Gao v. Sinova Specialties, Inc., 2018 NCBC 69.
STATE OF NORTH CAROLINA IN THE GENERAL COURT OF JUSTICE SUPERIOR COURT DIVISION MECKLENBURG COUNTY 16 CVS 6709
JIANXUN “BILL” GAO, individually, and derivatively on behalf of Sinova Specialties, Inc.,
Plaintiff,
v.
SINOVA SPECIALTIES, INC., a North Carolina Corporation; ORDER AND OPINION ON JOHANNES HECKMANN; PLAINTIFF’S MOTIONS TO DISMISS YAN “ELLEN” LIU; NEW SHORE, PURSUANT TO RULE 12(b)(1) INC., a North Carolina Corporation,
Defendants,
SINOVA SPECIALTIES, INC., a North Carolina Corporation,
Nominal Defendant.
1. THIS MATTER is before the Court on Plaintiff’s motions to dismiss the
counterclaims of Defendant/Nominal-Defendant Sinova Specialties, Inc. (“Sinova
US”), Defendant Johannes Heckmann (“Heckmann”), and Defendant Yan “Ellen” Liu
(“Liu”) (collectively, the “Counterclaimants”) pursuant to Rule 12(b)(1) of the North
Carolina Rules of Civil Procedure (“Rule(s)”). Having considered the motions, the
briefs, and the arguments of counsel at a hearing on the motions1, the Court DENIES
1 At the hearing, the Court also heard arguments of counsel on Plaintiff’s motions to
dismiss pursuant to Rule 12(b)(6) and Plaintiff’s motion for summary judgment. The Court is issuing separate orders and opinions on these motions. Plaintiff’s motion to dismiss Sinova US’s counterclaims and DENIES in part and
GRANTS in part Plaintiff’s motion to dismiss Heckmann’s and Liu’s counterclaims.
Brooks, Pierce, McLendon, Humphrey & Leonard, L.L.P., by Jeffrey E. Oleynik, Jessica Thaller-Moran, and Ryan C. Fairchild, and Greenberg Traurig, LLP, by Gabriel Aizenberg, Andrew J. Enschedé, and Lucia Marker-Moore, for Plaintiff.
Erwin, Bishop, Capitano & Moss, P.A., by Joseph W. Moss, Jr., for Defendant/Nominal-Defendant Sinova Specialties, Inc.
Essex Richards, PA, by Marc E. Gustafson, for Defendants Johannes Heckmann and New Shore, Inc.
Higgins & Owens, PLLC, by Sara W. Higgins, for Defendant Yan “Ellen” Liu.
Robinson, Judge.
I. FACTUAL BACKGROUND
2. The following factual background is taken from the pleadings and the
affidavits submitted in support of and in opposition to the motions.
A. The Parties
3. Sinova US is a North Carolina corporation with its principal place of
business in Matthews, North Carolina. (Verified Am. Compl. ¶ 9, ECF No. 56.1 [“Am.
Compl.”]; Heckmann’s Am. Answer, Affirmative Defenses & Countercls. ¶ 9, ECF No.
221 [“Heckmann’s Answer”]; Liu’s Am. Answer, Affirmative Defenses & Countercls.
¶ 9, ECF No. 215 [“Liu’s Answer”]; Sinova US’s Answer to Am. Compl. ¶ 9, ECF No.
195 [“Sinova US’s Answer”].) Sinova US was formed in 2009 for the purpose of selling
chemical products. (Heckmann’s Am. Countercls. ¶¶ 8−10, ECF No. 267; Heckmann’s Answer ¶ 1; Liu’s Am. Countercls. ¶¶ 8−10, ECF No. 268; Liu’s Answer ¶ 1; Sinova
US’s Second Am. Countercls. ¶¶ 8−10, ECF No. 266.)
4. Plaintiff Jianxun “Bill” Gao (“Gao”) owns a 25% interest in, and is a director
and officer of, Sinova US. (Aff. Jianxun “Bill” Gao ¶ 1, ECF No. 212.3 [“Gao Aff.”];
see Aff. Johannes Heckmann (April 26, 2017) ¶¶ 3−4, 16, ECF No. 228.2 [“Heckmann
Aff.”].)
5. Heckmann owns a 45% interest in, and is the president and a director of,
Sinova US. (Heckmann Aff. ¶ 3.)
6. Liu owns a 30% interest in, and is the secretary and a director of, Sinova
US. (Heckmann Aff. ¶ 4.)
B. Related Entities
7. In 2011, Feng Sujin, Zhang Lanjun, and Wang Shufen, Gao’s mother-in-
law, formed Sinova Chemicals Limited (“Sinova HK”), a Hong Kong corporation.
(Heckmann’s Am. Countercls. ¶ 3; Heckmann’s Answer ¶ 14; Liu’s Am. Countercls.
¶ 3; Liu’s Answer ¶ 14; Sinova US’s Second Am. Countercls. ¶ 3; Sinova US’s Answer
¶ 14.) In September 2014, Heckmann bought Feng Sujin’s 40% interest in Sinova
HK, and in October 2015, Liu bought Zhang Lanjun’s 30% interest in Sinova HK.
(Heckmann’s Answer ¶ 14; Liu’s Answer ¶ 14; Sinova US’s Answer ¶ 14.) As a result
of these later transactions, the owners of Sinova HK are Gao’s mother-in-law (30%),
Heckmann (40%), and Liu (30%).
8. In 2012, Gao, Liu, and Feng Sujin formed Sinova Specialties, Inc. (Beijing)
(“Sinova Beijing”), a Chinese corporation. (Heckmann’s Am. Countercls. ¶ 3; Heckmann’s Answer ¶ 15; Liu’s Am. Countercls. ¶ 3; Liu’s Answer ¶ 15; Sinova US’s
Second Am. Countercls. ¶ 3; Sinova US’s Answer ¶ 15.) Feng Sujin entrusted
Heckmann to manage Sinova Beijing for her. (Heckmann’s Answer ¶ 15; Liu’s
Answer ¶ 15; Sinova US’s Answer ¶ 15.)
9. Sinova US, Sinova Beijing, and Sinova HK are collectively referred to
herein as the “Sinova Companies.”
10. Xin Yong Zhong Da Chemicals (“XYZD”) is a Chinese corporation indirectly
controlled by Heckmann, Liu, and Gao through Liu’s mother, Gao’s mother-in-law,
and a third party. (Heckmann’s Am. Countercls. ¶ 4; Liu’s Am. Countercls. ¶ 4;
Sinova US’s Second Am. Countercls. ¶ 4.) In 2012, XYZD exported chemical
compounds on behalf of Sinova US before Sinova Beijing was formed. (Heckmann’s
Am. Countercls. ¶ 4; Liu’s Am. Countercls. ¶ 4; Sinova US’s Second Am. Countercls.
¶ 4.)
11. The Sinova Companies and XYZD are collectively referred to herein as the
“Sinova Group.”
C. Business Operations
12. The responsibilities of Sinova US were shared by Heckmann, Liu, and Gao.
(Heckmann’s Am. Countercls. ¶ 7; Liu’s Am. Countercls. ¶ 7; Sinova US’s Second Am.
Countercls. ¶ 7.) Heckmann was primarily responsible for sales, Liu was primarily
responsible for operations, and Gao was primarily responsible for the chemistry and
technical aspects of the business. (Heckmann’s Am. Countercls. ¶ 7; Liu’s Am.
Countercls. ¶ 7; Sinova US’s Second Am. Countercls. ¶ 7.) 13. From 2009 to 2012, Sinova US’s operations consisted of assisting Sinomax
Solutions Inc. (“SMBJ”), a separate Chinese company in which neither Heckmann,
Liu, nor Gao owned an interest, with its sales of the chemical compounds “PP,” “BFA,”
and “TSS” in the United States and Europe. (Heckmann’s Am. Countercls. ¶ 9; Liu’s
Am. Countercls. ¶ 9; Sinova US’s Second Am. Countercls. ¶ 9.) In 2012, the Sinova
Companies purchased SMBJ’s business, including SMBJ’s customer lists and the
licensing rights to PP, BFA, and TSS, and Sinova US began selling chemical
compounds in the United States and Europe on behalf of the Sinova Companies.
(Heckmann’s Am. Countercls. ¶ 10; Liu’s Am. Countercls. ¶ 10; Sinova US’s Second
Am. Countercls. ¶ 10.)
14. From May 2012 through early 2014, Gao operated a lab in Beijing for the
benefit of the Sinova Group and for the purpose of creating products for sale by the
Sinova Companies. (Heckmann’s Am. Countercls. ¶ 12; Liu’s Am. Countercls. ¶ 12;
Sinova US’s Second Am. Countercls. ¶ 12.) The Sinova Group paid all the costs of the
lab, which included the cost of an office lease, equipment, supplies, reagents, testing,
and salaries of approximately eleven employees. (Heckmann’s Am. Countercls. ¶ 13;
Liu’s Am. Countercls. ¶ 13; Sinova US’s Second Am. Countercls. ¶ 13.)
D. Agreements
15. On or about September 16, 2012, the Sinova Group, Heckmann, Liu, and
Gao entered into a “CDA and Non-Compete Agreement” (the “CDA”).2 (Am. Compl.
2 Most of the agreements and other documents involved in this case were originally
written in Chinese and then translated into English, often with grammar and sentence structures that are difficult to understand. Ex. A.) The CDA provides that “[t]he three persons in this agreement” are
Heckmann, Liu, and Gao, and that “[t]he company in this agreement is Sinova
Specialties Inc. (Beijing) and its related company [sic] in USA, HK and China.” (Am.
Compl. Ex. A, at 1.) The CDA imposes an obligation on each of the individual parties
to the agreement to “keep the secrecy of the company” and to “not leak the market,
technology and operation secrecy to any third party directly or indirectly at any time.”
(Am. Compl. Ex. A, at 2.) The CDA further provides that “[a]nyone who breaches the
[CDA] shall pay RMB 5million to the company. At the same time, he/she shall
compensate all the lost [sic] that caused [sic] to the company by his/her violating the
[CDA].” (Am. Compl. Ex. A, at 3−4.) The CDA is signed by Sinova Beijing,
Heckmann, Liu, and Gao. (Am. Compl. Ex. A, at 4.)
16. Also on or about September 16, 2012, Heckmann, Liu, and Gao entered into
a board agreement (the “2012 Board Agreement”). (Am. Compl. Ex. B.) The 2012
Board Agreement states that the shareholders of Sinova US and Sinova Beijing “are
allowed to set up non-related other companies but are not allowed to do business
compete [sic] with [Sinova US or Sinova Beijing]. The other companies are not
allowed to provide or accept the product or service of [Sinova US or Sinova Beijing].”
(Am. Compl. Ex. B, at 1.)
17. In the middle of 2013, Heckmann, Liu, and Gao negotiated the separation
of their business interests. (Heckmann’s Am. Countercls. ¶ 26; Liu’s Am. Countercls.
¶ 26; Sinova US’s Second Am. Countercls. ¶ 26.) The parties extensively negotiated
which chemical products would continue to be manufactured and sold by the Sinova Group (the “Common Projects”). (Heckmann’s Am. Countercls. ¶ 27; Liu’s Am.
Countercls. ¶ 27; Sinova US’s Second Am. Countercls. ¶ 27.) Heckmann, Liu, and
Gao agreed that the Common Projects were to include the Sinova Group’s marketable
and profitable chemical compounds and those chemical compounds that were still
under development with a potential upside as of January 2014. (Heckmann’s Am.
Countercls. ¶¶ 28−29; Liu’s Am. Countercls. ¶¶ 28−29; Sinova US’s Second Am.
Countercls. ¶¶ 28−29.) To determine which projects should be designated as Common
Projects, Heckmann and Liu asked Gao to identify all the projects that had been run
or developed in the lab. (Heckmann’s Am. Countercls. ¶ 33; Liu’s Am. Countercls.
¶ 33; Sinova US’s Second Am. Countercls. ¶ 33.) Counterclaimants allege that, over
several months, Heckmann, Liu, and Gao discussed what Heckmann and Liu were
led by Gao to believe were all of the projects being worked on in the lab. (Heckmann’s
Am. Countercls. ¶ 32; Liu’s Am. Countercls. ¶ 32; Sinova US’s Second Am. Countercls.
¶ 32.)
18. On or about January 15, 2014, Heckmann, Liu, and Gao entered into a
board agreement (the “2014 Board Agreement”). (Gao Aff. Ex. C.) The 2014 Board
Agreement states that the participants, whom are identified as Heckmann, Liu, and
Gao, agree to “[k]eep minimum necessary budget for operation [sic] the common
projects in [Sinova Beijing]” and to “[k]eep funding available for common projects at
$3.5 million.” (Gao Aff. Ex. C, ¶¶ 3−4.) The 2014 Board Agreement provides that
“[a]ll projects that are not common projects are to be done outside of any common
office facilities and at their own risk” and specifically identifies seven Common Projects. (Gao Aff. Ex. C, ¶¶ 3, 7.) The 2014 Board Agreement further provides that
“[e]ach board member will adhere to professional rules of conduct toward each other
and promises to promote the common projects to the best of their abilities and not to
cause adverse effects to another board member. Should such action occur damages
may be sought.” (Gao Aff. Ex. C, ¶ 11.) Additionally, the 2014 Board Agreement
expressly incorporates the prior confidentiality and non-compete obligations set forth
in the CDA and the 2012 Board Agreement. (Gao Aff. Ex. C, ¶ 2.)
19. Counterclaimants allege that, unbeknownst to them, Gao used the lab to
develop chemical compounds—including a compound referred to as “ANT”—for the
benefit of himself and companies other than any of the entities within the Sinova
Group. (Heckmann’s Am. Countercls. ¶¶ 21−22; Liu’s Am. Countercls. ¶¶ 21−22;
Sinova US’s Second Am. Countercls. ¶¶ 21−22.) Counterclaimants further allege
that, during Heckmann, Liu, and Gao’s negotiations, Gao concealed that he had
developed ANT in the lab and that it was, or had the potential to be, commercially
viable. (Heckmann’s Am. Countercls. ¶¶ 37, 39; Liu’s Am. Countercls. ¶¶ 37, 39;
Sinova US’s Second Am. Countercls. ¶¶ 37, 39.) Counterclaimants contend that, as
a result, ANT was not included as a Common Project in the 2014 Board Agreement,
and Gao sold ANT for personal gain through entities owned or controlled by him.
(Heckmann’s Am. Countercls. ¶¶ 44−45, 52; Liu’s Am. Countercls. ¶¶ 44−45, 52;
Sinova US’s Second Am. Countercls. ¶¶ 44−45, 52.) II. PROCEDURAL HISTORY
20. The Court recites only those portions of the procedural history relevant to
its determination of the motions.
21. Gao filed his complaint on April 8, 2016 and an amended complaint on July
8, 2016. The amended complaint asserts direct claims for judicial dissolution of
Sinova US, inspection of Sinova US’s corporate records, breach of fiduciary duty,
constructive fraud, and unjust enrichment.3 (Am. Compl. 37, 40, 43, 45, 47.) The
amended complaint asserts derivative claims on behalf of Sinova US for breach of
fiduciary duty, constructive fraud, corporate waste, unjust enrichment, and breach of
contract. (Am. Compl. 41, 44, 46−48.)
22. This action was designated as a mandatory complex business case by order
of the Honorable Mark Martin, Chief Justice of the Supreme Court of North Carolina,
dated April 11, 2016, (ECF No. 4), and assigned to the Honorable Louis A. Bledsoe,
III by order of then Chief Business Court Judge James L. Gale dated April 14, 2016,
(ECF No. 5). This case was later reassigned to the undersigned by order dated July
5, 2016. (ECF No. 54.)
23. All Defendants answered the amended complaint, and Sinova US,
Heckmann, and Liu asserted counterclaims against Gao. (ECF Nos. 97, 195, 215,
221.)
3 The amended complaint also asserts a direct claim for corporate waste, which the
Court dismissed with prejudice by order and opinion dated December 21, 2016. (ECF No. 188.) 24. On March 2, 2017, Sinova US filed its first amended counterclaims. (ECF
No. 207.)
25. On March 14, 2017, Gao filed his motion to dismiss Sinova US’s first
amended counterclaims pursuant to Rule 12(b)(1) for lack of standing and a brief in
support. (ECF No. 212.)
26. On June 30, 2017, Sinova US filed its second amended counterclaims4, and
Heckmann and Liu each filed first amended counterclaims. Sinova US, Heckmann,
and Liu each assert counterclaims against Gao for fraud and breach of contract—
including the CDA, the 2012 Board Agreement, and the 2014 Board Agreement.
(Heckmann’s Am. Countercls. 18, 20; Liu’s Am. Countercls. 18, 20; Sinova US’s
Second Am. Countercls. 24, 26.) Sinova US asserts additional counterclaims against
Gao for breach of fiduciary duty, constructive fraud, unfair and deceptive trade
practices, and unjust enrichment. (Sinova US’s Second Am. Countercls. 22−23,
29−30.)
27. On July 28, 2017, Gao filed his motion to dismiss Heckmann’s and Liu’s
amended counterclaims pursuant to Rule 12(b)(1) for lack of standing and a brief in
support. (ECF No. 271.)
28. The motions have been fully briefed, and the Court held a hearing on the
motions on December 6, 2017. The motions are now ripe for resolution.
4 Although Gao and Sinova US fully briefed Gao’s motion to dismiss Sinova US’s
counterclaims before Sinova US filed its second amended counterclaims, the parties informed the Court that the filing of Sinova US’s second amended counterclaims did not moot the motion. (See ECF No. 264.) III. LEGAL STANDARD
29. Gao’s motions to dismiss are based on the notion that Counterclaimants do
not have standing to bring the claims in question and therefore the Court does not
have subject matter jurisdiction over the claims. “Standing is a necessary
prerequisite to a court’s proper exercise of subject matter jurisdiction.” Neuse River
Found., Inc. v. Smithfield Foods, Inc., 155 N.C. App. 110, 113, 574 S.E.2d 48, 51
(2002). A court shall dismiss the action when it appears that the court lacks subject
matter jurisdiction. N.C. Gen. Stat. § 1A-1, Rule 12(h)(3). A court may consider
matters outside the pleadings in determining whether subject matter jurisdiction
exists. Keith v. Wallerich, 201 N.C. App. 550, 554, 687 S.E.2d 299, 302 (2009).
IV. ANALYSIS
A. Gao’s Motion to Dismiss Sinova US’s Counterclaims
30. Gao argues that Sinova US lacks standing to assert its counterclaims
because: (a) its board of directors failed to comply with Sinova US’s bylaws before
asserting its counterclaims; (b) the 2014 Board Agreement bars Sinova US from
expending funds on a lawsuit; and (c) Sinova US is merely a nominal defendant and
thus may not bring affirmative claims against Gao. (Pl.’s Mem. Supp. Mot. Dismiss
Sinova US’s Am. Countercls. Pursuant to Rule 12(b)(1), at 6−9, ECF No. 212.1 [“Pl.’s
Mem. Supp. Sinova US Mot.”]; Pl.’s Reply Mem. Supp. Mot. Dismiss Sinova US’s Am.
Countercls. Pursuant to Rule 12(b)(1), at 7−10, ECF No. 237 [“Pl.’s Reply Mem. Supp.
Sinova US Mot.”].) The Court addresses each of these arguments in turn. 31. Standing generally refers to a party’s right to have a court decide the merits
of a dispute. Neuse River Found., Inc., 155 N.C. App. at 114, 574 S.E.2d at 52.
“[S]tanding to sue means simply that the party has a sufficient stake in an otherwise
justiciable controversy to obtain judicial resolution of that controversy.” Newton v.
Barth, 788 S.E.2d 653, 659 (N.C. Ct. App. 2016) (alteration in original). Sinova US,
as the counterclaimant, has the burden of proving that it has standing to assert the
claims it has brought against Gao. Neuse River Found., Inc., 155 N.C. App. at 113,
574 S.E.2d at 51.
32. Gao first argues that Sinova US lacks standing to assert its counterclaims
because its board of directors failed to comply with the bylaws before asserting
counterclaims. (Pl.’s Mem. Supp. Sinova US Mot. 6−7.) The bylaws vest control over
the business and affairs of Sinova US in the board of directors. (Gao Aff. Ex. A, § 2.1.)
Under the bylaws, the board may take action by voting at regular or special meetings,
or by unanimous written consent. (Gao Aff. Ex. A, §§ 2.3−2.4, 2.8.) Although regular
meetings may be held without notice, Sinova US’s board has never held regular
meetings. (Gao Aff. ¶ 3.) Special meetings of the board require five days’ advance
notice. (Gao Aff. Ex. A, § 2.4.)
33. Sinova US filed its counterclaims on January 20, 2017 and its first amended
counterclaims on March 2, 2017. As of March 2, 2017, the board had neither held a
meeting at which a vote was taken to approve Sinova US filing counterclaims against
Gao nor unanimously consented in writing to such action. (Gao Aff. ¶¶ 5−8.) As a
result, Gao argues that Sinova US lacks standing, relying principally on two Court of Appeals cases, one of which was recently reversed by our Supreme Court. Willowmere
Cmty. Ass’n, Inc. v. City of Charlotte, 792 S.E.2d 805 (N.C. Ct. App. 2016), rev’d, 370
N.C. 553, 809 S.E.2d 558 (2018); Peninsula Prop. Owners Ass’n, Inc. v. Crescent Res.,
LLC, 171 N.C. App. 89, 614 S.E.2d 351 (2005).
34. The Court concludes that it is immaterial whether the board complied with
the bylaws prior to asserting its original and first amended counterclaims because
the board complied with the bylaws prior to Sinova US filing its second amended
counterclaims. The record indicates that, on April 21, 2017—after Sinova US filed
its counterclaims and first amended counterclaims—the board held a special meeting,
in compliance with the bylaws’ procedural requirements, to ratify Sinova US’s
engagement of counsel to represent it in this litigation and its assertion of
counterclaims against Gao. (Heckmann Aff. ¶¶ 15−16.) A majority of the board
approved a resolution ratifying Sinova US’s engagement of counsel and the filing of
counterclaims against Gao. (Heckmann Aff. ¶¶ 15−16.) After the April 21, 2017
meeting, Sinova US filed its second amended counterclaims.
35. Therefore, because the board subsequently complied with its bylaws and
ratified Sinova US’s engagement of counsel and the counterclaims—and because
Sinova US filed its second amended counterclaims after the board approved filing the
counterclaims—the Court concludes that, despite the failure of the board to comply
with Sinova US’s bylaws prior to first filing its counterclaims, Gao’s first argument
against standing fails as to Sinova US’s second amended counterclaims. See
Willowmere Cmty. Ass’n, Inc., 370 N.C. at 562, 809 S.E.2d at 565 (“[D]espite plaintiffs’ failure to strictly comply with their respective bylaws and internal governance
procedures in their decision to initiate this suit, they nonetheless possess a sufficient
stake in an otherwise justiciable controversy to confer jurisdiction on the trial court
to adjudicate this legal dispute.” (quotation marks omitted)).
36. Gao’s second argument is that Sinova US lacks standing because the 2014
Board Agreement prohibits Sinova US from expending funds on anything other than
“Common Projects,” which would by definition not include a lawsuit against Gao.
(Pl.’s Mem. Supp. Sinova US Mot. 8−9.)
37. “Interpreting a contract requires the court to examine the language of the
contract itself for indications of the parties’ intent at the moment of execution.” RME
Mgmt., LLC v. Chapel H.O.M. Assocs., LLC, 795 S.E.2d 641, 645 (N.C. Ct. App. 2017).
“Since the object of construction is to ascertain the intent of the parties, the contract
must be considered as an entirety. The problem is not what the separate parts mean,
but what the contract means when considered as a whole.” 42 E., LLC v. D.R. Horton,
Inc., 218 N.C. App. 503, 513, 722 S.E.2d 1, 8 (2012) (quoting Jones v. Casstevens, 222
N.C. 411, 413−14, 23 S.E.2d 303, 305 (1942)). The contract is to be construed
consistently with reason and common sense. Variety Wholesalers, Inc. v. Salem
Logistics Traffic Servs., LLC, 365 N.C. 520, 525, 723 S.E.2d 744, 748 (2012). When a
contract is plain and unambiguous, the Court can determine the parties’ intent as a
matter of law. 42 E., LLC, 218 N.C. App. at 513, 722 S.E.2d at 8. If a contract is
ambiguous, however, interpretation of the contract is a question of fact for the jury.
Variety Wholesalers, Inc., 365 N.C. at 525, 723 S.E.2d at 748. An ambiguity exists when the effect of provisions is uncertain or capable of several reasonable
interpretations. Id.
38. The Court concludes that, even assuming Gao is correct that a lawsuit
against him would not be a “Common Project,” the 2014 Board Agreement does not
unambiguously prohibit Sinova US from expending funds on anything other than
Common Projects. First, the 2014 Board Agreement states that Heckmann, Liu, and
Gao agree to “[k]eep minimum necessary budget for operation [sic] the common
projects in [Sinova Beijing,]” not Sinova US. (Gao Aff. Ex. C, ¶ 3.) Second, the
agreement further states that Heckmann, Liu, and Gao agree to “[k]eep funding
available for common projects at $3.5 million. This will pay for expenses incurred for
common projects only against receipts or signed PO.” (Gao Aff. Ex. C, ¶ 4 (emphasis
added).) Sinova US, like any company, presumably has expenses in addition to the
direct expenses it incurs in developing Common Projects, such as overhead expenses.
Under Gao’s interpretation, Heckmann, Liu, and Gao, individually, would be
responsible for paying all overhead expenses incurred by Sinova US.
39. The Court believes that the 2014 Board Agreement can reasonably be
interpreted as limiting the projects for which Sinova US will provide funding, rather
than limiting all company expenditures to only Common Project expenses—that is,
the $3.5 million budget may only be used to pay direct expenses incurred in
developing Common Projects, and not for any direct expenses incurred by Heckmann,
Liu, or Gao in their pursuit of non-common projects. This interpretation is further
supported by paragraph 9 of the 2014 Board Agreement, which states that “[i]f cash flow needed for running common project is above $3.5 million,” Heckmann, Liu, and
Gao should make an additional investment and, if a shareholder does not do so, then
that shareholder forfeits his/her right to the profits from the common project(s) in
which he/she did not further invest. (Gao Aff. Ex. C, ¶ 9 (emphasis added).)
40. Alternatively, the Court concludes that, even assuming arguendo that the
2014 Board Agreement prohibits Sinova US from expending funds on anything other
than Common Projects, a failure by Sinova US to comply with this provision by
funding this litigation does not affect Sinova US’s standing. Contrary to the bylaw
provisions at issue in Peninsula and Willowmere, which concerned the prerequisites
to the corporation taking action—specifically, initiating a lawsuit—the provision at
issue here concerns whether the corporation may pay for the prosecution of
counterclaims, rather than whether or how the corporation may act to bring
counterclaims.
41. Gao’s third argument is that Sinova US lacks standing because it is merely
a nominal defendant as to Gao’s judicial dissolution claim and derivative claims and,
as such, cannot defend itself against these claims. Gao argues that because Sinova
US cannot defend itself against Gao’s claims, it follows that Sinova US cannot assert
counterclaims against Gao. (Pl.’s Reply Mem. Supp. Sinova US Mot. 7−10.)
42. In general, a corporation may not defend itself against a derivative action
on the merits. Swenson v. Thibaut, 39 N.C. App. 77, 101, 250 S.E.2d 279, 294 (1978).
This is because a derivative action seeks to enforce the rights of a corporation and
any recovery accrues to the corporation, rather than the shareholder-plaintiff. Id. at 98−99, 250 S.E.2d at 293. As a result, a corporation in a derivative suit, although
designated as a nominal defendant, is generally aligned as a party plaintiff. Id. at
98−101, 250 S.E.2d at 293−94.
43. Nonetheless, that a corporation in a derivative suit cannot defend itself on
the merits does not resolve the issue of whether a corporation in a derivative suit may
assert counterclaims against the shareholder-plaintiff. This appears to be an issue
of first impression in North Carolina, and a novel issue that has not often been
addressed in other jurisdictions. Federal decisions that have addressed this issue
have considered it in the context of Rule 13 of the Federal Rules of Civil Procedure
(“Federal Rule(s)”)—specifically, whether the shareholder-plaintiff is an “opposing
party” such that a counterclaim may be asserted against him. See Fed. R. Civ. P.
13(a)−(b) (providing that a pleading must/may state a counterclaim against an
“opposing party”); N.C. Gen. Stat. § 1A-1, Rule 13(a)−(b) (same). The general rule
articulated by these decisions is that “a stockholder suing derivatively is not subject
to a counterclaim of the corporation that alleges an individual liability to the
corporation; in the language of [Federal Rule 13], the plaintiff individually is not
thought an ‘opposing party’ since the plaintiff stockholder sues derivatively to
vindicate a corporate right.” Burg v. Horn, 37 F.R.D. 562, 563 (E.D.N.Y. 1965). This
rule, however, has exceptions. Id. Federal courts have held that this rule does not
apply “in the case of a closely held corporation where the substance of the action was
to determine the rights of the three individual [shareholders] against one another.”
Berger v. Reynolds Metals Co., 39 F.R.D. 313, 314−15 (E.D. Pa. 1966) (declining to dismiss the defendant-corporation’s counterclaim against the shareholder-plaintiff in
a derivative action); Burg, 37 F.R.D. at 564 (same). These decisions reason in part
that to conclude that the shareholder-plaintiff is not an opposing party “is to place
form over substance and to undermine and thwart the salient purpose of [Federal]
Rule 13.” Berger, 39 F.R.D. at 315; see also Burg, 37 F.R.D. at 564 (“[I]t is not
important to determine whether the ‘counterclaim’ should be styled a ‘crossclaim,’ it
must follow that the claim presented as a ‘counterclaim’ belongs in the present suit.”
(citation omitted).)
44. The Court finds persuasive the reasoning of the federal courts that have
confronted this issue and, in the absence of contrary case law from our appellate
courts, concludes that Sinova US may assert counterclaims against Gao. As Gao has
conceded, Sinova US could initiate a separate lawsuit against Gao, (Pl.’s Sur-Surreply
Supp. Mot. Dismiss 3, ECF No. 265), and the Court sees no reason why Sinova US
should be prohibited from asserting its claims against Gao in this action, whether
they be styled as counterclaims or crossclaims, as opposed to requiring Sinova US to
file a separate action against Gao. Therefore, the Court concludes that Sinova US
has standing to assert its counterclaims against Gao, and Gao’s motion to dismiss as
to Sinova US’s counterclaims is denied.
B. Gao’s Motion to Dismiss Heckmann’s and Liu’s Counterclaims
45. Gao argues that Heckmann and Liu lack standing because their
counterclaims are derivative claims that must be brought on behalf of Sinova US. (Pl.’s Mem. Supp. Mot. Dismiss Am. Countercls. of Liu & Heckmann Pursuant to Rule
12(b)(1), at 3, ECF No. 271.1.)
46. It is a well-settled general principle of North Carolina law that
shareholders of a corporation cannot pursue individual causes of action for wrongs or
injuries to the corporation. Barger v. McCoy Hillard & Parks, 346 N.C. 650, 658, 488
S.E.2d 215, 219 (1997); Corwin v. British Am. Tobacco PLC, 796 S.E.2d 324, 338 (N.C.
Ct. App. 2016). There are two exceptions: (1) when there is a special duty between
the wrongdoer and the shareholder; and (2) when the shareholder suffered an injury
separate and distinct from the injury suffered by the corporation and the other
shareholders. Barger, 346 N.C. at 658, 488 S.E.2d at 219; Corwin, 796 S.E.2d at 338.
47. For the special duty exception to apply, “the duty must be one that the
alleged wrongdoer owed directly to the shareholder as an individual”—a duty that
was personal to the shareholder and separate and distinct from the fiduciary duty
owed to the corporation. Barger, 346 N.C. at 659, 488 S.E.2d at 220. In Barger, our
Supreme Court set forth an illustrative, non-exclusive list of situations in which a
special duty may be found. Such list included when the wrongful actions of the party
induced plaintiff to become a shareholder, the wrongdoer violated his fiduciary duty
to the shareholder, the wrongdoer performed individualized services directly for the
shareholder, and the wrongdoer undertook to advise shareholders independently of
the corporation. Id. 1. Breach of Contract
48. In their breach of contract counterclaims, Heckmann and Liu allege that
Gao breached the 2012 Board Agreement, the 2014 Board Agreement, and the CDA.
49. Sinova US is not a party to either the 2012 Board Agreement or the 2014
Board Agreement—indeed, Gao argues this point in support of his motion to dismiss
Sinova US’s breach of contract counterclaim pursuant to Rule 12(b)(6). (Pl.’s Mem.
Supp. Mot. Dismiss Second Am. Counterclaims of Sinova US Pursuant to Rule
12(b)(6), at 3−5, ECF No. 273.1.) Heckmann and Liu, however, are parties to the
2012 and 2014 Board Agreements, and a special duty may arise from contract.
Barger, 346 N.C. at 659, 488 S.E.2d at 220; Dawson v. Atlanta Design Assocs., Inc.,
144 N.C. App. 716, 719, 551 S.E.2d 877, 880 (2001). Therefore, the Court concludes,
based on its review of these documents, that the 2012 and 2014 Board Agreements
between Heckmann, Liu, and Gao create a special duty between the parties thereto
and, as such, Heckmann and Liu have standing to assert a direct claim for breach of
these agreements. See Dawson, 144 N.C. App. at 719, 551 S.E.2d at 880 (“Plaintiff’s
individual contract with Defendants creates a ‘special duty’ running from Defendants
to Plaintiff.”); Grasinger v. Williams, 2015 NCBC LEXIS 4, at *14−15 (N.C. Super.
Ct. Jan. 15, 2015) (concluding that shareholder-plaintiffs had standing to assert a
direct claim for breach of an agreement requiring that shareholders be provided with
notice of a proposed sale of the company).
50. Conversely, the record before the Court shows that Sinova US is a party to
the CDA. The CDA is on Sinova US letterhead, states that “[t]he company in this agreement is Sinova Specialties Inc. (Beijing) and its related company [sic] in USA,
HK and China[,]” and is signed by Sinova Beijing. (Am. Compl. Ex. A (emphasis
added).) Further, the CDA creates duties that are owed to the company and provides
that anyone who breaches the agreement “shall pay RMB 5million to the company.”
(Am. Compl. Ex. A, ¶¶ 3, 5 (emphasis added).) Thus, the Court concludes that
Heckmann and Liu have failed to show that they have standing to assert a direct
claim for breach of the CDA pursuant to the special duty exception.
51. For the special injury (as opposed to special duty) exception to apply, the
injury must be peculiar or personal to the shareholder. Barger, 346 N.C. at 659, 488
S.E.2d at 220. “[A] plaintiff must show that its particular injury was ‘separate and
distinct from the injury sustained by the other shareholders or the corporation itself.’”
Raymond James Capital Partners, L.P. v. Hayes, 789 S.E.2d 695, 702 (N.C. Ct. App.
2016) (quoting Barger, 346 N.C. at 659, 488 S.E.2d at 219).
52. Heckmann’s and Liu’s counterclaims for breach of the CDA seek redress for
injuries to Sinova US. The claims allege that Gao breached the CDA by disclosing
Sinova US’s “market, technology and operation secrecy” to third parties. Heckmann
and Liu have failed to allege that they suffered any special injury from Gao’s alleged
breach of the CDA.
53. Therefore, the Court concludes that Heckmann and Liu have failed to show
that they have standing to assert a direct claim for breach of the CDA. Accordingly,
Gao’s motion to dismiss Heckmann’s and Liu’s breach of contract counterclaims for
lack of standing, insofar as these counterclaims allege a breach of the CDA, is granted and these claims are dismissed without prejudice. Gao’s motion to dismiss is denied
as to the 2012 Board Agreement and the 2014 Board Agreement.
2. Fraud
54. In their fraud counterclaims, Heckmann and Liu allege that Gao
fraudulently induced Heckmann and Liu to enter into the 2014 Board Agreement by
concealing that ANT was a marketable project that had been developed in the lab.
Heckmann and Liu allege that, as a result of Gao’s concealment, ANT was not
included as a Common Project and they entered into a materially different agreement
than they would have if they had known of ANT and its marketability.
55. As discussed above, Sinova US is not a party to the 2014 Board Agreement;
rather, it is a contract between Heckman, Liu, and Gao. The Court concludes that,
just as Heckmann and Liu have standing to assert a direct claim for breach of the
2014 Board Agreement, they likewise have standing to assert a direct claim that they
were fraudulently induced into entering this agreement. As such, Gao’s motion to
dismiss Heckmann’s and Liu’s fraud counterclaims is denied.
V. CONCLUSION
56. For the foregoing reasons, the court DENIES Gao’s motion to dismiss
Sinova US’s counterclaims and GRANTS in part and DENIES in part Gao’s motion
to dismiss Heckmann’s and Liu’s counterclaims as follows:
A. The Court GRANTS Gao’s motion to dismiss Heckmann’s and Liu’s
breach of contract counterclaims to the extent these claims are based
on the CDA, and these claims are dismissed without prejudice. B. The Court DENIES Gao’s motion to dismiss Heckmann’s and Liu’s
breach of contract counterclaims to the extent these claims are based
on the 2012 Board Agreement and the 2014 Board Agreement.
C. The Court DENIES Gao’s motion to dismiss Heckmann’s and Liu’s
fraud counterclaims.
SO ORDERED, this the 16th day of July, 2018.
/s/ Michael L. Robinson Michael L. Robinson Special Superior Court Judge for Complex Business Cases