Opinion ID: 764897
Heading Depth: 2
Heading Rank: 2

Heading: Pre-litigation Activity

Text: 44 The plaintiffs' claims spring from a series of agreements between Wah Kwong or its subsidiaries and KKL. The agreements apparently involved a $6 million loan from Wah Kwong that enabled KKL to continue in business. However, the plaintiffs argue that the agreements actually established a partnership relationship between Wah Kwong and KKL's other principal (Vansgnes). 45 In particular, the plaintiffs argue that convoluted agreements, subagreements, collateral agreements--many of which cancelled prior agreements--addenda, and side letters were used to construct KKL. Thus, while Wah Kwong ostensibly made a loan to start KKL, backed by a demand note and stating an interest rate, the plaintiffs submit that in fact this loan was for show and did not reflect the true equity relationship between the parties. The plaintiffs allege that Wah Kwong was entitled to receive and retain KKL's profits over $100,000 and that the $6 million was the cost of buying into KKL's business. Moreover, the $6 million went back to Wah Kwong via intermediaries immediately after the loan was made. 46 The basic substance of the written agreements was as follows: Karlander chartered vessels from shipowning companies in which MSI and VSM had interests. The payments (charterhire) accumulated and became overdue. Karlander's owners decided to restructure the company by forming KKL to operate Karlander's Australian-U.S. liner service; KKL undertook Karlander's charters with the shipowning companies and assumed outstanding charterhire. At about the same time, Wah Kwong sought advice from its accountants at Price Waterhouse, who suggested five ways Wah Kwong might respond to the restructuring and the unpaid charterhire, including the injection of $6 million as a loan to KKL. In March 1983, Wah Kwong and Karlander entered into a Loan Facility under which MSI would provide up to $6 million to Karlander to pay off overdue charterhire. 47 On November 26, 1983, Karlander, KKL and Wah Kwong executed a document called the Heads of Agreement. This document provided that English law would govern its interpretation. Vangsnes and Frank Chao signed for all parties, including various holding companies controlled by Wah Kwong and others controlled by Vangsnes. Southern Cross was one of those companies, though Southern Cross's CEO has submitted an affidavit that Vangsnes was never authorized to sign documents on behalf of Southern Cross. 48 Noting that Karlander was indebted to Wah Kwong and that Karlander's successor, KKL, required financial assistance to pay off Karlander's creditors, the Heads of Agreement provided that MSI would make a $6 million interest-free deposit, repayable on demand, with a finance company established as a wholly-owned subsidiary of KKL. The finance company then would advance the deposit to KKL, which would advance the money to Karlander to pay off the outstanding charterhire. As security for the $6 million deposit, KKL granted MSI an option to acquire half of KKL's stock. (KKL's main asset at that point was its rights in an arbitration proceeding between Karlander and the Weyerhauser company.) 49 The Heads of Agreement also authorized MSI to appoint two members of KKL's board of directors, at least one of whom was required for a quorum; to appoint a financial consultant to KKL; and to approve KKL's auditors. The agreement additionally allowed MSI to appoint two members of the boards of directors of the holding companies, including Southern Cross. 50 The Heads of Agreement stated that it would not become effective until additional documents were executed. One such document, a side letter signed the same day as the Heads of Agreement, noted that repayment of the $6 million deposit is by mutual agreement instead of on demand. Another document, the Supplemental Agreement, warranted that KKL's total outstanding debts were not more than $10.6 million, and stated that if that representation were false, MSI would be entitled to demand repayment of the $6 million. The Supplemental Agreement also established a two-person committee, including one MSI nominee, to monitor KKL's cash flow and recommend guidelines for payments to creditors. 51 In accordance with the Heads of Agreement and the related agreements, on February 6, 1984, VSM drew a $6 million check on MSI's account payable to KKL's subsidiary. The subsidiary endorsed the check to KKL, which endorsed it to VSM as the shipowners' agent in payment of outstanding charterhire. Thus, the loan proceeds returned to Wah Kwong-controlled companies. On February 22, 1984, George Chao sent Vangsnes a notice of default indicating that KKL's total outstanding debts in fact exceeded $10.6 million. On March 2, 1984, the parties executed a document providing for the assignment of KKL's and Karlander's ship-operation earnings to VSM as security for the various obligations to MSI and VSM. The agreement provided that KKL's earnings would be paid to VSM-designated bank accounts, though such earnings first would be applied to charterhire due to shipowners. Wah Kwong represents that the Assignment of Earnings was never implemented. 52 In April 1984, the parties agreed that the finance committee provided for in the Supplemental Agreement would be replaced by an arrangement in which the Wah Kwong-nominated members of the KKL board would examine KKL's various expenditures. In August 1984, Vangsnes agreed that all KKL checks would be signed jointly by Wah Kwong and KKL representatives. The plaintiffs assert that Wah Kwong took further steps to ensure its control of KKL's expenses, including entering into agreements with two principal booking agents in the U.S., Great Lakes Overseas, Inc. (GLO) in the midwest and Southern Cross in New Jersey, to arrange for booking services and provide customers to KKL. Wah Kwong also sent two employees to New Jersey and stationed them on Southern Cross's premises to ensure that only properly approved expenses would be paid in the U.S.; these employees remained in New Jersey for almost two years. 53 The plaintiffs argue that Wah Kwong's representatives essentially raided KKL, paying sums owed to Wah Kwong subsidiaries ahead of the priority actually allowed to them under the various agreements. It was this activity, according to the plaintiffs, that led to KKL's liquidation. At the time KKL stopped doing business in January 1986, it still carried the $6 million to Wah Kwong on its books as a debt, along with other accumulated arrearages, including debts to the plaintiffs. 54