Court Opinion

ID: 2812762
Source: CourtListenerOpinion
Date Created: 2015-06-29 21:05:43.958859+00
Date Added: 2024-06-11T11:30:25.418738
License: Public Domain

Filed 6/29/15 Yang Jin Co. v. Kong CA2/2
                  NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.

              IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA

                                     SECOND APPELLATE DISTRICT

                                                  DIVISION TWO

YANG JIN CO., LTD.,                                                  B233894

         Plaintiff and Respondent,                                   (Los Angeles County
                                                                     Super. Ct. No. BC403206)
         v.

YOUNG WON KONG,

         Defendant and Appellant.

         APPEAL from a judgment of the Superior Court of Los Angeles County.
Luis Lavin, Judge. Reversed and remanded in part and affirmed in part.

         Browne George Ross, Peter W. Ross, Benjamin D. Scheibe, Corbin K. Barthold
for Defendant and Appellant.

         Ryu Law Firm, Thomas J. Ryu for Plaintiff and Respondent.

                  ___________________________________________________
        Plaintiff and respondent Yang Jin Co., Ltd. (Yang Jin) sued defendant and
appellant Young Won Kong. Yang Jin and Kong had jointly operated a garment dyeing
business. Yang Jin claimed, among other things, that Kong defrauded Yang Jin and
misappropriated funds from the business. A jury returned a verdict in favor of Yang Jin
and against Kong, awarding $4.7 million in damages.
        On appeal, Kong argues that the majority of Yang Jin’s claims could only be
brought through a derivative, not direct, action, and that the damages award was contrary
to the facts and law. Yang Jin’s deficient respondent’s brief does little to counter Kong’s
arguments, most of which are well taken.
        We find that the jury’s verdict can be upheld only as to one cause of action for
which damages were awarded—for breach of oral contract. Accordingly, we reverse the
judgment, in part, and direct the trial court to modify the judgment to reflect a damages
award of $1.5 million.
                                     BACKGROUND
Facts
        Before getting his start in the garment and apparel business, Kong worked in
banks, as a vice president in loan departments.1 In 1995, Kong started a garment
manufacturing company. He went on to establish a number of apparel companies, as
either full or part owner. These companies included Fashion Solutions International, Inc.,
and Greenwest LLC (Greenwest). Kong also formed a company in Guatemala called
Fashion Solutions Guatemala (FSG).
        In 2004, Kong, with two partners, purchased a company—which Kong named
Lekos—to produce and dye fabric in the United States. The fabric was then sent to

1       This statement of facts reflects the applicable standard of review following a jury
trial. “We state the facts in the light most favorable to the jury’s verdict, resolving all
conflicts and indulging all reasonable inferences to support the judgment.” (Green Wood
Industrial Co. v. Forceman Internat. Development Group, Inc. (2007) 156 Cal. App. 4th
766, 770, fn. 2; see also American Master Lease LLC v. Idanta Partners, Ltd. (2014) 225
Cal. App. 4th 1451, 1459.)

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Guatemala, where FSG would use the fabric to make clothing for sale in the United
States. Kong’s business volume increased to the point that Lekos became unable to
handle all dyeing work, so Kong began using a subcontractor in Guatemala, World Fama,
for additional dyeing jobs.
       By 2005, Kong’s companies employed about 100 people in Los Angeles and 1,200
in Guatemala, and had annual sales of approximately $43 million. Kong wished to
continue expanding operations, and began looking for an equity partner. He approached
Ji Soo Ryu, the president of a large Korean clothing company, Yang Jin. Kong told Ryu
that if Yang Jin loaned him $1 million, Yang Jin would receive a significant return.
Accordingly, in 2006, Yang Jin, through a subsidiary, loaned $1 million to Greenwest.
       Soon after Yang Jin made the initial loan, Kong presented a second proposal for a
“better” business deal. Kong told Ryu that by acquiring World Fama, the dyeing
company in Guatemala, Kong’s businesses would gain a substantial amount of synergy,
would save on costs, and would make more money. Kong wanted Yang Jin to contribute
capital to purchase World Fama. He told Ryu that the dyeing factory would generate
large profits, and Yang Jin would be able to recoup its entire investment within three
years and share in the profits.
       Kong proposed various scenarios by which Yang Jin could contribute to the
purchase of World Fama. Eventually, in around February 2007, Yang Jin (through Ryu)
orally agreed with Kong to form a joint venture for the purchase and operation of the
Guatemalan dyeing business. The members of the joint venture were Yang Jin, Kong,
and Lekos. Yang Jin was to invest $2 million, Kong was to invest $2 million, and Lekos
would invest $500,000. These funds were to be used to purchase World Fama for $4.3
million, with the remainder used for operations. Yang Jin entered into the joint venture
agreement because Ryu trusted Kong based on his purported experience and abilities, and
because Kong, as an individual, was a party to the joint venture.
       As part of their agreement in forming the joint venture, Yang Jin and Kong
decided they would need a corporate vehicle in the United States to act as the parent of
the Guatemalan business. Kong set up both the parent company, L.A. Guatemala

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Partnership, LLC (LAG), as well as the Guatemalan company, LA USA Dyeing &
Finishing (D&F).
       Kong requested of Yang Jin that Kong be delegated authority to operate the
venture, including the handling of orders and shipment of goods. Yang Jin agreed to the
request, but did not agree to grant full control of the joint venture to Kong—for example,
Kong was not allowed to transfer, mortgage, or sell assets of the venture without Yang
Jin’s approval.
       After the parties agreed to form the joint venture, in April 2007 the parties
executed an “operating agreement” governing the affairs of LAG, the American parent
company. At the time of execution of the operating agreement, Yang Jin made a $1
million loan to Kong, and soon after made a $2 million payment, to cover the investment
called for in the joint venture agreement. Unbeknownst to Yang Jin, however, Kong did
not invest the $2 million that he promised to contribute.
       D&F took over World Fama’s operations after it was purchased by the joint
venture in June 2007. Approximately one year later, in May 2008, Ryu traveled to
Guatemala to observe D&F’s facilities. Based on financial statements previously
provided by Kong, Ryu believed that D&F’s long-term liabilities totaled $1.5 million. A
balance sheet found in the accounting department at D&F, however, showed long-term
liabilities of $3.4 million. The head of the accounting department at D&F informed Ryu
that the liabilities reflected a bank loan of $3.5 million. Ryu then learned that a
Guatemalan bank, Banco Industrial, made the loan to D&F, and in order to get the loan,
D&F pledged all of its assets and its cash flow as collateral. The financial statements
previously provided to Yang Jin did not reflect the loan or the pledge, Kong had never
informed Yang Jin about the obligation, and Yang Jin never approved the loan.
       Ryu flew from Guatemala to Los Angeles to question Kong about the undisclosed
loan. Kong refused to admit the existence of the loan until Ryu confronted him with the
corroborative balance sheet. Ryu eventually discovered that Kong had taken $2 million

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from the loan and transferred it to Greenwest. Greenwest then used that money to make
Kong’s required investment in the joint venture.2
       After demanding and receiving further financial documents from Kong, Yang Jin
discovered more improprieties. For example, it discovered that Kong took more than
$100,000 from D&F to pay employees of Kong’s private company, FSG. D&F also did
$1.68 million worth of work for FSG, for which D&F never received payment. In
addition, Kong transferred $60,000 from LAG to Greenwest. Moreover, approximately
$900,000 of D&F’s funds were used to make principal and interest payments on the
Banco Industrial loan. Although Kong used proceeds of the loan to make his investment
in the joint venture, neither he nor his companies made payments on the loan.
       Kong quickly depleted almost all of D&F’s funds. D&F exhausted its supplies
and could not pay its creditors. The only option Yang Jin had to keep the company
running was to give D&F an additional $809,000. Despite Yang Jin’s efforts, D&F lost
approximately $2.7 million between 2009 and 2010.
       Eventually, Kong promised Yang Jin that he would pay back $2 million of the
$3.5 million loan. Kong also pledged all of his shares in LAG and FSG as security, in
case he failed to repay the $2 million. Kong further promised to sell FSG-owned real
estate in Guatemala and use the proceeds to reduce the venture’s debts.

2      At trial, an expert retained by Yang Jin explained (based on his review of financial
documents) how money flowed through the companies. In February 2007, Greenwest
made a $500,000 down payment to World Fama. Yang Jin made its initial $1 million
loan in April 2007, and afterward its $2 million investment. In May 2007, Lekos made
its $500,000 investment. In June 2007, $3.5 million was transferred from LAG to D&F,
and this money was used to complete the purchase of World Fama for a total of $4
million. After the World Fama acquisition, Kong pledged the assets of D&F and FSG to
obtain a $3.5 million loan. D&F then, using loan funds, transferred $500,000 to LAG
and $2 million to Greenwest. Of this $2 million, Greenwest transferred $1.5 million to
LAG and retained $500,000 to repay its earlier $500,000 down payment. In September
2007, LAG repaid Yang Jin its $1 million loan. In summary, Yang Jin and Lekos both
made their agreed upon investments, while Kong (through Greenwest) contributed $1.5
million using the funds from the undisclosed loan.

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       Kong, however, failed to repay the $2 million. In addition, he did not turn over his
shares in LAG or FSG to Yang Jin—it turned out that Kong had already pledged the
shares to a bank in Los Angeles, Nara Bank. At least one obligation apparently was met,
though. The Guatemalan real estate was sold, and the proceeds were used to offset
amounts owing from FSG to D&F.3
Procedural Background
       In December 2008, Yang Jin filed suit against Kong and various other defendants,
including Greenwest. The operative first amended complaint, filed in January 2010,
alleged 12 causes of action against Kong.
       A 10-day jury trial was conducted in January and February 2011, with only Kong
and Greenwest remaining as defendants. The jury found Greenwest liable for breach of
contract and awarded Yang Jin $1.1 million. Kong was found liable on seven separate
causes of action: breach of the joint venture agreement, breach of the share pledge
agreement, fraud, negligent misrepresentation, breach of fiduciary duty, conversion, and
breach of the covenant of good faith and fair dealing. The jury awarded damages on four
of these claims—$1.5 million for breach of the joint venture agreement, $100,000 for
fraud, $1.1 million for negligent misrepresentation, and $2 million for conversion—for a
total of $4.7 million in damages.
       Kong thereafter filed motions for new trial and for judgment notwithstanding the
verdict, both of which were denied. Kong timely appealed the judgment.
                                       DISCUSSION
       Kong asserts that the judgment was unsupported by the evidence, and that it rested
upon errors of law. “In reviewing the sufficiency of evidence on appeal, we resolve all
conflicts in favor of the prevailing party and we indulge all legitimate and reasonable
inferences to uphold the verdict if possible. ‘It is an elementary, but often overlooked

3      It does not appear that this sale took place at the behest of Kong. Instead, the
record indicates that, due to a default, Banco Industrial took control of the land and sold it
at public auction.

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principle of law, that when a verdict is attacked as being unsupported, the power of the
appellate court begins and ends with a determination as to whether there is any
substantial evidence, contradicted or uncontradicted, which will support the conclusion
reached by the jury. When two or more inferences can be reasonably deduced from the
facts, the reviewing court is without power to substitute its deductions for those of the
trial court.’ [Citation.]” (Ortega v. Pajaro Valley Unified School Dist. (1998) 64
Cal. App. 4th 1023, 1043.) We review questions of law de novo. (Aryeh v. Canon
Business Solutions, Inc. (2013) 55 Cal. 4th 1185, 1191.)
       As the respondent to this appeal, Yang Jin was under no obligation to file a
respondent’s brief. (See Kim v. Westmoore Partners, Inc. (2011) 201 Cal. App. 4th 267,
273; Kriegler v. Eichler Homes, Inc. (1969) 269 Cal. App. 2d 224, 226-227.) Since it did
choose to file a brief, however, it was required to comply with relevant appellate rules,
including California Rules of Court, rule 8.204(a)(1)(C), which directs a party, when
referencing a matter in the record, to cite to the record where the matter appears. Yang
Jin’s purported statement of facts, comprising approximately 15 pages, contains
essentially no citations to the record. Furthermore, much of Yang Jin’s argument relies
on asserted facts for which no record citation is provided. We exercise our discretion to
disregard any of these alleged facts where no record support is apparent. (See
Dominguez v. Financial Indemnity Co. (2010) 183 Cal. App. 4th 388, 392, fn. 2 [“because
[respondent’s] brief fails to provide a citation to the appellate record for these facts, we
do not consider them”].)
       Nevertheless—despite the clear deficiencies in Yang Jin’s brief—Kong still bears
the burden of demonstrating reversible error. (Boyle v. CertainTeed Corp. (2006) 137
Cal. App. 4th 645, 649-650 [“[A]n appealed judgment is presumed correct, and appellant
bears the burden of overcoming the presumption of correctness.”].)
I. Conversion
       Kong contends that the jury’s award of $2 million on the conversion claim has no
legal validity because the subject of the conversion claim was money that belonged to
D&F or its corporate parent LAG, not to Yang Jin.

                                              7
       Yang Jin brought the conversion claim as a direct action against Kong, not as a
derivative action. A claim is derivative, rather than direct, if its gravamen “‘is injury to
the corporation, or to the whole body of its stock and property without any severance or
distribution among individual holders, or it seeks to recover assets for the corporation or
to prevent the dissipation of its assets.’” (Jones v. H. F. Ahmanson & Co. (1969)
1 Cal. 3d 93, 106.) A fraudulent transfer of company assets without compensation results
in injury to the company itself, and therefore gives rise to a derivative action. (PacLink
Communications Internat. v. Superior Court (2001) 90 Cal. App. 4th 958, 964 (PacLink).)
Members of a limited liability company are not directly injured by such a transfer;
instead, their injury is a diminution in the value of their holdings in the company. (Ibid.)
       Members of a limited liability company cannot sue individually for injury to the
company. (PacLink, supra, 90 Cal. App. 4th 958, 965.) “‘It is a general rule that a
corporation which suffers damages through wrongdoing by its officers and directors must
itself bring the action to recover the losses thereby occasioned, or if the corporation fails
to bring an action, suit may be filed by a stockholder acting derivatively on behalf of the
corporation. An individual [stockholder] may not maintain an action in his own right . . .
for destruction of or diminution in the value of the stock. . . .’” ( Rankin v. Frebank Co.
(1975) 47 Cal. App. 3d 75, 95.)
       It is clear from the record that the subject of the $2 million conversion award was
the money that Kong transferred from D&F’s loan proceeds to Greenwest. Although
Kong engaged in a variety of misdeeds, this transfer was the act most likely to support a
conversion claim, and the only one involving a sum of exactly $2 million. Indeed, jury
instructions pertaining to the conversion claim specifically identified $2 million as the
amount that Kong and/or Greenwest allegedly took. This transfer likely caused direct
harm to D&F and its corporate parent LAG, but caused no direct harm to Yang Jin. If

                                              8
anything, Yang Jin only suffered a diminution in the value of its holdings, which is
derivative harm.4
       Yang Jin does not demonstrate that it properly brought a direct claim. Instead it
argues that Kong waived the argument that the claim was derivative by failing to raise it
below. The record shows, however, that both Kong and Yang Jin repeatedly raised the
issue in the trial court. Yang Jin itself filed a pretrial brief on “direct vs. derivative
injuries.” Kong also raised the issue in a pretrial brief, objected at trial that Yang Jin was
seeking damages incurred by D&F, and moved for nonsuit on the issue. Kong further
raised the issue in his motion for judgment notwithstanding the verdict. Given this
record, we cannot find a waiver on the part of Kong. Nor did the lack of a jury
instruction on derivative versus direct injury result in a waiver, since the issue was a
question of law for the court to decide. (Stofer v. Shapell Industries, Inc. (2015) 233
Cal. App. 4th 176, 188-189 [the court decides questions of law, while the jury determines
issues of fact].)
       Therefore, because Yang Jin could only bring the conversion claim derivatively
and failed to do so, the judgment must be reversed insofar as it awards damages to Yang
Jin for conversion.
II. Fraud
       Yang Jin’s fraud claim suffers a similar fate. The jury awarded $100,000 to Yang
Jin for fraud damages, a figure resembling only the amount that Kong took from D&F to
pay FSG salaries. An exhibit introduced by Yang Jin at trial pegged the amount used on
D&F salaries at $115,318.38. In closing argument, when laying out damages, Yang Jin’s
counsel stated that Kong “used over a hundred thousand dollars of D&F’s money to pay
for his own employees.” Meanwhile, the next closest basis of damages suffered by Yang
Jin was the $809,000 that it was forced to put into D&F to keep it from failing. Thus, it

4      Actually, since most, if not all, of the $2 million was transferred back to LAG, it is
unclear how much, if any, damages resulted from the conversion.

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is clear that the jury’s award of $100,000 could only be predicated upon D&F’s payment
of FSG salaries.
       This misappropriation likely gave rise to a derivative action, but it did not support
a direct action. The conduct dissipated assets of D&F, causing harm to the company
itself. (See Jones v. H. F. Ahmanson & Co., supra, 1 Cal. 3d 93, 106.) Yang Jin,
therefore, had no standing to seek recovery of the wages directly.
       Again, Yang Jin does not argue the propriety of bringing a direct rather than
derivative action, or whether the award compensated for a derivative injury, but simply
contends that Kong waived the issue by failing to raise it below. As discussed above, the
issue was not waived. Therefore, the award of $100,000 for fraud must be reversed.
III. Breach of oral joint venture agreement
       The jury found that Kong breached a joint venture agreement—the parties to
which were Kong, Yang Jin, and Lekos—and that Yang Jin was damaged by the breach
in the amount of $1.5 million. On appeal, Kong argues that Yang Jin cannot recover for
breach of oral agreement because any joint venture agreement was superseded by the
written LAG operating agreement. Furthermore, according to Kong, damages awarded to
Yang Jin were based on the prospect of a profitable venture, but Yang Jin never proved it
was entitled to a profit from the joint venture.
       We find that Yang Jin presented evidence sufficient to establish that it entered into
a joint venture agreement—between itself, Kong, and Lekos—that was separate and
distinct from the LAG operating agreement. Ryu, Yang Jin’s president, testified that the
parties entered into the oral joint venture agreement in around February 2007, that the
oral joint venture agreement was separate from the LAG operating agreement, and that
Kong made numerous promises that formed the basis of the joint venture agreement.
These included a promise to invest $2 million in the joint venture, to contribute real estate
to the joint venture, to represent Yang Jin’s as well as Kong’s own interests, to bring a
supply of stable orders, and to carry out acquisition-related work.
       It is true, as pointed out by Kong, that the LAG operating agreement called for a
$2 million investment by Kong’s company, Greenwest. The LAG operating agreement,

                                              10
however, did not incorporate other obligations that Ryu testified were a part of the oral
joint venture agreement. Moreover, the LAG operating agreement did not reference
Kong as a party, while Ryu repeatedly testified that Kong himself was a party to the joint
venture agreement. Nor do we find that the LAG operating agreement superseded an
earlier oral joint venture agreement. Although the operating agreement contained an
“entire agreement” clause, it was relatively narrow, pertaining only to parties’ rights and
obligations with respect to “the company”—i.e., LAG.
       At trial, Kong’s attorney argued that the evidence showed only the existence of the
LAG operating agreement, and not an oral joint venture agreement. When the existence
of a contract is disputed, the trier of fact decides whether the contract actually existed.
(Bustamante v. Intuit, Inc. (2006) 141 Cal. App. 4th 199, 208.) We find that there was
substantial evidence for the jury to determine that the parties entered into an oral joint
venture agreement separate and distinct from the LAG operating agreement.
       Kong’s argument that Yang Jin never established it was entitled to a guaranteed
profit also fails. At trial, Yang Jin’s expert provided two estimates of the “benefit of the
bargain” Yang Jin could have expected if Kong had performed as agreed. The expert’s
more liberal estimate calculated benefit of the bargain damages at $5,128,850, while the
more conservative estimate valued them at $1,539,125. The jury awarded damages of
$1.5 million for breach of the joint venture agreement, with 600,000 compensating for
past economic loss, and $900,000 for future economic loss. Kong asserts that this award
was based on the expert’s lower estimate.
       It is not clear that the jury based its damages award on the expert’s analysis,
however. There was evidence that Yang Jin was forced to put an additional $809,000
into the venture. It is possible that the jury based its award partially on this figure, with
future economic loss based on additional amounts that Yang Jin would likely have to pay.
Even if the jury did base its award on the expert testimony, however, we find no error.
Benefit of the bargain damages are recoverable for breach of contract. (Civ. Code,
§ 3300; see Al-Husry v. Nilsen Farms Mini-Market, Inc. (1994) 25 Cal. App. 4th 641, 648-
649.) The jury was entitled to find that Yang Jin was made worse off in the amount of

                                              11
$1.5 million because Kong failed to comply with the terms of the joint venture
agreement.
       Kong argues that the parties agreed to share losses, and that this term precluded
Yang Jin from seeking any expected profit. But if Yang Jin’s injuries were caused by
Kong’s breach, Yang Jin had a right to recover damages. If there had been no breach,
then an agreement to share losses would have more pertinence. The evidence supported a
finding of a breach, however, and Yang Jin never agreed to refrain from seeking damages
for breach of contract.
IV. Negligent misrepresentation
       On appeal, Kong asserts that the jury’s finding of liability for negligent
misrepresentation was based on representations made by Kong after Yang Jin discovered
both the undisclosed loan and Kong’s failure to directly invest $2 million in the business.
Following Yang Jin’s discovery, Kong, in June 2008, agreed to pay back $2 million of
the $3.5 million loan and to pledge all of his shares in LAG and FSG as security. Kong
argues that Yang Jin suffered no “out-of-pocket” losses by relying on these further
representations. Instead, according to Kong, the jury’s award of $1.1 million was based
on benefit of the bargain damages, which are not recoverable on a negligent
misrepresentation claim. In response, Yang Jin concedes that the jury awarded benefit of
the bargain damages for negligent misrepresentation, but argues that such damages were
proper.
       Yang Jin is incorrect. Benefit of the bargain damages put a plaintiff in the position
it “would have enjoyed had the false representation been true,” awarding plaintiff the
difference in value between what it expected to receive and what it actually received.
(Fragale v. Faulkner (2003) 110 Cal. App. 4th 229, 236 (Fragale)). While benefit of the
bargain damages are recoverable for fraud perpetrated by a fiduciary5 (Salahutdin v.

5      In the special verdict, with respect to a separate breach of fiduciary duty claim, the
jury found Yang Jin and Kong to be fiduciaries based on their common interests in the
joint venture.

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Valley of California, Inc. (1994) 24 Cal. App. 4th 555, 566-568), only actual, out-of-
pocket losses are recoverable for a fiduciary’s negligent misrepresentation. (Alliance
Mortgage Co. v. Rothwell (1995) 10 Cal. 4th 1226, 1249-1250; Fragale, supra, 110
Cal.App.4th at pp. 236-237.) Thus, while Yang Jin potentially could have recovered
benefit of the bargain damages on its separate fraud claim, it could not do so for negligent
misrepresentation. Therefore, since the jury’s verdict awarding benefit of the bargain
damages for negligent misrepresentation has no basis in law, it must be reversed.
                                      DISPOSITION
       The judgment is reversed, in part, and remanded to the trial court to reflect
judgment in favor of Kong on the fraud, conversion, and negligent misrepresentation
causes of action, and to reflect a damages award of $1.5 million in favor of Yang Jin and
against Kong, with prejudgment interest to be calculated accordingly. In all other
respects, the judgment is affirmed.
       The parties shall bear their own costs on appeal.
       NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS.

                                          BOREN, P.J.
We concur:

       CHAVEZ, J.

       HOFFSTADT, J.

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