Date: 03-05-2007

Case Style: Jerry Davis, et al. v. Yageo Corporation, et al., etc.

Case Number: 04-16911

Judge: Betty B. Fletcher

Court: United States Court of Appeals for the Ninth Circuit on appeal from the Northern District of California, San Francisco

Plaintiff's Attorney:

Rodney R. Patula (argued), Eric G. S. Marcks, Daniel T. Balmat, and Penn A. Butler, Squire, Sanders & Dempsey LLP, San Francisco, California, for plaintiffs-appellees-crossappellants and plaintiffs-appellants Dux Capital Management Corp. and Jerry Davis.

Defendant's Attorney:

Robin Meadow (argued), Alison M. Turner, Eric R. Cioffi, Cynthia E. Tobisman, Greines, Martin, Stein & Richland LLP, Los Angeles, California, and William McGrane, Maureen A. Harrington, McGrane, Greenfield, Hannon & Harrington, San Francisco, California, for defendantsappellants- cross-appellees-intervenors Yageo Corp., Yageo Holding (Bermuda) Ltd., An-Ehr Chen, Yan Sheng Chan, Cheng-Ling Lee, and Pierre Chen.

Merle C. Meyers (argued), Kathy L. Quon, Goldberg, Stinnett, Meyers & Davis, San Francisco, California, for defendant-appellee E. Lynn Schoenmann.

K. John Shaffer, Stutman, Treister & Glatt, PC, Los Angeles, California, for cross-appellee-intervenor Rextron International Ltd.

Iain A. Macdonald, MacDonald & Associates, San Francisco, California, for appellee George Chen.

Jon R. Vaught, Vaught & Bourtris LLP, Oakland, California, for cross-appellees Equity Plus Securities, Ltd., Rex Y.C. Yang, and Wen-Chin Yeh.

Description:

These consolidated cases arise out of a corporate dispute between majority and minority shareholders over the minority shareholder's right to elect two of the five directors to the Long Life Noodle Company, Inc.'s board of directors. Plaintiffs Dux Capital Management Corp. and its agent, Jerry Davis, alleged that: Defendants, Yageo Corp. and certain of its subsidiaries and employees who controlled the Long Life Noodle Company's board of directors, placed the corporation into bankruptcy without considering other alternatives that may have yielded greater value for the corporation and its shareholders. Defendants petitioned for bankruptcy in order to prevent plaintiffs, who were minority shareholders, from participating in the governance of the corporation. In bankruptcy, the equity of the minority shareholders was wiped out and the assets of the corporation were sold to one of defendant Yageo Corp.'s subsidiaries, Equity Plus Securities, Ltd., a secured creditor of LLNC.

In a jury trial, the jury found defendants Yageo Corp., Yageo Corp. subsidiaries Yageo Holding (Bermuda) Ltd. and Rextron International Ltd., and Yageo Corp. employees An- Ehr Chen, Yan Sheng Chan, and Cheng-Ling Lee1 liable for breach of fiduciary duty. On appeal, defendants argue that plaintiffs lack standing to sue as assignees of the corporate claim and that their breach of fiduciary duty claims are preempted by federal bankruptcy law and barred by res judicata. The district court held that plaintiffs have standing and that their claims are neither preempted nor barred by res judicata. Plaintiffs cross-appeal the district court's damages calculations and its determination that they did not have standing to assert the claims of minority shareholders. Plaintiffs filed a separate appeal of the district court's refusal to entertain their Fed. R. Civ. P. 60(b) motion for post-judgment relief. In a related case, plaintiffs appeal from the district court's order affirming the bankruptcy court decision in an adversary proceeding against debtor George Chen (a founder of Long Life Noodle Company) and the Trustee of Chen's bankruptcy estate, E. Lynn Schoenmann. We affirm the district court on all issues.

I. FACTS AND PROCEDURAL HISTORY

A. Yageo's Investment in LLNC

Long Life Noodle Company, Inc. ("LLNC"), was formed in 1996 by George Chen and George "Geordy" Murphy. In 1998, George Chen approached Pierre Chen, director and general manager/president of defendant Yageo Corp. ("Yageo") in Taiwan, about investing in LLNC. Pierre Chen directed An-Ehr Chen, his assistant, to investigate this investment opportunity. An-Ehr Chen recommended that Yageo invest through Rextron International Ltd. ("Rextron"), a whollyowned subsidiary of another subsidiary, Yageo Holding (Bermuda) Ltd. ("Yageo Holding"), and Equity Plus Securities Ltd. ("Equity Plus"), another Yageo affiliate. Yageo Holding and Rextron were merely holding companies, and their investments were determined by Pierre Chen as general manager of Yageo.

LLNC in return for all of the preferred stock and some of the common stock and thereby became the majority shareholder. Murphy and George Chen owned the balance of the common stock as minority shareholders. After Rextron's initial investment, LLNC borrowed approximately one million dollars from Equity Plus. These loans were secured by all of LLNC's assets. The loans were negotiated by attorney Gayle Chan, whom LLNC hired to handle these transactions. She was Rextron's corporate counsel and she did not inform LLNC of this conflict of interest.

Under LLNC's Articles of Incorporation, Rextron could elect three of the five directors of the board. Rextron elected defendants An-Ehr Chen, Cheng-Ling Lee, and Yan Sheng Chan to the board, all of whom were Yageo employees. An- Ehr Chen was the assistant to the president of Yageo and a director of Rextron, Lee succeeded Pierre Chen as general manager/president of Yageo in 2000, and Chan was the vice-president of Yageo. Murphy and George Chen at that point controlled two of the five seats on the board.

In February 2001, George Chen resigned as an officer and director of LLNC. Murphy resigned in March 2001. Their seats remained vacant after their resignations; this left control of the LLNC board of directors to Rextron. The LLNC By- Laws provided that board actions had to be unanimous, and unanimity could be achieved since only Rextron-controlled directors remained on the board.

B. Chen-Dux Settlement

Around the same time period, George Chen was involved in separate litigation with Dux Capital Management Corp. ("Dux") and Jerry Davis, Dux's agent.2 In September 1998, Dux lent Chen $150,000, for which Chen executed a promissory note to Dux secured by Chen's stock in LLNC. Chen defaulted on the loan, and Dux demanded repayment. In March 2000, Chen sued Dux in California state court for declaratory relief, alleging that he never received the $150,000. Dux cross-claimed. On April 25, 2001, Chen and Dux entered into a settlement agreement. Pursuant to the settlement agreement, Chen was to transfer 200,000 shares of common stock in LLNC and voting proxies for all of his 411,538 shares (including the 200,000 transferred) to Dux. These shares were to be held in escrow for Dux "pending the expiration of the right of first refusal described in the Long Life Noodle Company Shareholder Agreement."3 Settlement Agreement and Mutual General Release ("Settlement Agreement") 1. Dux had the right to vote the 200,000 shares pending expiration or exercise of the right of first refusal. Moreover, Paragraph 12.18 of the Settlement Agreement expressly provided, "A finding by the court that this Agreement is in good faith under [California] Code of Civil Procedure Section 877.6 is a condition to the validity and enforceability of this Agreement." Id. 12.18. The California superior court made this good faith determination on July 25, 2001 and approved the settlement agreement. Chen transferred 200,000 of his shares and voting proxies for all his shares to Dux.

C. LLNC Directors' Decision to File Bankruptcy

On April 26, 2001, the day after Chen and Dux reached their settlement agreement, Dux and Davis demanded a meeting of the shareholders to elect directors to the two vacant seats on the board. Dux's counsel, Lorne Polger, sent a formal demand letter on April 30, 2001. After receiving plaintiffs' demand, Rextron and its representatives, particularly An-Ehr Chen and Gayle Chan, discussed ways to prevent plaintiffs from voting directors to the board and participating in the management of the corporation. Defendants began to consider bankruptcy at the end of April or beginning of May 2001.

The LLNC By-Laws provided that shareholders were to elect directors at the annual meeting on May 1. No meeting was held on May 1, 2001. From May 1 to May 3, the directors and Rextron attorneys continued to discuss options for preventing the minority shareholders from electing their two directors. On May 3, 2001, the board of directors (consisting of three directors elected by Rextron) unanimously voted to petition for bankruptcy. The By-Laws required any action taken by the board to be unanimous.

On May 4, Polger faxed another letter to LLNC and Rextron attorneys demanding a meeting and an inspection of LLNC's books and records. Rextron counsel Gayle Chan denied this request on May 7, 2001, and even though she knew of the board's resolution to pursue bankruptcy, she stated that she would try to arrange for an inspection on May 15. Also on May 7, 2001, An-Ehr Chen, on behalf of Rextron, requested that LLNC's board convert 700,000 of Rextron's preferred shares to common. The LLNC board granted this request by unanimous written consent. On May 9, 2001, LLNC filed its petition for bankruptcy.

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Outcome: For the foregoing reasons, the district court is AFFIRMED.

Plaintiff's Experts: Unavailable

Defendant's Experts: Unavailable

Comments: None