Sweegen v. Chen
| Decision Date | 29 June 2021 |
| Docket Number | G059226 |
| Court | California Court of Appeals Court of Appeals |
| Parties | ODG SWEEGEN et al., Plaintiffs and Respondents, v. STEVEN CHEN et al., Defendants and Appellants. |
NOT TO BE PUBLISHED
Appeal from an order of the Superior Court of Orange County No 30-2020-01140383, Glenda Sanders, Judge. Affirmed.
Greenberg Traurig, Gregory A. Nylen, Karin L. Bohmholdt, Alex Linhardt and Breeanna N. Brewer for Defendants and Appellants Steven Chen, Min Wang Chen, Lucas Wenthe, The Chen Family Living Trust, Conagen, Inc., Phyto Tech Corp., Bug Venture LLC, ProTab Laboratories, Anhui Longking Biotechnology Co Ltd.
Meylan Davitt Jain Arevian & Kim, Raymond B. Kim and Shaunt T Arevian for Defendant and Appellant SweeGen, Inc.
Hueston Hennigan, Alison L. Plessman, David B. Sarfati, Eunice Leong and Salvatore Bonaccorso for Plaintiffs and Respondents ODG SweeGen LLC, Harold Handelsman Revocable Trust, Marstar Investments LLC, John M. Pigott, John D. Howard, Barbra Womble, Christopher Bancroft, SweeGen Investment Fund, LLC, SHG Planning Inc., 401k Evergreen Life in Respect of Its Segregated Account 191, and the Hugh Bancroft Jr. Trust U/W Article Third.
Plaintiffs invested $18.8 million in SweeGen, Inc. (SweeGen), which is owned and controlled by defendants Steven and Min Chen (the Chens; collectively the defendants).[1] The Chens also own several other entities that supply services and products to SweeGen. Plaintiffs became aware of several unexplained monetary transfers made by SweeGen to the Chens and their other entities. They concluded the Chens were engaged in self-dealing, so they brought this lawsuit and filed a motion for a preliminary injunction, which the trial court granted. The injunction requires SweeGen to give plaintiffs five days' notice before transferring funds or assets to the Chens or Chen-owned entities or entering any agreements with them. Transactions made within the course of SweeGen's daily business are excluded from this requirement. The court also ordered plaintiffs to post a $210, 000 bond.
Defendants appeal the court's order. First, they argue the court erred in finding that plaintiffs were likely to succeed on the merits. This finding was based on the court's determination that there were numerous transactions involving SweeGen that were not fair or in the company's best interests. There is substantial evidence supporting this finding. Among other things, the record shows that (1) the Chens caused SweeGen to make a substantial interest-free loan to their family trust, which was repaid by another Chen-owned entity; (2) the Chens altered SweeGen's financial statements; (3) the Chens purchased a manufacturing facility with a shell company, grossly misrepresented the purchase price, then recommended that SweeGen buy the facility at that price; and (4) SweeGen made numerous unexplained monetary transfers to Chen-owned entities.
Next, defendants argue plaintiffs will not suffer any irreparable harm without the injunction and, consequently, the balance of harms tilts in their favor. We disagree. There are already significant sums of money that are unaccounted for and have not been traced. Thus, there exists a reasonable probability that without the injunction the Chens will transfer additional sums of money to themselves or their entities that will be untraceable even after an accounting. Further, there appears to be a legitimate concern that any damages caused by a devaluation in plaintiffs' shares due to the Chen's self-dealing will be difficult to ascertain. In contrast, defendants have failed to provide any evidence that the injunction will interfere with SweeGen's business.
Finally, defendants argue the injunction is impermissibly vague and the amount of the bond is too low. Not so. The language of the injunction sufficiently articulates defendants' duties. As for the bond, the court was unpersuaded by defendants' evidence of potential business loss and attorney fees. It acted within its discretion by ignoring this evidence and setting the amount of the bond based on its own reasonable calculation of potential attorney fees.
For these reasons, we affirm the trial court's order.
SweeGen is a Nevada corporation headquartered in Rancho Santa Margarita, California. Steven acquired it in 2014. It previously manufactured electronic devices, but it abandoned this business after the acquisition and began producing stevia-based sweeteners.[2] Due to this change in business, SweeGen did not have any revenue or employees after its acquisition until late 2017. It has grown dramatically since then. It went from having one employee in 2017 to 27 employees in 2020. It nearly doubled its gross revenues from 2017 to 2018. Still, despite this growth, an income statement for the fiscal year ending June 2019 shows SweeGen was operating at a net loss in the millions.
Steven and his spouse, defendant Min (also known as Diana Chen), are the majority shareholders of SweeGen through their trust, the Chen Family Trust Dated 7/16/2003 (Chen trust). Steven is the chief executive officer (CEO), president, and the sole board member of SweeGen. Min is involved with directing financial operations at SweeGen, but her official title is unclear. Defendants' briefs treat Min as a de facto officer or director of the company, so we will treat her as such for purposes of this appeal. Defendant Lucas Wenthe is SweeGen's vice-president of business development.
Steven, or the Chen trust, is also the founder and controlling shareholder of several other entities, including defendants (1) Conagen, Inc. (Conagen), (2) Phyto Tech Corp., doing business as Blue California (Blue California), (3) ProTab Laboratories (ProTab), (4) Anhui Longking Biotechnology Co., Ltd. (Anhui), and (5) Bug Venture LLC (Bug Venture). Min also holds a number of positions at these entities, including director of Conagen, chief operating officer of Blue California, and president of ProTab. We will refer to these five entities as the Chen affiliates and will use the term “defendants” to refer to all the defendants except for SweeGen.
Many of the Chen affiliates provide services and products that complement SweeGen's business. Conagen holds a large intellectual property portfolio relating to stevia sweeteners. SweeGen became the exclusive licensee of this portfolio in November 2016. Blue California imports and sells botanical ingredients. Among other things, Blue California assists SweeGen with consulting work and product shipments. ProTab formulates and blends neutraceutical and dietary supplement products. Among other things, ProTab assists SweeGen with converting liquid formulations into powder (known as spray drying). Anhui is an overseas manufacturer of stevia-based products. As of 2020, it is SweeGen's exclusive product manufacturer.[3]
SweeGen began seeking investors in early 2018. Between April 2018 and April 2019, plaintiffs ODG SweeGen LLC, Harold Handelsman Revocable Trust (the Handelsman trust), Marstar Investments LLC, John M. Pigott, John D. Howard, Barbra Womble, Christopher Bancroft, SweeGen Investment Fund, LLC, SHG Planning Inc., 401k Evergreen Life in Respect of Its Segregated Account 191, and the Hugh Bancroft Jr. Trust U/W Article Third (together plaintiffs) separately invested a total of $18.8 million in SweeGen. They purchased 1, 575, 444 shares of common stock, which represented 5.64 percent of SweeGen's shares.
In October 2019, a subset of plaintiffs-the Handelsman trust, Marstar Investments LLC, ODG SweeGen, LLC, and SweeGen Investment Fund LLC-invested additional money in SweeGen. They entered into note purchase agreements (NPAs) in which they agreed to purchase secured convertible promissory notes that could be converted into shares. This subset of plaintiffs conducted additional due diligence prior to entering their respective NPAs.
Plaintiffs eventually became suspicious of several monetary transfers that SweeGen made to the Chens and the Chen affiliates. In May 2020, they made a demand under Corporations Code section 1601 et seq., for SweeGen to produce documents relating to those transfers. The documents and information produced by SweeGen (the section 1601 production) only raised further questions and concerns. So, plaintiffs filed this lawsuit asserting the following direct and derivative claims: (1) breach of fiduciary duty (derivative); (2) breach of fiduciary duty (direct); (3) conversion (derivative and direct); (4) aiding and abetting breaches of fiduciary duty (derivative and direct); (5) accounting (derivative and direct); (6) violations of Corporations Code section 1601 (direct); (7) unjust enrichment (derivative and direct); (8) civil conspiracy (derivative and direct); and (9) alter ego liability.
Plaintiffs then filed an ex parte motion for a preliminary injunction to enjoin SweeGen from engaging in any transactions with the Chens or the Chen affiliates without giving plaintiffs five days' notice and the opportunity to object. The motion identified several transactions made by SweeGen, which plaintiffs believed were evidence of self-dealing by the Chens. These transactions, which include numerous unexplained monetary transfers, among other things, are discussed in more detail in the analysis section below.
The ex parte motion was initially set to be heard on June 9, 2020 but was continued to June 30. Defendants agreed to a temporary restraining order (TRO) during the interim period that required SweeGen to give notice to plaintiffs of any transactions with the Chens or the Chen affiliates outside the ordinary course of...
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