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Seiden v. Kaneko

Court of Chancery of Delaware

March 22, 2017

ROBERT W. SEIDEN ESQ. in his capacity as Receiver for Southern China Livestock, Inc., Plaintiff,

          Submitted: February 13, 2017

          Jonathan M. Stemerman, Esquire of Elliott Greenleaf, P.C., Wilmington, Delaware and Douglas E. Spelfogel, Esquire and Katherine R. Catanese, Esquire of Foley & Lardner LLP, New York, New York, Attorneys for Plaintiff.

          Andrew D. Cordo, Esquire and Toni-Ann Platia, Esquire of Ashby & Geddes, Wilmington, Delaware and Adrienne M. Ward, Esquire and John B. Horgan, Esquire of Ellenoff Grossman & Schole LLP, New York, New York, Attorneys for Defendants.


          SLIGHTS, Vice Chancellor

         After accepting a capital infusion from United States-based investors through a private placement, Southern China Livestock, Inc. ("SCLI" or "the Company"), a Delaware holding company that owned a non-public, China-based operating company, "went dark" leaving its investors scrambling to recover their money. Unfortunately, this is a scenario that has been played out all too frequently in this court. In this case, the investors tracked down the Company's former President, Shu Kaneko, here in the United States. A receiver was appointed for the Company and the receiver initiated this action against Kaneko and others to recover, inter alia, amounts that Kaneko allegedly diverted from Company accounts.

         According to Kaneko, after he resigned from the Company but prior to the initiation of this litigation, the Company gave him a general release of claims (the "Release") in exchange for his commitment to assist the Company in taking certain steps to firm up its capital structure in anticipation of a potential sale of the Company to a private equity firm. Kaneko has moved for summary judgment, inter alia, on the ground that the receiver's claims are barred by the Release. In response, the receiver argues that the release fails for lack of consideration. After carefully considering the undisputed evidence in the record, I am satisfied that the Release is binding and enforceable and that it releases Kaneko from all claims asserted against him in this litigation. Accordingly, Kaneko's motion for summary judgment must be GRANTED. Kaneko's counterclaim for indemnification under 8 Del. C. §145(c) is STAYED. His request for fee shifting is DENIED. A determination of Kaneko's entitlement to mandatory indemnification for his fees and expenses will await a final, non-appealable judgment.

         I. BACKGROUND

         The summary judgment record is extensive; it is comprised of deposition testimony and exhibits presented by both parties. For purposes of this Memorandum Opinion, I have focused on the facts relevant to the dispute concerning the validity of the Release.[1]

         A. The Parties and Relevant Non-Parties

         Robert W. Seiden, Esq. (the "Receiver") was appointed as receiver over SCLI by order of this Court dated January 17, 2014, following the entry of a default judgment and subsequent contempt citation against SCLI in consolidated Section 220 actions. Defendant, Shu Kaneko, a resident of California, was previously President, Treasurer, Director, Secretary, and Chief Financial Officer of Southern China Livestock International, Inc. ("SCL International") and the President, Treasurer, Director of Business Development and Secretary of SCLI.

         SCLI, formerly known as Expedite 4, Inc., is a Delaware corporation that wholly owns SCL International. SCL International, in turn, is the holding company for Beijing Huaxin Tianying Livestock Technology, Limited, which holds the equity interests of its operating subsidiary, Jiangxi Yingtan Huaxin Livestock Limited. At all relevant times, these entities were engaged in various capacities in the business of breeding, raising and selling live hogs in the People's Republic of China.

         B. The Company Seeks to Recover Lost Shares

         In 2012, the Company entered in a Business Services Agreement with HF Capital Advisors, LLC ("HF Capital") (defined in the agreement as "the Agent"). HF Capital is controlled by Alan Lewis. It performs advisory services for clients Lewis served through his employment with Hickey Freihofner, a division of Brill Securities.[2] Lewis had been previously engaged by the Company through Hickey Freihofner when the Company was looking to mitigate the financial consequences of its failure to consummate an initial public offering. His charge then was to solicit a private equity buyer for the interests of the Company's U.S. shareholders or, alternatively, to help the company become listed on a foreign stock exchange.[3] That engagement was ultimately unsuccessful. In 2012, hope sprang anew when the Company contacted Lewis again to assist in the Company's renewed efforts to provide an exit for its U.S investors. The Company had been approached by two separate China-based private equity firms that were interested in making a sizeable investment and then taking SCLI public on the Chinese Main Board exchange.[4]

         Lewis was interested in the business opportunity the Company was proposing, particularly because his prior contingent fee arrangement with the Company had not paid off. He was told that the focus of the engagement would be to address concerns raised by the potential private equity investors that the Company needed "to fix [its] structure with respect to . . . the [so-called] 'management shares' that were tied up in a 'Slow Walk Offshore Structure.'"[5] Lewis offered to assist the Company in securing the return of the management shares (at times referred to by the parties as the "Song Held Shares") in hopes that he might be given the opportunity to serve as a broker-dealer on the capital raise from the two private equity firms.[6]

         Once engaged by SCLI, Lewis reached out to Kaneko to see if he might assist in securing the return of the management shares.[7] During the course of their initial discussion, Kaneko made clear to Lewis that he had done nothing wrong and owed the Company nothing.[8] Nevertheless, according to Lewis, Kaneko appeared "eager to cooperate and help clear his name."[9] After the call, Kaneko made contact with the various parties who held the management shares in order to secure their signatures on the paperwork the Company needed to secure the lost shares.[10]

         When Lewis and Kaneko spoke again, Kaneko advised Lewis that "because [the shareholders] knew that various parties, including the company, were alleging that they had-that Shu in particular, had misappropriated funds, they all requested a liability waiver. . . ."[11] In response, Lewis directed Darren Ofsink, an attorney who had been retained by the Company to handle the legal issues associated with the return of the management shares, to "begin preparing the paperwork for the transfer of the shares and the liability waiver in connection with that."[12]

         The agreements-both the signed Release and the signed agreements from the shareholders evidencing the transfer of the shares back to the Company-were held in escrow by Ofsink and then released once all signed agreements had been obtained.[13] The board of directors of SCLI executed a written consent five months later in July 2013 resolving that "it is in the best interest of the Company to enter into the Settlement Agreement, the Kaneko Agreement, the Escrow Agreement and the Business Services Agreement . . . and each of the Agreements be, and hereby is, approved, ratified, and confirmed in all respects . . ."[14]

         C. Procedural History

         The Receiver filed the original complaint in this action on July 7, 2014, almost one year after the Company had signed the Release. He filed the First Amended Complaint ("FAC") on December 19, 2014, in which he asserted seventeen causes of action against Kaneko and others including, inter alia, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conversion, fraudulent transfer, unjust enrichment and corporate waste. On January 30, 2015, Kaneko filed a motion to dismiss the FAC. That motion was granted in part and denied in part in the Court's Memorandum Opinion and Order dated November 3, 2015. Kaneko answered the FAC on November 18, 2015, and asserted a Verified Third Party Claim against SCLI for indemnification pursuant to 8 Del. C. §145(c). Kaneko has now moved for summary judgment.


         "The function of summary judgment is the avoidance of a useless trial where there is no genuine issue as to any material fact."[15] "[T]he moving party initially bears the burden of showing that [no material issues of fact] are present."[16] If the "motion [] is 'supported' by such a showing, then the burden shifts to the non-moving party to demonstrate that there are material issues of fact."[17] The court must view the evidence most favorably to the non-moving party, but may not look to the allegations or denials in the pleadings when determining whether a material issue of fact remains for trial.[18] Any such determination must be made from competent evidence in the summary judgment record.[19]

         A. The Release

         Delaware law recognizes that general releases serve as an "important tool for settling disputes precisely because they are designed to provide complete peace."[20]"[A]n effective release terminates the rights of the party executing and delivering the release and . . . is a bar to recovery on the claim released."[21] "When determining whether a release covers a claim, 'the intent of the parties as to its scope and effect are controlling, and the court will attempt to ascertain their intent from the overall language of the document.'"[22] "Delaware courts recognize the validity of general releases, "[23] and acknowledge that the standard language of such releases is "intended to cover everything-what the parties presently have in mind, as well as what they do not have in mind."[24] "If [a subsequent] claim falls within the plain language of [a] release, then the claim should be dismissed."[25] The only circumstances in which a release would be set aside are "fraud, duress, coercion, or mutual mistake. . . ."[26] And "the party seeking to nullify the release bears the burden of demonstrating by clear and convincing evidence that the release is invalid."[27]

         If the Release is valid and applies to the conduct alleged in the FAC, then any factual disputes that may exist regarding Kaneko's conduct are irrelevant because the claims would be barred as a matter of law. I address the release issue in two parts: (1) does the language of the Release bar the Receiver's claims?; and, if so (2) is the Release supported by adequate consideration and otherwise valid and binding upon the parties?

         1. The Scope of the General Release

         The Release contains a mutual release of liability for both the Company and Kaneko. In releasing Kaneko, the Company represented, inter alia, that it:

hereby forever releases and discharges each Shu Release Party (defined to include Kaneko) from all actions, any causes of action, suits, dues, sums of money, accounts, reckonings, bonds, bills, specialties, covenants, contracts, controversies, agreements, promises, variances, trespasses, damages, judgments, extents, executions, claims, and demands whatsoever, in law, admiralty or equity, which against any Shu Release Party, any Company Release Party ever had, now have or hereafter can, shall or may, have for, upon, or by reason of any matters, cause or thing whatsoever from the beginning of the world to the day of the date of this Agreement.[28]

         This is standard general release language. It reflects the Company's intent to release all accrued claims the Company may have had against Kaneko sounding in law or in equity.[29] Kaneko gave identical covenants in favor of the Company. I need not parse through this language because, on its face, it clearly and unambiguously captures the alleged wrongdoing contained in the FAC.

         2. The General Release Is Valid

         Before considering whether any material factual disputes exist concerning the validity of the Release, I must first address the Receiver's argument that this Court has already determined that the Release is invalid for lack of consideration when ruling on Kaneko's motion to dismiss. The Receiver is wrong. In its decision on the motion to dismiss, the Court made clear that it was drawing all reasonable inferences that logically flow from the well-pled facts in the plaintiff's favor, as it is required to do on a Rule 12(b)(6) motion.[30] In opposing the motion to dismiss, the Receiver pointed to his complaint and argued that because the Song Held Shares were not permitted to be transferred under a lockup agreement, SCLI was already entitled to a return of those shares and therefore their return to the Company did not constitute consideration to support the Release. Kaneko argued in response that the Company approached him with the idea of the Release and that it would not have done so if it saw no value in what it was seeking in return. On this point, Vice Chancellor Noble concluded that "[p]laintiff's allegations regarding Kaneko's extended control over SCLI and SCL International, however, cast doubt on this reasoning and, with all reasonable inferences drawn in Plaintiff's favor, suggest that the Company may have offered this deal intending to insulate Kaneko from liability for his alleged fraudulent scheme . . ."[31]

         Because Vice Chancellor Noble did not make definitive findings of fact on the motion to dismiss, but appropriately accepted all well-pled facts as true and drew all reasonable inferences in the Receiver's favor, his conclusion regarding the lack of consideration for the Release cannot be the law of the case. While it is "established that a trial court's previous decision in a case will form the law of the case for the issue decided, " our Supreme Court has explained that the doctrine only applies "provided the facts underlying the ruling do not change."[32] In this instance, the law of the case doctrine is inapplicable not because the facts have changed, but because the underlying facts were never conclusively determined.

         Turning to the merits, the Receiver raises three grounds upon which the Court can disregard the claim preclusive effects of the Release, each of which, according to the Receiver, implicate disputed issues of material fact: (a) the Release should be disregarded because Kaneko's control over SCLI prevented SCLI from entering into an arm-length agreement with him; (b) the Release was not supported by valid consideration; and (c) Lewis lacked authority to enter into the Release on behalf of the Company. Having now thoroughly reviewed the evidentiary record, I am satisfied that no such material factual disputes exist and that the Receiver's arguments with respect to the Release fail as a matter of law.

         a. No Evidence That Kaneko Controlled SCLI at the Time of the Release

         The Receiver argues that the extent to which Kaneko exercised control over SLCI is a contested issue of fact that precludes summary judgment. The record reveals no such dispute. While the Receiver has pointed to evidence that Kaneko may have exercised some control of the Company's bank accounts while serving as CFO, and perhaps for some time after he left that position in 2010, the Receiver has failed to identify any evidence that Kaneko exercised any control over the Company (and particularly its board of directors) at the time Lewis negotiated and the Company entered into the Release in 2013. In fact, the Receiver admits as much when it argues that "Kaneko is contorting the facts showing he had control well into March, 2012."[33] The Receiver's evidence of Kaneko's purported control, even if present in the record, stops approximately ten months short of the relevant time frame.

         In what can fairly be characterized as a Hail Mary, the Receiver argues that an issue of material fact concerning Kaneko's control at the time of the Release exists because "[a]t the time the Release was signed, Kaneko was the only one who could facilitate the return of the Song Held Shares, supporting that he maintained control, either directly or indirectly, even after he no longer worked directly for SCLI, and was an officer of Yu Shu Mei, one of the entities that held the Song Held Shares."[34] This logic is hard to follow. The fact that Kaneko was positioned to secure the return of the Song Held ...

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