Exhibit A

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United States District Court,

N.D. California.

SHANGHAI AUTOMATION INSTRUMENT CO. LTD. 

and Shanghai Microlink Electronic Co., Ltd., Plaintiffs,

v.

Dennis KUEI, Matthew Tsai, and Microlink Data System, 

Inc., et al., Defendants.

No. C-00-4822 PJH(EMC).

Nov. 19, 2001.

Chinese corporation moved for entry of default 

judgment in its conversion and fraud action against its joint 

venture partners. Adopting the report and recommendation 

of Chen, United States Magistrate Judge, the District 

Court, Hamilton, J., held that: (1) complaint stated claims 

against defaulting partner for conversion and breach of 

contract, and (2) no just reason existed for delaying entry 

of default judgment against defaulting partner, even 

though second partner had answered complaint.

Motion granted.

West Headnotes

[1] Federal Civil Procedure 170A 2411

170A Federal Civil Procedure

 170AXVII Judgment

 170AXVII(B) By Default

 170AXVII(B)1 In General

 170Ak2411 k. In general. Most Cited Cases

There is no matter of right to entry of default judgment; its entry is entirely within court's discretion. 

Fed.Rules Civ.Proc.Rule 55(b)(2), 28 U.S.C.A.

[2] Federal Civil Procedure 170A 2411

170A Federal Civil Procedure

 170AXVII Judgment

 170AXVII(B) By Default

 170AXVII(B)1 In General

 170Ak2411 k. In general. Most Cited Cases

Court may find entry of default judgment appropriate 

in consideration of, inter alia: (1) sufficiency of complaint 

and merits of plaintiff's substantive claims; (2) possibility 

of prejudice if entry is denied; (3) sum of money at stake; 

(4) possibility of dispute concerning material facts; (5) 

whether default was due to excusable neglect; and (6) 

strong policy favoring decisions on merits. Fed.Rules 

Civ.Proc.Rule 55(b)(2), 28 U.S.C.A.

[3] Federal Civil Procedure 170A 2418.1

170A Federal Civil Procedure

 170AXVII Judgment

 170AXVII(B) By Default

 170AXVII(B)1 In General

 170Ak2418 Proceedings for Judgment

 170Ak2418.1 k. In general. Most Cited 

Cases

On motion for entry of default judgment, after default 

has been entered, factual allegations of complaint together 

with other competent evidence submitted must be taken as 

true; however, where less than all defendants have defaulted, allegations are only true as to those defaulting 

defendants. Fed.Rules Civ.Proc.Rule 55(b)(2), 28 

U.S.C.A.

[4] Federal Courts 170B 409.1

170B Federal Courts

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 170BVI State Laws as Rules of Decision

 170BVI(C) Application to Particular Matters

 170Bk409 Conflict of Laws

 170Bk409.1 k. In general. Most Cited Cases

In diversity case, absent choice-of-law contractual

provision and under California choice of law rules, federal 

court sitting in California presumes that California law 

applies unless there exists compelling reason to displace 

state law with law of foreign jurisdiction.

[5] Joint Adventures 224 4(1)

224 Joint Adventures

 224k3 Mutual Rights, Duties, and Liabilities of Parties

 224k4 In General

 224k4(1) k. In general. Most Cited Cases

Joint Adventures 224 5(1)

224 Joint Adventures

 224k3 Mutual Rights, Duties, and Liabilities of Parties

 224k5 Actions Between Parties

 224k5(1) k. In general. Most Cited Cases

Under California law, where joint venturer wrongfully 

repudiates joint venture agreement and converts assets of 

joint venture to his own use and benefit, victim may: (1) 

waive any tort and sue to specifically enforce joint venture 

agreement; (2) submit to defendant's repudiation and sue 

for conversion; (3) submit to repudiation and sue for 

breach of joint venture agreement, i.e. lost profits; and (4) 

sue in tort.

[6] Joint Adventures 224 5(1)

224 Joint Adventures

 224k3 Mutual Rights, Duties, and Liabilities of Parties

 224k5 Actions Between Parties

 224k5(1) k. In general. Most Cited Cases

Under California law, joint venture itself has no claim 

against joint venturer who wrongfully repudiates joint 

venture agreement and converts assets; rather, any claim 

belongs to victimized joint venture partner.

[7] Corporations and Business Organizations 101 

1037

101 Corporations and Business Organizations

 101II Disregarding Corporate Entity; Piercing Corporate Veil

 101k1035 Reasons and Justifications

 101k1037 k. Justice and equity in general. Most 

Cited Cases

 (Formerly 101k1.4(4))

 Corporations and Business Organizations 101 

1039

101 Corporations and Business Organizations

 101II Disregarding Corporate Entity; Piercing Corporate Veil

 101k1035 Reasons and Justifications

 101k1039 k. Alter ego in general. Most Cited 

Cases

 (Formerly 101k1.4(4))

Under California law, corporation's veil may be 

pierced, and corporation may be deemed alter ego of individual, where: (1) unity of interest and ownership exists 

between personality of corporation and individual owner; 

and (2) failure to disregard their separate identities would 

result in inequitable result.

[8] Corporations and Business Organizations 101 

1043

101 Corporations and Business Organizations

 101II Disregarding Corporate Entity; Piercing Corporate Veil

 101k1042 Factors Considered

 101k1043 k. In general. Most Cited Cases

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 (Formerly 101k1.4(1))

Under California law, factors to consider in determining whether there is unity of interest, warranting 

piercing of corporate veil, include: inadequate capitalization; commingling of funds and other assets; treating assets 

of corporation as one's own; unauthorized diversion of 

corporate assets to non-corporate uses; holding out as 

personally liable for corporate debts; having sole ownership of all stock in corporation by individual or members of 

family; contracting with another with intent to avoid performance by using corporation as shield against personal 

liability; using corporation as mere shell for single venture 

or business of individual or another corporation; concealing personal business activities; failing to maintain adequate corporate records; disregarding legal formalities; use 

of same office or business location; and use of corporate 

entity to procure labor, services or merchandise for another 

person or entity.

[9] Corporations and Business Organizations 101 

1074

101 Corporations and Business Organizations

 101II Disregarding Corporate Entity; Piercing Corporate Veil

 101k1057 Particular Occasions for Determining 

Corporate Entity

 101k1074 k. Fraud. Most Cited Cases

 (Formerly 101k1.6(13))

Under California law, individual participants in joint 

venture and their corporations possessed sufficient unity of 

interest to warrant piercing of corporate veil, in fraud action by victimized joint venture partner; participants controlled corporations, comingled funds, and held themselves 

out as personally liable for corporate debts.

[10] Conversion and Civil Theft 97C 100

97C Conversion and Civil Theft

 97CI Acts Constituting and Liability Therefor

 97Ck100 k. In general; nature and elements. Most 

Cited Cases

 (Formerly 389k1 Trover and Conversion)

Elements of conversion, under California law, are: (1) 

ownership or right to possession of property; (2) wrongful 

disposition of that property right; and (3) monetary damages.

[11] Joint Adventures 224 5(2)

224 Joint Adventures

 224k3 Mutual Rights, Duties, and Liabilities of Parties

 224k5 Actions Between Parties

 224k5(2) k. Pleading and evidence. Most Cited 

Cases

Under California law, allegation that joint venture

participant caused property of joint venture to be transferred, without payment, to his alter ego corporation was 

sufficient to state claim for conversion.

[12] Evidence 157 93

157 Evidence

 157III Burden of Proof

 157k93 k. Facts within knowledge of adverse party. 

Most Cited Cases

Although burden of proving each element generally 

lies with party asserting claim, burden of proving fact may 

be shifted to party who has sole access to evidence which 

would prove claim false.

[13] Joint Adventures 224 5(2)

224 Joint Adventures

 224k3 Mutual Rights, Duties, and Liabilities of Parties

 224k5 Actions Between Parties

 224k5(2) k. Pleading and evidence. Most Cited 

Cases

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Under California law, joint venture participant who

converted for his personal use portion of funds borrowed 

by venture for operating expenses was liable to victimized 

joint venture partner for partner's percentage of entire loan 

amount, even though partner was unable to prove what 

portion of funds were converted; participant had sole access to evidence as to what portion of funds were converted, and so had burden of proof on that issue.

[14] Contracts 95 326

95 Contracts

 95VI Actions for Breach

 95k326 k. Grounds of action. Most Cited Cases

Elements of breach of contract claim, under California 

law, are: (1) existence of contract; (2) performance by 

plaintiff; (3) breach by defendant; and (4) damages.

[15] Contracts 95 312(3)

95 Contracts

 95V Performance or Breach

 95k312 Acts or Omissions Constituting Breach in 

General

 95k312(3) k. Failure to make payments. Most 

Cited Cases

Under California law, lender's allegation that it had 

entered into contracts to loan funds to debtor, that it had 

loaned agreed funds, and that debtor had failed to repay 

loans according to terms of agreements, was sufficient to 

state claim for breach of contract.

[16] Federal Civil Procedure 170A 2415

170A Federal Civil Procedure

 170AXVII Judgment

 170AXVII(B) By Default

 170AXVII(B)1 In General

 170Ak2415 k. Grounds. Most Cited Cases

Entry of default judgment was warranted in joint 

venturer participant's breach of contract and conversion 

action against partner and his alter ego corporations; there 

was no serious dispute concerning material facts, partner's 

failure to appear could not be attributed to excusable neglect, and plaintiff was likely to suffer significant prejudice 

if recovery was delayed. Fed.Rules Civ.Proc.Rule

55(b)(2), 28 U.S.C.A.

[17] Federal Civil Procedure 170A 2576

170A Federal Civil Procedure

 170AXVII Judgment

 170AXVII(D) On Trial of Issues

 170Ak2576 k. Judgment against one or more 

coparties. Most Cited Cases

No just reason existed for delaying entry of default 

judgment against one of two joint venture participants 

being sued by their partner for conversion and breach of 

contract; although second participant had answered complaint, defendants' liability turned on their individual 

conduct, and so judgment against first participant would 

not be inconsistent with judgment in favor of second participant. Fed.Rules Civ.Proc.Rules 54(b), 55(b), 28 

U.S.C.A.

[18] Damages 115 87(1)

115 Damages

 115V Exemplary Damages

 115k87 Nature and Theory of Damages Additional 

to Compensation

 115k87(1) k. In general. Most Cited Cases

Under California law, factors to be considered in fixing punitive damages award are: (1) nature of defendants' 

acts; (2) amount of compensatory damages awarded; and 

(3) wealth of defendants.

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*997 Juan C. Basombrio, Dorsey & Whitney, Costa Mesa, 

CA, for plaintiffs.

ORDER ADOPTING MAGISTRATE JUDGE'S 

REPORT AND RECOMMENDATION

HAMILTON, District Judge.

The court has reviewed Magistrate Judge Chen's November 2, 2001, Report and Recommendation Re: Plaintiff's Motion for Entry of default Judgment. No objections 

have been filed. The court finds the Report correct, 

well-reasoned and thorough, and adopts it in every respect. 

Accordingly, plaintiff's motion (Docket No. 47) is 

GRANTED. A separate judgment will be entered against 

defendants Dennis Kuei, Micro Link Systems, Inc., 

Microlink Data Systems, Inc., Cipher Instrument, Inc., and 

MIG, Inc. The remaining defendant, Matthew Tsai has

filed a petition in bankruptcy and this matter is stayed as to 

him.

IT IS SO ORDERED.

REPORT AND RECOMMENDATION RE: PLAINTIFFS' MOTION FOR ENTRY OF DEFAULT 

JUDGMENT (No. 47)

CHEN, United States Magistrate Judge.

Before the Court is the motion by plaintiffs Shanghai 

Automation Instrument Co., Ltd. and Shanghai Microlink 

Electronic Co., Ltd. for entry of default judgment against 

Dennis Kuei, Microlink Data System, Inc., Micro Link 

Systems, Inc., Cipher Instrument, Inc., and Microlink 

International Group, Inc. For the below reasons, the Court 

recommends that this motion be granted and default 

judgment entered.

BACKGROUND

In May 1993, Shanghai Automation Instrument Co., 

Ltd. (hereinafter referred to “Shanghai Automation”), a 

company based in the People's Republic of China, orally 

agreed with Dennis Kuei, and Matthew Tsai, citizens and 

residents of the state of California, to enter into a joint 

venture (hereinafter referred to as the “Joint Venture”). 

(First Am. Compl. ¶ 15.) Shanghai Automation, Kuei and 

Tsai sought to assemble laptop computers in China for, 

inter alia, export to California. Id. Shanghai Automation 

contributed 75 percent of the initial costs of the Joint 

Venture and Kuei and Tsai contributed 25 percent. (First 

Am. Compl. ¶ 16.) Accordingly, Shanghai Automation 

was entitled to 75 percent of the profits of the Joint Venture, and Kuei and Tsai, the remaining 25 percent. Id.

On May 20, 1993, the parties reduced the oral 

agreement to enter the Joint Venture to a writing (hereinafter referred to *998 as the “JV Agreement.”). (First Am. 

Compl. ¶ 18.) At the signing of the JV Agreement, Kuei 

and Tsai represented that they owned and/or controlled a 

company, Micro Link Systems, Inc. (hereinafter “Micro 

Link Systems”), and designated this company a party to the 

JV Agreement as well. Id.

Thereafter, the parties formed and registered in China, 

Shanghai Microlink Electronic Company, Ltd. (hereinafter 

referred to as “SMEC”) to facilitate the goals of the Joint 

Venture. (First Am. Compl. ¶ 20.) Kuei was made 

Vice-Chairman of the Board of Directors of SMEC and

Tsai, a director. (First Am. Compl. ¶ 24.)

With control of the daily operations of SMEC, Kuei 

and Tsai purchased laptop computer components exclusively from a Taiwanese corporation, Cypher Corporation 

(hereinafter referred to as “Cypher (Taiwan)”), manufactured the laptops in China and sold the laptops to Cipher 

Instrument, Inc. (hereinafter referred to as “Cipher (CA)”), 

a California corporation. (First Am. Compl. ¶¶ 25-26.) 

Unbeknownst to Shanghai Automation, these transactions 

were not arm's-length deals as Kuei and Tsai owned and 

controlled both Cypher (Taiwan) and Cipher (CA). Id. To 

further complicate matters, Kuei and Tsai directed SMEC 

to make payments to Microlink Data Systems, Inc. (hereinafter “Microlink Data”), a California corporation owned 

by Kuei and Tsai, for the laptop computer components 

purchased from Cypher (Taiwan). (First Am. Compl. ¶¶ 8, 

13 and 25.) For the laptops sold to Cipher (CA), the Joint 

Venture received partial payment from Cipher (CA) and 

Microlink Data and from Tsai personally. (First Am.

Compl. ¶ 26.)

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In 1998, Kuei and Tsai entered into eight separate 

sales agreements for the Joint Venture's sale of 8,000 laptop computers to Cipher (CA). (First Am. Compl. ¶ 31.) At 

Kuei and Tsai's direction, the Joint Venture shipped 7,000 

of the 8,000 laptops to Cipher (CA) and the remaining 

1,000 to Solar Technology Limited, a Hong Kong corporation not alleged to be owned and controlled by defendants Kuei and Tsai. Id. Neither Cipher nor any other entity 

or individual made payment for the 7,000 laptops. Id.

On February 8, 1998, Kuei was arrested in China for

alleged fraud in connection with a business venture and 

requested that Shanghai Automation make loans to Kuei in 

the total amount of $2,187,000.00. (First Am. Compl. ¶ 

32.) Kuei represented to Shanghai Automation that, as long 

as he was in custody, he was not in a position to facilitate 

the repayment of the monies owed to the Joint Venture by 

“Microlink” FN1 and Cipher (CA). Id. Shanghai Automation made personal loans to Kuei on July 12, August 6 and 

9, October 8, 1999 and January 31, 2000, which he did not 

repay. Id.

FN1. As discussed infra, defendants Kuei and 

Tsai use Microlink Data, Micro Link Systems and 

Microlink International, Inc. interchangeably.

Shanghai Automation also made loans, in the total 

amount of $1,190,000.00, to Kuei and Tsai based on their 

representations that they needed operating expenses for 

their “Microlink” companies. (First Am. Compl. ¶ 33.) 

Shanghai Automation made loans to Kuei and Tsai on 

October 16 and 17, 1996, July 16, 1997, February 24 and 

May 13, 1998, which were also not repaid. Id.

During the course of the Joint Venture, Kuei, Tsai and 

Shanghai Automation, as joint venturers, borrowed monies 

from the Commercial and Industrial Bank of China that 

were to be used for operating expenses for the Joint Venture. (First Am. Compl. ¶ 37.) These loans, in the amount 

*999 of $3,830,000.00, were guaranteed by Shanghai 

Automation. Id. The Joint Venture defaulted on these loans 

and Shanghai Automation currently faces liability as to 

these loans. Id.

On February 8, 2001, Shanghai Automation, on behalf

of itself and SMEC, filed the Complaint herein against 

defendants Kuei, Tsai, Microlink Data, Micro Link Systems, Cipher (CA) and Microlink International Group, 

Inc., a California corporation purportedly owned and controlled by Kuei and Tsai (hereinafter referred to as “MIG, 

Inc.”), alleging: conversion, fraud, intentional misrepresentation, fraudulent concealment, breach of fiduciary 

duty, breach of contract, unjust enrichment, breach of the 

implied covenant of good faith and fair dealing and tortious interference with contract. The Complaint was served 

on all defendants including all corporate entities who were 

served through the California Secretary of State as per 

Judge Hamilton's order.

On May 3, 2001, defendant Tsai, individually, filed an 

answer to the Complaint. The remaining defendants, 

however, failed to answer and on May 14, 2001, defaults 

were entered. Default was not entered against Tsai.

On June 1, 2001, in anticipation of this motion for

entry of default judgment, eventually filed on July 6, 2001, 

Judge Hamilton referred this matter to the Court for a 

report and recommendation.

REPORT

[1][2] Federal Rule of Civil Procedure 55(b)(2) permits the Court, following a defendant's default, to enter a 

final judgment in a case. There is no matter of right to the 

entry of a default judgment, and its entry is entirely within 

this Court's discretion. See Draper v. Coombs, 792 F.2d 

915, 924 (9th Cir.1986); Aldabe v. Aldabe, 616 F.2d 1089, 

1092 (9th Cir.1980); Kloepping v. Fireman's Fund, No. 

C94-2684 TEH, 1996 WL 75314, *2 (N.D.Cal. Feb.13, 

1996). This Court may find entry of a default judgment 

appropriate in consideration of, inter alia: [1] the sufficiency of the complaint and the merits of a plaintiff's substantive claims; [2] the possibility of prejudice if entry is 

denied; [3] the sum of money at stake; [4] the possibility of 

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a dispute concerning material facts; [5] whether default 

was due to excusable neglect; and [6] the strong policy 

favoring decisions on the merits. See PepsiCo, Inc. v. 

Triunfo-Mex, Inc., 189 F.R.D. 431, 432 (C.D.Cal.1999)

(“applying this discretionary standard, default judgments 

are more often granted than denied”), citing, Eitel v. 

McCool, 782 F.2d 1470, 1471-72 (9th Cir.1986); see also 

Board of Trustees of the Sheet Metal Workers v. Sawyer,

No. C99-3225 VRW, 2000 WL 1006522, *1 (N.D.Cal. 

July 13, 2000).

The Court considered the pleadings and other papers

filed with this motion for entry of default judgment as well 

as considered the arguments of counsel for the plaintiffs at 

hearings on the motion conducted on September 5 and 25, 

2001.

Defendants Kuei, Microlink Data, Micro Link Systems, Cipher (CA) and MIG, Inc. were served with both 

the Complaint and the current motion, yet failed to respond 

or enter any appearance in this case. (Basombrio Decl. ¶¶ 

6-10, Ex. 5-9.)

The Complaint alleges, inter alia, that defendants 

Kuei, Microlink Data, Micro Link Systems, Cipher (CA) 

and MIG, Inc.: [1] wrongfully converted property; [2] 

intentionally misrepresented and intended to defraud 

Plaintiffs; [3] fraudulently concealed information from 

Plaintiffs; [4] breached fiduciary duties; [5] breached 

contracts; [6] unjustly enriched themselves; [7] breached 

the implied covenant of good faith and fair dealing; and [8] 

tortiously interfered with contracts. Some of the claims are 

brought on behalf *1000 of Shanghai Automation, while 

others are advanced on behalf of SMEC. Shanghai Automation seeks general and compensatory damages, in the 

amount of $25,507,000.00, general and compensatory 

damages on behalf of SMEC, in the amount of 

$6,100,000.00, and punitive damages, in the amount of 

$15,000,000.00. FN2

FN2. As indicated by Amended Proposed Judgment by Default submitted by Shanghai Automation on September 18, 2001.

[3] Where, as here, a default has been entered, the 

factual allegations of the Complaint together with other 

competent evidence submitted must be taken as true. See 

TeleVideo Systems, Inc. v. Heidenthal, 826 F.2d 915, 917 

(9th Cir.1987); Danning v. Lavine, 572 F.2d 1386, 1388 

(9th Cir.1978). However, where less than all defendants 

have defaulted, the allegations are only true as to those 

defaulting defendants.

[4] In a diversity case, absent a choice-of-law contractual provision and under California choice of law rules, 

the Court presumes California law to apply unless there 

exists a compelling reason to displace state law with the 

law of a foreign jurisdiction. See Browne v. McDonnell 

Douglas Corp., 504 F.Supp. 514, 517 (N.D.Cal.1980)

(stating that a district court in California will apply California law, “unless it is shown that there is a compelling 

reason to displace forum law”); Hurtado v. Superior Court,

11 Cal.3d 574, 581, 114 Cal.Rptr. 106, 522 P.2d 666

(1974) (noting that generally a California court will apply 

California law unless a party invokes the law of a foreign 

jurisdiction). Given that the defendants are California 

citizens and corporations and the transactions were presumably centered in California, there is good reason to 

apply California law. See Globespan, Inc. v. O'Neill, 151 

F.Supp.2d 1229, 1231-32 (C.D.Cal.2001) (applying the 

“governmental interests” analysis for choosing the law to 

be applied). No party sought a different choice of law.

1. The Proper Plaintiff

Shanghai Automation contends that by their acts, 

specifically their conversion of the assets of the Joint 

Venture for their own benefit, defendants Kuei and Tsai 

repudiated the Joint Venture and in effect withdrew the 25 

percent of Joint Venture capital that had been defendants 

Kuei and Tsai's original contribution to the Joint Venture. 

Shanghai Automation further contends that the actions of 

defendants Kuei and Tsai left Shanghai Automation, 

through subrogation, as the 100 percent beneficial owner 

of the Joint Venture's main, if not sole, asset-the corporate 

entity, SMEC.

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[5] Where a joint venturer wrongfully repudiates a 

joint venture agreement and converts the assets of the joint 

venture to his own use and benefit, the victim possesses the 

following remedies; he or she may: [1] waive any tort and 

sue to specifically enforce the joint venture agreement; [2] 

submit to defendant's repudiation and sue for conversion; 

[3] submit to the repudiation and sue for breach of the joint 

venture agreement (i.e. lost profits); and [4] sue in tort. 

Gherman v. Colburn, 72 Cal.App.3d 544, 564-65, 140 

Cal.Rptr. 330 (1977); see Boyd v. Bevilacqua, 247 

Cal.App.2d 272, 55 Cal.Rptr. 610, (1966) (“[while it is the 

general rule that] a joint venturer may not sue his

co-adventurer in an action at law in respect to the joint 

venture until an accounting has been had, such rule does 

not apply where the wrongful act or acts complained of are 

not only a breach of contract but constitute a tort and particularly where the tort is of such a nature that it terminates 

the joint venture, wrongfully destroys it and results in the 

*1001 conversion by the co-adventurer of the entire assets 

to his own use.”)

[6] While Shanghai Automation may advance these 

remedies, it fails to provide any authority for the proposition that it may also maintain claims on behalf of the Joint 

Venture or SMEC, through subrogation. It also fails to 

provide any authority to find that the actions taken by any 

defendant “in effect withdrew the 25 percent of the capital 

of the Joint Venture that they had originally contributed,” 

(First Am. Compl. ¶ 29), effectively resulting in a complete 

forfeiture by Kuei and Tsai of their equity in the Joint 

Venture. Absent authority to the contrary, it appears that 

neither the Joint Venture nor SMEC has standing to sue in 

this case. Only Shanghai Automation (hereinafter referred 

to as “Plaintiff”), the victimized Joint Venture partner, is 

entitled to pursue any or all of the aforementioned claims 

set forth by Gherman v. Colburn, supra. It may sue to 

recover its 75 percent entitlement for the acts committed 

against the Joint Venture.

2. The Proper Defendants

Plaintiff Shanghai Automation alleges that 

co-defendants Microlink Data, Micro Link Systems, Cipher (CA) and MIG, Inc. were the alter egos of defendants 

Kuei and Tsai, and thus Kuei may be sued directly for 

liabilities incurred by these defendant corporations.

[7] A corporation's veil may be pierced and the corporation may be deemed an alter ego of an individual 

where: [i] an unity of interest and ownership exists between the personality of the corporation and the individual 

owner; and [ii] failure to disregard their separate identities 

would result in an inequitable result. See AT&T Co. v. 

Compagnie Bruxelles Lambert, 94 F.3d 586, 591 (9th 

Cir.1996) (applying California law); Sonora Diamond 

Corp. v. The Superior Court of Tuolumne County, 83 

Cal.App.4th 523, 538, 99 Cal.Rptr.2d 824 (2000).

[8] In determining whether there exists an unity of 

interest and ownership between corporation and individual, the Court must look to a totality of circumstances, 

where no one factor is conclusive in consideration of factors such as: failing to adequately capitalize a corporation; 

commingling funds and other assets; treating the assets of 

the corporation as one's own; diverting corporate assets to 

non-corporate uses without authority to do so; holding out 

as personally liable for corporate debts; having sole ownership of all the stock in a corporation by an individual or 

members of a family; contracting with another with intent 

to avoid performance by using a corporation as a shield 

against personal liability; using the corporation as a mere 

shell for a single venture or business of an individual or 

another corporation; concealing personal business activities; failing to maintain adequate corporate records; disregarding legal formalities; the use of the same office or 

business location; and the use of the corporate entity to 

procure labor, services or merchandise for another person 

or entity. See Sonora Diamond, 83 Cal.App.4th at 538-39, 

99 Cal.Rptr.2d 824; Associated Vendors, Inc. v. Oakland 

Meat Co., 210 Cal.App.2d 825, 838-40, 26 Cal.Rptr. 806 

(1962) (finding that the trial court's determination to pierce 

the corporate veil was supported by substantial evidence); 

see also Mid-Century Ins. Co. v. Gardner, 9 Cal.App.4th 

1205, 1212-13, 11 Cal.Rptr.2d 918 (1992) (noting that the 

issue is a question of fact and that “it is the plaintiff's 

burden to overcome the presumption of the separate ex2:09-md-02042-SFC Doc # 449-2 Filed 11/26/13 Pg 9 of 18 Pg ID 11074
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istence of the corporate entity”); Roman Catholic Archbishop v. Superior Court, 15 Cal.App.3d 405, 406, 411, 93 

Cal.Rptr. 338 (1971).

[9] Applying these factors to the evidence in the record, the Court concludes *1002 that defendants Microlink 

Data, Micro Link Systems, Cipher (CA) and MIG, Inc. and 

defendants Kuei and Tsai possess a unity of interest and 

ownership.FN3

FN3. To the extent the Complaint alleges the acts 

of defendant Kuei and Tsai as interwoven, the 

Court assumes the truth of factual allegations 

regarding alter ego liability that implicate both 

defendants Kuei and Tsai. See, e.g., United States 

v. Local 1804-1, Intern. Longshoremen Ass'n, 812 

F.Supp. 1303, 1311 (S.D.N.Y.1993). Any reference to facts implicating defendant Tsai will not 

have a preclusive effect should his case proceed 

to trial. See In re Daley, 776 F.2d 834, 838 n. 7 

(9th Cir.1985) (noting that because default 

judgments are not actually litigated, they do not 

receive preclusive effect in later proceedings), 

cert. denied, 476 U.S. 1159, 106 S.Ct. 2279, 90 

L.Ed.2d 721 (1986).

First, according to the allegations of the Complaint, 

defendants Kuei and Tsai refer to and use Micro Link 

Systems, Microlink Data and MIG, Inc. interchangeably. 

(First Am. Compl. ¶ 23.) For example, although they very 

clearly intended for Micro Link Systems to be party to the 

Joint Venture, (First Am. Compl. ¶¶ 18-22.), defendants 

Kuei and Tsai filed documentation in support of the application of the formation of SMEC with the Shanghai 

Commission on Foreign Trade and Economic Cooperation 

that listed Microlink Data instead. (First Am. Compl. ¶¶ 

20, 27.) Additionally, while the three companies are 

slightly different in name, the fact remains that Micro Link 

Systems, Microlink Data and MIG, Inc. share two business 

addresses: 46600 Landing Parkway in Fremont, California 

and 1900 Wyatt Drive # 4-5 in Santa Clara, California. 

(Basombrio Decl. ¶¶ 2-4, Ex. 1-3.)

Second, Cipher (CA) also shares 46600 Landing 

Parkway in Fremont, California, as its business address. 

(Basombrio Decl. ¶ 5, Ex. 4.)

Third, defendant Kuei is the chief executive officer of 

Microlink Data and the chief executive officer, secretary, 

chief financial officer, director and registered agent of 

Cipher (CA). (Basombrio Decl. ¶¶ 2, 5, Ex. 1 and 4.) Defendant Tsai is the president of Micro Link Systems, a 

director and registered agent of Microlink Data, the president of MIG, Inc. and a director of Cipher (CA). 

(Basombrio Decl. ¶¶ 2-5, Ex. 1-4.) More importantly, 

according to the Complaint, defendant Kuei's and Tsai's 

conduct clearly indicates that between the two of them they 

had control of these corporations by, inter alia, signing 

legal documents on behalf of MIG, Inc., Microlink Data 

and Micro Link Systems and Cipher (CA). (First Am. 

Compl. ¶¶ 34, 35, 38.)

Fourth, the Complaint alleges that defendants Kuei 

and Tsai commingled the funds of Cipher (CA) and 

Microlink Data by transferring funds from Microlink Data 

to the Joint Venture for laptop computers received by 

Cipher (CA). (First Am. Compl. ¶¶ 25-26.) Additionally, 

payments due from the Joint Venture to Cypher (Taiwan) 

for computer components were made to Microlink Data

instead. Id.

The Complaint alleges that defendants Kuei and Tsai

held themselves out to be personally liable for the debts of 

Cipher (CA) by making a personal payment for Cipher

(CA)'s debt to the Joint Venture for the laptop computers. 

(First Am. Compl. ¶ 26.) Also, in 1998, defendants Kuei 

and Tsai personally borrowed money from Plaintiff by 

representing that the money was necessary on behalf of 

their struggling “Microlink” entities. (First Am. Compl. ¶ 

33.)

Finally, the record indicates that these corporate entities have all been suspended by the Franchise Tax 

Board.FN4

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FN4. Microlink Data was suspended in November 1993. (Basombrio Decl. ¶ 2, Ex. 1.) Micro 

Link Systems was suspended in August 1995. 

(Basombrio Decl. ¶ 3, Ex. 2.) MIG, Inc. was 

suspended in August 1995. (Basombrio Decl. ¶ 4, 

Ex. 3.) Cipher (CA) was suspended in April 2000. 

(Basombrio Decl. ¶ 5, Ex. 4.)

*1003 While the Court does not have before it information about corporate documents, financial records or 

other indicia of alter ego liability, in light of the foregoing, 

it is clear that assets were commingled, business addresses 

were interchangeable, defendants Kuei and Tsai are alleged to have controlled the operations and held themselves out to be personally liable for the debt of Microlink 

Data, Micro Link Systems, Cipher (CA) and MIG, Inc. The 

allegations provide a firm basis to find that defendants 

Microlink Data, Micro Link Systems, Cipher (CA) and

MIG, Inc., suspended entities, were mere shells for defendants Kuei and Tsai in an attempt to avoid personal 

liability. An unity of interest and ownership exists between 

defendant Kuei and the corporate defendants to establish 

the first prong of the alter ego doctrine.

An inequitable result exists where an unsatisfied 

creditor exists in connection with an abuse of the corporate 

form. See United States v. Standard Beauty Supply Stores, 

Inc., 561 F.2d 774, 777 (9th Cir.1977) (noting that an 

inequitable result is found where some conduct amounting 

to bad faith makes it inequitable for the equitable owner of 

a corporation to hide behind a corporate veil). Were 

Microlink Data, Micro Link Systems, Cipher (CA) and

MIG, Inc. not considered as the alter egos of defendant 

Kuei, an inequitable result would occur as defendant Kuei 

would be allowed to shield himself from liability from the 

conversion and transfer of funds into these currently-suspended corporate entities, which are apparently 

without assets, in contradiction of the Joint Venture. See 

Flynt Distributing Co. v. Harvey, 734 F.2d 1389, 1393 (9th 

Cir.1984).

Here, given the allegations against defendant Kuei 

which are taken as true, the Court disregards the corporate 

entities of Microlink Data, Micro Link Systems, Cipher 

(CA) and MIG, Inc. and considers the corporate defendants 

the alter ego of defendant Kuei. See Say & Say, Inc. v. 

Ebershoff, 20 Cal.App.4th 1759, 1769, 25 Cal.Rptr.2d 703 

(1993) (“a court may disregard the corporate entity and 

treat the acts as if they were done by the individuals 

themselves of by the controlling corporation where the 

corporate form is used to accomplish a wrongful purpose”).

3. The Sufficiency and Merits of Plaintiff Shanghai

Automation's Claims

As to the substantive claims, the Complaint is supported by detailed allegations as well as affidavits and 

documentary evidence submitted in support of this motion.

[10][11] Plaintiff Shanghai Automation establishes 

claims for conversion under California law by alleging: [1] 

ownership or right to possession of property; [2] wrongful 

disposition of that property right; and [3] monetary damages. See Kingvision Pay-Per-View, Ltd. v. Chavez, No. 

C00-2270 CRB, 2000 WL 1847644, *4 (N.D.Cal. Dec.11,

2000), citing, G.S. Rasmussen & Assoc. v. Kalitta Flying 

Serv., 958 F.2d 896, 906 (9th Cir.1992). Plaintiff Shanghai 

Automation establishes its claim for conversion. According to the Complaint, defendant Kuei caused 7,000 laptop 

computers, which were the property of the Joint Venture, 

to be transferred, without payment, to Cipher (CA), an alter 

ego of defendant Kuei. (First Am. Compl. ¶ 31.) Defendant 

Kuei's conversion of the Joint Venture's property resulted 

in damages to Shanghai Automation in the amount equal to 

its 75 percent stake in the Joint Venture's property-7,000 

laptop computers which were never paid for. Id. According 

to the Complaint and documents submitted by Plaintiff, 75 

percent of the 7,000 laptops is valued at $16,012,500.00. 

Id.

*1004 [12][13] Second, plaintiff Shanghai Automation alleges that the Joint Venture borrowed monies, 

through a loan guaranteed by Plaintiff, from the Commercial and Industrial Bank of China, in the amount of

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$3,830,000.00, to be used for operating expenses. (First 

Am. Compl. ¶ 37.) While Plaintiff admits that some of 

funds were legitimately spent on operating expenses of the 

Joint Venture, it alleges that defendant Kuei converted the 

majority of funds for personal use and never used the funds 

for the operating expenses of the Joint Venture. Id. What is 

unknown, however, is what portion of those funds were 

converted for personal use. Although the burden of proving each element generally lies with the party asserting the 

claim, the burden of proving a fact may be shifted to the 

party who has the sole access to evidence which would 

prove the claim false. See G.E.J. Corporation v. Uranium 

Aire, Inc., 311 F.2d 749, 751 (9th Cir.1962), citing, 9 

WIGMORE, EVIDENCE § 749, at 467 (rev. ed.1960); 

see, e.g., Selma, R. & D.R. Co. v. United States, 139 U.S. 

560, 567-68, 11 S.Ct. 638, 35 L.Ed. 266 (1891); Healey v. 

Coury, 162 Ariz. 349, 783 P.2d 795, 800-01 (1989)

(“generally, a party must establish a fact which is essential 

to his claim ... however, the burden of proof as to a matter 

which is peculiarly within the knowledge or control of the 

opposite party is placed on that party”); cf. In re Malget,

165 B.R. 933, 936 (Bkrtcy.S.D.Cal.1994) (burden does not 

shift where evidence is merely difficult to obtain). Plaintiff 

does not have access to the financial records of the Joint 

Venture which were kept by defendants Kuei and Tsai. 

These records appear unavailable. Here, because defendants Kuei and Tsai allegedly controlled these funds and 

presumably have sole possession of this information, the 

burden should shift to defendant Kuei to show which

amount of the loan was not converted to his personal use. 

Because defendant Kuei defaulted and fails to respond, 

Plaintiff is entitled to recover its 75 percent share in the 

entire amount of the loan-$2,872,500.00.

[14][15] Under California law, a breach of contract 

claim may be established where a party demonstrates: [1] 

the existence of a contract; [2] performance by the plaintiff; [3] breach by the defendant; and [4] damages. See 

First Commercial Mortgage Co. v. Reece, 89 Cal.App.4th 

731, 108 Cal.Rptr.2d 23, 33 (2001), citing, 4 WITKIN, 

CAL. PROCEDURE (PLEADING) §§ 476, (4th ed.1997). 

Here, plaintiff Shanghai Automation clearly established 

valid claims for recovery as to its breach of contract claims 

by alleging that Shanghai Automation entered into contracts for the loan of monies to defendant Kuei. Shanghai 

Automation made personal loans to Kuei on July 12, August 6 and 9, October 8, 1999 and January 31, 2000, in the 

total amount of $2,187,000.00. (First Am. Compl. ¶ 32.) 

Shanghai Automation also lent to defendants Kuei and 

Tsai, jointly, on October 16 and 17, 1996, July 16, 1997, 

February 24 and May 13, 1998, additional monies, totaling 

$1,190,000.00. (First Am. Compl. ¶ 33.) The amounts due 

on these various personal loans are still outstanding. (First 

Am. Compl. ¶¶ 32-33.) Defendant Kuei is liable to 

Shanghai Automation for a total amount of $3,377,000.00.

4. The Factors Weigh in Favor of Entry of Default 

Judgment

[16] In consideration of the other factors listed above, 

all relevant factors weigh in favor of entry of default 

judgment against defendant Kuei and his alter egos.

Shanghai Automation seeks to recover an amount well in 

excess of $22,000,000.00, a substantial amount. Plaintiff is 

likely to suffer significant prejudice were recovery delayed 

as the operations of Micro Link Systems, Microlink Data, 

Cipher (CA) and MIG, Inc. have all been suspended and 

*1005 defendant Kuei may have disappeared from the 

local area. Given defendant Kuei's international connections, there is a substantial likelihood that his assets may be 

disbursed or transferred out of this country.

The Court has not been presented with anything that

suggests there is a serious dispute concerning the material 

facts. Defendant Tsai, filed an conclusory answer asserting 

several affirmative defenses without tendering any specific 

facts or allegations which contradict the allegations of the 

Complaint. As previously mentioned, the documentary

evidence submitted by Plaintiff substantiates its claims. 

Most importantly, it appears that defendant Tsai, the sole 

non-defaulting defendant, is not likely to defend this suit. 

Other than filing an answer and appearing at one case 

management conference, defendant Tsai has not appeared 

at other conferences, has completely failed to respond to 

discovery requests, and has not appeared or filed any opposition to the motion for default judgment. Furthermore, 

defendant Tsai filed a petition in the Bankruptcy Court and 

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the case against him in this matter has been stayed. (Notice 

of Automatic Stay by Matthew Tsai, filed October 17, 

2001.) While there remains a theoretical possibility that the 

Bankruptcy Trustee could assume the defense of this action, there is a substantial likelihood that this suit will not 

be defended.

The default of defendant Kuei and his defendant alter 

egos cannot be attributed to excusable neglect. All were 

properly served with the Complaint, the notice of entry of 

default, as well as the papers in support of the instant motion.

While there is a strong policy favoring decisions of the 

merits, every other factor under Eitel v. McCool, supra,

weighs in Shanghai Automation's favor in this case.

5. The Entry of Default Judgment Against Less Than 

All Defendants-Frow v. De La Vega

[17] However, because one defendant, Tsai, answered 

the Complaint and is not in default (at least at this juncture), the question arises as to whether the Court has the 

discretion under Federal Rule of Civil Procedure 54(b)

(judgments) to enter a default judgment against less than 

all the defendants. Rule 54(b) provides in pertinent part:

...when multiple parties are involved, the court may 

direct the entry of a final judgment as to one or more but 

fewer than all of the claims or parties only upon an express determination that there is no just reason for delay 

and upon an express direction for the entry of judgment.

See Curtiss-Wright Corp. v. General Elec. Co., 446 

U.S. 1, 8, 100 S.Ct. 1460, 64 L.Ed.2d 1 (1980) (noting that 

the court has discretion to enter a default judgment as to 

less than all defendants).

As indicated above, the factors that militate in favor of 

entering a default judgment here would also tend to indicate “there is no just reason for delay.” However, in Frow 

v. De La Vega, 82 U.S. (15 Wall.) 552, 21 L.Ed. 60 (1872), 

the Supreme Court held that under certain circumstances, 

the court should not enter a default judgment against one or 

more defendants which is, or likely to be, inconsistent with 

judgment on the merits in favor of the remaining answering defendants.

In Frow, the appellant was one of fourteen defendants 

charged with the conspiracy to defraud in a land transaction. The appellant defaulted while the remaining thirteen 

defendants answered on the merits. The trial court entered 

a “decree pro confesso ” followed by a “final decree absolute” against the appellant (latter day default and default 

judgment). The Supreme*1006 Court reversed, finding 

that the trial court could not enter a final decree on the 

merits against one defendant before the cause was fully 

adjudicated as to the others. See Frow, 82 U.S. (15 Wall.) 

at 554-55. The Court stated that:

“where a bill makes a joint charge against several defendants, and one of them makes default, [the trial court 

should] simply [ ] enter a default and a formal decree pro 

confesso against him, and proceed with the cause upon 

the answers of the other defendants. The defaulting defendant has merely lost his standing in court. He will not 

be entitled to service of notices in the cause, nor to appear in it in any way. He can adduce no evidence; he 

cannot be heard at the final hearing.”

Id. at 554. The Frow Court further stated that if a final 

judgment were to be entered, “there might be one decree of 

the court sustaining the charge of joint fraud committed by 

the defendants, and another decree disaffirming the said 

charge, declaring it to be entirely unfounded and dismissing the complainant's bill.” Id.

Frow stands for the proposition that “when one of 

several defendants who is alleged to be jointly liable defaults, judgment should not be entered against that defendant until the matter has been adjudicated with regard to 

all defendants, or all defendants have defaulted.” 10A 

CHARLES ALAN WRIGHT, ARTHUR R. MILLER & 

MARY KAY KANE, FEDERAL PRACTICE AND 

PROCEDURE: CIVIL 3D § 2690 (2001).

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While “Frow undoubtedly stands for the proposition 

that in certain circumstances it is inappropriate to enter a 

default judgment against one defendant when other defendants in the same case have prevailed,” subsequent 

courts have pointed out that the precise holding of what 

those circumstances is unclear. See Farzetta v. Turner & 

Newall, Ltd., 797 F.2d 151, 154 (3rd Cir.1986).

FN5

FN5. The Third Circuit in Farzetta, supra, noted 

that the Frow Court did not identify what the 

Court intended to be “certain circumstances,” 

largely in part due to the Court's ambiguity and 

failure to identify the relationship between the 

co-defendants. See Farzetta, 797 F.2d at 154 n. 2.

As a result, the scope of Frow 's injunction against 

entering default judgments while claims are pending

against other defendants has been stated variously. Some 

courts have focused on whether the complaint seeks to 

hold defendants jointly liable-such as where a tortious act 

is committed by several persons acting in concert wherein 

each tortfeasor is entirely responsible for the resulting 

damage-in contrast to cases in which there is “several” or 

“joint and several” liability wherein a finding of liability as 

to one defendant is consistent with a finding of no liability 

as to others. See In re Uranium Antitrust Litigation, 617 

F.2d 1248, 1257 (7th Cir.1980) (Frow not applicable 

where different results as to different parties not logically 

inconsistent); Whelan v. Abell, 953 F.2d 663, 674 

(D.C.Cir.1992) (default order improper where liability “is 

truly joint-that is, when the theory of recovery requires that 

all defendants be found liable if any one of them is liable”); 

Carter v. District of Columbia, 795 F.2d 116, 137 

(D.C.Cir.1986); International Controls Corp. v. Vesco,

535 F.2d 742, 746 (2nd Cir.1976); Martin v. Coughlin, 895 

F.Supp. 39, 43 (N.D.N.Y.1995); State of Florida ex rel. 

Dept. of Ins. of State of Florida v. Countrywide Truck Ins. 

Agency, Inc., 258 Neb. 113, 602 N.W.2d 432, 438 (1999).

Other courts, including the Ninth Circuit, have held 

that Frow is not limited to claims asserting joint liability, 

but extend to certain circumstances in which the defendants have closely related defenses or are otherwise similarly situated. See In re *1007 First T.D. & Investment, 

Inc., 253 F.3d 520, 532 (9th Cir.2001); Gulf Coast Fans v. 

Midwest Electronics Importers, 740 F.2d 1499, 1512 (11th 

Cir.1984) (distributor's breach of contract claim against 

importer and exporter of fans could not logically result in 

one defendant being liable but not the other); Phoenix 

Renovation Corp. v. Gulf Coast Software, Inc., 197 F.R.D. 

580, 582-83 (E.D.Va.2000) (software manufacturer and 

software distributor were similarly situated with respect to 

claims of breach of contract and fraud brought by purchaser); Western Security Bank v. Powerhorse Lockwood 

Irrigation Corp., No. CV1:00-2032, 2001 WL 180067, *2 

(N.D.Ohio Feb.21, 2001) (liability of defendant and 

guarantor closely interrelated).

In First T.D., supra, two mortgage investment companies, involved in schemes to defraud, went into bankruptcy proceedings. The companies' bankruptcy trustee 

filed an action against 132 investors, apparent creditors in 

the bankruptcy proceedings, alleging that the investors had 

imperfect (unsecured) interests, because they did not have 

physical possession of the notes and deeds originally assigned by the companies. 88 of 132 individuals failed to 

answer and default was entered against those individuals.FN6 18 of the 44 individuals who answered, moved for, 

and were granted, summary judgment as the trial court 

determined that the California Business and Professions 

Code protected perfection of the individuals' interests 

without physical possession of notes or deeds. In essence, 

the trial court determined that all defendants' interests were 

perfected by statute. Thereafter, however, the trial court 

granted the trustee's motion for entry of default judgment 

against the 88 non-answering defendants.

FN6. The lawsuit would have the effect denying 

these 132 individuals priority in asset distribution.

On appeal, the Ninth Circuit recognized the general

rule created by Frow extended to similarly-situated defendants, even if not jointly and severally liable, where 

necessary to avoid an inherent inconsistent result. See First 

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T.D., 253 F.3d at 532. The court concluded that, because 

each individual defendant's transaction followed an identical pattern with almost identical legal documents, it was 

incongruous and unfair to allow recovery against defaulting defendants on a legal theory that had already been 

rejected by the court as to answering defendants in the 

same action. See id., at 531-32. Therefore, the court held 

that under Frow, the lower court abused its discretion by in 

entering default judgments which created inconsistent 

judgments against the multiple defendants. See id.

The two most authoritative treatises on the Federal

Rules of Civil Procedure, Moore's Federal Practice and 

Procedure and Federal Practice and Procedure by Wright, 

Miller & Kane, are sometimes cited as presenting these 

ostensibly two divergent views-Moore's representing the 

joint liability position and Wright, Miller and Kane's, the 

allegedly more expansive view of Frow. For instance, the 

Virginia District Court in Phoenix Renovation, supra,

quotes Moore's in support of the statement that “[m]ost 

jurisdictions have narrowly construed Frow to bar entry of 

default judgment against one of several defendants only if 

‘the theory or recovery is one of true join liability, such 

that, as a matter of law, no one defendant may be liable 

unless all defendants are liable, or the nature of the relief 

demanded is such that, in order to be effective, it must be 

granted against each and every defendant.’ ” 

*1008Phoenix Renovation, 197 F.R.D. at 582-83, quoting,

10 J. MOORE, ET AL., MOORE'S FEDERAL PRACTICE ¶ 55.25 (3d ed.1999). The court then cites Wright, 

Miller and Kane as supporting the view that “when defendants are similarly situated though not jointly liable, 

final judgment should not be entered against a defaulting 

defendant ....” Id. at 583, quoting, WRIGHT, ET AL., 

supra, § 2690.

However, upon close examination it appears that these 

two lines of cases may be reconciled, for a single principle 

runs through all these cases. As explained by the court in In 

re Uranium Antitrust Litigation, supra, “[t]he result in 

Frow was clearly mandated by the Court's desire to avoid 

logically inconsistent adjudications as to liability.” In re 

Uranium Antitrust Litigation, 617 F.2d at 1257 (emphasis 

added). Professors Wright, Miller and Kane explain that 

the key “is to recognize that the Frow principle is designed 

to apply only when it is necessary that the relief against the 

defendants be consistent,” WRIGHT ET AL., § 2690, a 

statement entirely consistent with Professor Moore's conclusion that Frow applies not only to cases involving joint 

liability, but also where the same relief “must be granted 

against each and every defendant.” MOORE ET AL., ¶ 

55.25. There are numerous situations where it would be 

“logically inconsistent” to hold one defendant liable and 

another not. Allegations of joint liability-the focus of the 

first line of cases-is but one subset of those situations.FN7

But there are other situations which do not technically 

involve joint liability but which demand consistency in 

judgments, such as In re First T.D. & Investment, supra,

where the identical nature of the claims, facts, and legal 

issues relative to each defendant made it logically inconsistent to rule in favor of some defendants but not others. In 

contrast, there are situations such as in In re Uranium 

Antitrust Litigation, supra, where it was theoretically 

proper to hold some defendants liable, e.g. for conspiracy 

to commit anti-trust violations, but other defendants innocent. See, e.g., Farzetta, 797 F.2d at 155 (finding the 

differing judgments in asbestos case consistent); Douglas 

v. Metro Rental Services, Inc., 827 F.2d 252, (7th 

Cir.1987) (finding that differing judgments against corporation and its agent not inconsistent).

FN7. In Frow, the inconsistency flowed not only 

the fact of allegation of joint liability, but the fact 

that there was a single res in controversy. See In 

re Uranium Antitrust Litigation, 617 F.2d at 

1257, n. 40.

So viewed, these two lines of cases are not at odds but 

reflect a more general principle. Frow 's applicability turns 

not on labels such as “joint liability” or “joint and several 

liability,” but rather on the key question of whether under 

the theory of the complaint, liability of all the defendants 

must be uniform.FN8 Where Frow applies, it would be an 

abuse of discretion to enter a default judgment against 

some but not all defendants prior to adjudication of the 

claims against answering defendants. See Gulf Coast Fans,

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740 F.2d at 1511-12; Martin v. Coughlin, 895 F.Supp. at 

42-43; Phoenix Renovation, 197 F.R.D. at 582-83; Western 

Security Bank, supra, 2001 WL 180067 at *2. Under these 

circumstances, there is, as a matter of law, “just reason for 

delay” of entry of judgment under Rule 54(b).

FN8. To be sure, a few courts appear to have declined to enter default judgment without closely 

considering whether the different judgment 

would result in inconsistency. See Federal Deposit Ins. Corp. v. Manatt, 723 F.Supp. 99, 106 

(E.D.Ark.1989); In re Vantage Petroleum Corp.,

43 B.R. 257, 259-60 (Bkrtcy.E.D.N.Y.1984).

On the other hand, where uniformity of liability is not 

logically required by the facts and theories of the case, the 

risk of *1009 inconsistent judgments is not sufficiently 

extreme to bar entry of default judgment as a matter of law. 

In those situations, the Court concludes that it retains the 

discretion to balance various factors in deciding whether to 

enter judgment against less than all defendants permitted 

under Rule 54(b).

As noted by the lower court in In re Uranium Antitrust 

Litigation, 473 F.Supp. 382, 388-89 (N.D.Ill.1979), Rule 

54(b) was amended in 1961 to permit entry of judgment in

multiple party litigation in order the deal with the problem 

of hardship resulting from delay in waiting until completion of the entire case. The purpose of Rule 54(b) which 

post-dates Frow by nearly a century,FN9 is to “strike a 

balance between premature decision-making and the 

pragmatic needs of the litigants in complex multiple-party 

actions.” Id., at 389. Preserving the Court's discretion in 

balancing those competing interests comports with other 

provisions of the Federal Rules which weigh the policy 

against inconsistent judgments against the pragmatic consideration of the hardship to existing parties in the litigation. See id. (discussing similar policy considerations underlying Rule 19 joinder of necessary parties). To hold that 

the mere possibility of inconsistent judgment divests the 

Court of its discretion under Rule 54(b) would imply that 

whenever there are multiple defendants who raise similar 

defenses, the court could never enter a default judgment 

until conclusion of the entire case regardless of the substantial prejudice likely to be suffered by the plaintiff as a 

result of the delay. Such a rule would contravene the purpose of the 1961 amendment to Rule 54(b).

FN9. The Second Circuit has suggested but not 

held that it is unlikely that Frow retains any force 

subsequent to the adoption of Rule 54(b). See 

International Controls, 535 F.2d at 746-47 n. 4.

In the instant case, Frow does not bar the exercise of 

discretion to enter a default judgment against the defaulting defendants. This is not a case of “joint” liability where 

the theory of the case demands uniformity of judgment 

among all defendants. Plaintiffs have alleged “joint and 

several” liability, not strictly “joint” liability against the 

defendants. More important than the label, however, is the 

fact that judgment against the other defendants would not 

necessarily be inconsistent with a judgment in favor of 

defendant Tsai should he choose to defend. The claims of 

conversion and breach of contract can stand against the 

other defendants without necessarily finding defendant 

Tsai individually liable as well. Defendant Tsai's liability, 

either derivative of the corporate defendants under an alter 

ego theory or as a joint participant with defendant Kuei, 

turns on the facts proven with respect to his own conduct 

and involvement. For example, while Shanghai Automation may be entitled to judgment on its claim against Cipher (CA) for the conversion of the laptop computers, 

defendant Tsai may be able to prove that Cipher (CA) was 

an alter ego of only defendant Kuei due to their differences 

in conduct, control, and culpability. Differences could 

obtain with respect to other causes of action as well. For 

instance, the claim for recovery of loans advanced to defendant Kuei may not be recoverable from defendant Tsai 

if he proves he had no direct involvement in and did not 

unlawfully benefit from that transaction. Likewise, it is 

possible that the bank loans guaranteed by Shanghai Automation where solely or primarily converted by defendant 

Kuei.

Thus, because differing judgments would not necessarily be illogical, Frow does not apply, and the Court 

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retains discretion to enter default judgments against *1010

less than all defendants under Rule 54(b). This is an appropriate case to exercise such discretion. As noted above, 

there are strong reasons favoring entry of a default judgment against defendants other than defendant Tsai in the 

instant case. Nearly all the factors enumerated in Eitel v. 

McCool, supra, and previously discussed, militate in 

Plaintiff's favor, particularly the danger that any damages 

awarded is likely to become increasingly uncollectible 

with the passage of time. Cf. In re Uranium Antitrust, 473 

F.Supp. at 390 (plaintiff faced the possibility that the 

“defaulting defendants, which are all foreign corporations, 

may conceal or transfer their assets which are subject to 

execution by United States Courts”). Weighed against 

those considerations is the risk of inconsistent judgments 

should defendant Tsai actively defend and obtain a favorable judgment inconsistent with the default judgments. 

However, that risk is slight. As noted above, differing 

judgments against defendant Tsai and the defaulting defendants would not necessarily be illogical. Moreover, for 

the reasons previously stated, defendant Tsai is unlikely to 

defend this suit. The instant case is a far cry from situations 

in which there was an “extreme risk of inconsistent outcomes,” see Phoenix Renovation, 197 F.R.D. at 584, or 

where contradictory outcomes was “more likely” than

consistent outcomes. See Western Security Bank, supra,

2001 WL 180067, at *2.

In short, the Court finds there is no “just reason for 

delay” in entering default judgments as to liability against 

the defaulting defendants. However, a further question is 

raised with respect to entry of a damages judgment at this 

juncture. In In re Uranium Antitrust Litigation, supra, the 

court permitted entering a default judgment against some 

defendants as to liability, but postponed a damages hearing 

until liability of all defendants were resolved. It did so 

because there could only be a single damage amount assessed on the basis of the plaintiff's claim of conspiracy 

involving joint and several liability. See In re Uranium 

Antitrust Litigation, 617 F.2d at 1262; see also Hunt v. 

Inter-Globe Energy, Inc., 770 F.2d 145, 148 (10th 

Cir.1985) (consistent damage awards on the same claim 

essential among joint and several tortfeasors). In the instant case, however, Plaintiff's claims do not demand a 

single damage award against all defendants. For the reasons stated above, a full damages award against the defaulting defendants would not necessarily be inconsistent 

with a possible lesser award against defendant Tsai. Defendant Tsai might be found liable for certain proven 

conduct and not others, and thus could be held liable on 

less than all Plaintiff's claims. Hence, the Court finds there 

is no “just reason for delay” in entering default judgments 

as to damages against the defaulting defendants.

Accordingly, entry of default judgment is appropriate 

under Rule 55(b). In order to obtain the entry of a default 

judgment, however, Plaintiff must prove the amount of 

damages to which it is entitled. See Shop Ironworkers 

Local 79 Pension Trust v. United Safe, Inc., No. C99-2745 

VRW, 1999 WL 638504, *2 (N.D.Cal. Aug.18, 1999); see 

also Pope v. United States, 323 U.S. 1, 12, 65 S.Ct. 16, 89 

L.Ed. 3 (1944). After reviewing the Complaint and papers 

submitted in support of Plaintiff's motion, for the reasons 

stated above, the Court finds that Plaintiff Shanghai Automation has presented sufficient evidence to establish that 

it is entitled to recover general and compensatory damages 

against the defaulting defendants, in the following

amounts: [1] 75 percent of the 7,000 laptop computers 

converted, $16,012,500.00; [2] 75 percent of SMEC's

monies converted, $2,872,500.00; and [3] loans made to 

defendants Kuei and Tsai, jointly, $3,377,000.00.

*1011 [18] In determining whether punitive damages 

are appropriate, the Court “ ‘cannot make a fully informed 

determination of whether an award of punitive damages is 

excessive unless the record contains evidence of [the defendants'] financial condition.’ ” In re Felton, 197 B.R. 

881, 891 (N.D.Cal.1996), quoting, Adams v. Murakami, 54 

Cal.3d 105, 110, 284 Cal.Rptr. 318, 813 P.2d 1348 (1991); 

see also Professional Seminar Consultants, Inc. v. Sino 

American Technology Exchange Council, Inc. 727 F.2d 

1470, 1473 (9th Cir.1984) (stating that the factors to be 

considered in fixing a punitive damage award are: (1) the 

nature of the defendants' acts; (2) the amount of compensatory damages awarded; and (3) the wealth of the defendants). Based on the evidence in the record and the 

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insufficient information presented to the Court regarding, 

inter alia, defendants' wealth from which to base such a 

award, the Court declines to award punitive damages.

Shanghai Automation fails to submit any evidence or

argument in support of attorney's fees and costs and appears to have abandoned its claim in this regard.

RECOMMENDATION

GOOD CAUSE APPEARING, IT IS HEREBY 

RECOMMENDED that the motion by plaintiff Shanghai 

Automation for entry of default judgment (No. 47) be 

GRANTED and judgment entered against defendants 

Kuei, Micro Link Systems, Inc., Microlink Data Systems, 

Inc., Cipher Instrument, Inc. and MIG, Inc. as follows:

75 percent of the 7,000 laptop computers converted $16,012,500.00

 

75 percent of SMEC's monies converted $ 2,872,500.00

 

loans made to defendants Kuei and Tsai, jointly $ 3,377,000.00.

 

TOTAL $22,262,000.00

A judgment in favor of plaintiff Shanghai Automation 

and against defendants Kuei, Micro Link Systems, Inc., 

Microlink Data Systems, Inc., Cipher Instrument, Inc. and 

MIG, Inc. should be entered for general and compensatory 

damages in the amount of $22,262,000.00.

Any party may file objections to this Report and 

Recommendation pursuant to 28 U.S.C. § 636(b)(1)(B), 

Federal Rule of Civil Procedure 72(b) and Local Civil Rule 

72-3.

Nov. 2, 2001.

N.D.Cal.,2001.

Shanghai Automation Instrument Co., Ltd. v. Kuei

194 F.Supp.2d 995

END OF DOCUMENT

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