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Cathay Industries USA, Inc. v. Bellah

United States District Court, N.D. Illinois, Eastern Division

December 3, 2019

CATHAY INDUSTRIES USA, INC., Plaintiff,
v.
WILLIAM J. BELLAH, Defendant.

          MEMORANDUM OPINION AND ORDER

          HON. MARIA VALDEZ, UNITED STATES MAGISTRATE JUDGE

         Plaintiff Cathay Industries, USA, Inc. brought this complaint against Defendant William J. Bellah alleging breach of contract with respect to repayment of a promissory note. Bellah disputes that any amounts are owed.

         A one-day bench trial was heard on April 15, 2019. The matter is now before the Court for findings of fact and conclusions of law in accordance with Federal Rule of Civil Procedure (“Rule”) 52(a). The Court has considered the testimony of the witnesses who testified at trial, the parties' admitted trial exhibits, the stipulations made by the parties, the proposed findings of fact and conclusions of law submitted by the parties, and the closing arguments of counsel. To the extent certain findings of fact may be deemed conclusions of law, they should also be considered conclusions of law. Similarly, to the extent matters contained in the conclusions of law may be deemed findings of fact, they should also be considered findings of fact.

         FINDINGS OF FACT

         1. Plaintiff Cathay Industries USA, Inc. (“Cathay USA”) is a manufacturer and distributor of iron oxide pigments. (Tr. 16:15-17.) Cathay USA is a Nevada company with its principal place of business in Valparaiso, Indiana, and it is authorized to transact business in Illinois. (Compl. ¶ 1.)

         2. Defendant William J. Bellah is an individual who resides in Mexico and Colorado. (Tr. 71:22-24.)

         3. This Court has diversity jurisdiction under 28 U.S.C. § 1332(a)(1), because Cathay USA and Bellah are citizens of different states, and the amount in controversy exceeds $75, 000. (Joint Final Pretrial Order [“JPTO”], Sec. 1.)

         4. Terence Yu is the CEO of Cathay Pigments Holdings, Inc. (“Cathay Holdings”). Plaintiff Cathay USA is a wholly owned subsidiary of Cathay Holdings. (Yu Dep. at 6:17-25; Def.'s Ex. 7, at 8.)

         5. Kevin Miles, who is currently Cathay USA's Chief Executive Officer, was Compass's Chief Financial Officer from 2007 to 2012. (Tr. 18:1-3.)

         6. Prior to January 1, 2007, Bellah met Terence Yu. (Tr. 74:9-17.)

         7. Prior to January 1, 2007, Bellah was an owner of Compass Chemical International, LLC (“Compass”), which imported phosphorus derivatives for use in various industrial and water treatment applications. Bellah started the company out of his house. (Tr. 73:3-74:8.)

         8. Yu assisted Bellah in setting up Compass, and both men originally had an ownership interest in the company, either personally or through corporate control. (Tr. 74:15-24; Yu Dep. 8:12-19.)

         9. Cathay USA acquired Compass from Bellah, among others, on January 1, 2007. (JPTO Stip. 1.)

         10. Also on January 1, 2007, Bel-Air Investments (“Bel-Air”), a company owned and controlled by Bellah, and Cathay Holdings entered into a Consulting Services Agreement (“2007 Consulting Agreement”). (JPTO Stip. 3.)

         11. As a result of the sale of Compass, Bellah incurred certain tax obligations amounting to nearly $1.5 million. (JPTO Stip. 2.)

         12. The tax obligations were the result of Yu's preferred method of effecting the merger. (Tr. 51:24-52:16.) It was originally structured to be a non-taxable event, but the merger was finally structured in a way that allowed Cathay Holdings to get a valuation advantage for negative goodwill. (Def.'s Ex. 2; Tr. 52:4-12.) Yu “explicitly” said that the merger would have to structured so that Bellah would realize a gain and ultimately be responsible for the resulting tax consequences over the next ten years. (Yu Dep. 30:13-31:16.)

         13. According to Yu, it was important to him for the transaction to be a share swap, and he needed it to be completed by the end of the year. (Yu Dep. at 23:17-23.)

         14. Bellah, however, refused to engage in the share swap unless Yu gave him the $1.5 million. (Yu Dep. at 24:3-5.) Yu came up with the idea to lend Bellah $1.5 million because at that point Yu could “not go back to [his] board to say that the deal is off.” (Yu Dep. at 24:7-11.)

         15. On September 23, 2008, Bellah prepared and executed a $1, 500, 000.00 Promissory Note (the “Note”) in favor of Compass. (JPTO Stip. 2; Tr. 42:13-16; Yu Dep. at 27:23-28:5; 80:23-81:4.)

         16. The Note states that the loan was “made by [Compass] to [Bellah] under and pursuant to that certain Agreement by and between [Bellah], [Compass], and Terence Yu, dated simultaneously herewith.” (JPTO Stip. 2; Joint Ex. 1 at 1.) The Note further states that it “evidences certain promises made by [Bellah] under and pursuant to the Agreement, to which reference is hereby made for a statement of the terms and conditions under which the Maturity Date or any payment hereon may be accelerated. The holder of this Promissory Note is entitled to all of the benefits and security provided for in the Agreement.” (Joint Ex. at 3.)

         17. Yu does not recall a written contract reflecting the “Agreement” referenced in the Note but believes the term referred to the share swap, by which Cathay USA acquired Compass. (Yu Dep. at 21:25-23:16.)

         18. According to Yu, the Agreement provided that Bellah would work for Cathay USA for ten years, and the Note would be repaid from his bonus payment during that time. (Yu Dep. at 21:5-20, 27:18-22, 28:8-16.)

         19. The Note provides that the outstanding principal and 5% annual interest on the loan would be payable in yearly installments beginning September 15, 2009 and ending on September 15, 2018. (Joint Ex. 1 at 1-2.)

         20. Pursuant to the 2007 Consulting Agreement, Bel-Air was to provide “General Worldwide management and sales consulting services” to Cathay Holdings in exchange for monthly fees, starting at $20, 000 per month in 2007 and increasing yearly to $30, 000 per month in 2011. (Joint Ex. 3, Sched. A-B.)

         21. The 2007 Consulting Agreement also obligated Cathay Holdings to make bonus payments to Bel-Air, immediately following each calendar year to be paid prior to the end of the first quarter of the following year, equal to a lump sum payment equal to the prior year's total payments or a minimum as follows: Q1 2008 = $240, 000, Q1 2009 = $270, 000, Q1 2010 = $300, 000, Q1 2011 = $330, 000, and Q1 2012 = $360, 000. (JPTO Stip. 4.)

         22. The parties to the 2007 Consulting Agreement (Cathay Holdings and Bel-Air) and the parties to the Note (Compass and Bellah) agreed that a portion of the amounts due to Bel-Air under the 2007 Consulting Agreement would be credited toward the ...


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