Tsai added Eric as an additional authorized signatory on Cube Global's Chase account. Eric's sole involvement with Cube Global, however, was a two month internship in 2011.

         ¶ 17 The actual ownership of Cube Global was disputed at trial. Tsai testified that Fang "created" Cube Global, and claimed that Cube Global was owned by Fang and Huang. Tsai could not recall if Fang had requested that Tsai file the articles of incorporation or if Fang requested an accountant to do so. Tsai testified that Cube Global had share certificates, which were admitted into evidence.[3] Tsai also testified that Fang and Huang kept minutes of Cube Global's meetings.[4] Tsai stated that she only spoke to Fang and Huang one or two times per year. According to Cube Global's 2010 tax returns, Fang made $198, 077 in capital contributions, while Huang made $162, 063 in capital contributions. Tsai testified that another Cube Global tax return showed that Fang and Huang made additional capital contributions of $53, 450 and $43, 732, respectively.[5] Tsai testified that these were cash contributions that were used to purchase inventory from China. Over plaintiffs' objection, the circuit court admitted into evidence a cash receipt from Cube Global's Chinese supplier, Morgan Hardware, for approximately $400, 000, which was purportedly for the inventory purchased with Fang's and Huang's capital contributions. ...


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