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Barna Capital Group LTD v. Shiping

United States District Court, D. Nevada

April 1, 2019

TONG SHIPPING, et al., Defendants.

         Presently before the court is plaintiff Barna Capital Group Ltd.'s (“Barna”) motion to remand. (ECF No. 15). Defendants Tong Shiping, Cheng Weihong, Meng Dong, Lv Fuqui, Yu Jun, Bai Shaohua, Xinwei Wang, and Lili Yang (collectively “individual defendants”) filed a response (ECF No. 17), to which Barna replied (ECF No. 19).

         I. Facts

         This is a shareholder derivative action in which Barna, a Cyprus corporation with offices in the Republic of Cyprus and the Russian Federation, is suing on behalf of CALI, a Nevada corporation. (ECF Nos. 1-3, 17). The complaint contains the following allegations:

         CALI is in the business of selling imported luxury vehicles in the People's Republic of China (“China”) and provides services related to automobile importation. (ECF No. 1-3). CALI's business model consists of purchasing luxury automobiles primarily in North America and selling them in China for more than two or three times the purchase price. Id. CALI reports over $400, 000, 000 per year in revenue and a profit margin of around 0.4%. Id. CALI's profit margin is low in comparison to its competitors, which report profit margins around 12%. Id.

         Barna has been a minority shareholder of CALI at all times relevant to this litigation and currently holds 20% of the outstanding CALI shares. Id. Defendant Shiping and his wife, defendant Weihong, own through various business entities a majority of CALI's shares. Id. Shiping is also the president, chief executive officer, and a board member of CALI. Id. Weihong is a former board member and former vice-president of CALI. Id. Shiping and Weihong effectively control CALI. Id.

         When Weihong was a board member and vice-president of CALI, she and her husband secretly owned and operated a web of interrelated companies that sold imported vehicles in China. Id. These companies included defendant Calistar Automall Sales and Services, Ltd. (“Calistar”), which Weihong owned. Id. Weihong's son-in-law and nephew owned and operated Tianjin Binhai International Car City Co., Ltd. (“Tianjin”), which is another company involved in selling imported vehicles. Id. One of CALI's board members, defendant Yang Lili, was also on Tianjin's board of directors. Id.

         On or about June 2, 2016, Calistar entered into a Strategic Cooperative Agreement (“the agreement”) with Tianjin. Id. In accordance with the agreement, Tianjin would purchase vehicles below market price from CALI and sell those vehicles to Calistar at cost. Id. This arrangement ensured that Tianjin would not make any money. Id. Calistar would later sell those cars at market prices, earning a high profit margin. Id. In effect, profits that originally belonged to CALI and its shareholders were diverted to Calistar, Shiping, and Weihong. Id.

         On September 30, 2016, Weihong, through her business entity defendant Mighty Mark Investments Limited (“Mighty Mark”), sold all of its shares in a group of companies, including Tianjin and Calistar, to defendant LISI Group (Holdings) Limited (“LISI”). Id. The only significant asset in the transaction was the agreement between Tianjin and Calistar. Id. LISI paid for the acquisition by issuing LISI stock to entities that Weihong owned and controlled. Id. The value of that stock now exceeds $400, 000, 000. Id. In addition, LISI reported sales of approximately $200, 000, 000 in the first six months after it purchased Calistar. Id.

         After discovering Shiping and Weihong's scheme, Barna demanded that CALI allow Barna to inspect CALI's accounts, financial records, public communications, internal communication relating to Weihong's business dealings, invoices and contracts with Tianjin, disclosures of conflicts of interest, and related actions by the board of directors. Id. CALI denied Barna's demand. Id.

         On March 20, 2018, Barna sent CALI's counsel a draft of the complaint and demanded that CALI and the individual defendants to cease diverting CALI's profits. Id. Barna also demanded that the individual defendants to disgorge their ill-gotten gains. Id. On March 30, 2018, CALI's counsel sent a letter inviting BARNA to meet with Shiping in China but did not offer to cease diverting its profits to entities owned by Weihong. Id.

         On March 31, Barna sent a letter to CALI's counsel in which Barna declined to meet in China but offered to meet in the State of Nevada or Moscow, Russia. Id. CALI's counsel thereafter sent an email to Barna stating, “We will pass your response on to our client and get back to you.” Id. On April 4, 2018, CALI's chief operating officer, Jin Yang, contacted Barna and offered to schedule a teleconference. Id. Two days later, CALI's counsel informed Barna that CALI's audit committee retained the law firm DLA Piper to investigate Barna's allegations. Id.

         On April 6, 2018, Barna initiated this lawsuit in state court, asserting six causes of action: (1) breach of fiduciary duty; (2) abuse of control; (3) waste of corporate assets; (4) conspiracy; (5) unjust enrichment; and (6) injunctive relief. Id. The defendants in this litigation consist of the individual defendants; CALI; LISI; Mighty Mark; Calistar; Tianjin; Mega Convention Group Limited; Tianjin Calistar Automall Operation Management Co., Ltd.; Tianjin Calistar Industrial Company, Ltd.; World Vast International Enterprise Limited; and Tianjin Bohai Car Supply Chain Management Co., Ltd. (collectively “defendants”). Id.

         Shortly after Barna initiated this lawsuit, DLA Piper resigned and CALI stated in a public SEC filing that it did not believe that it would complete the investigation into Barna's allegations. (ECF No. 19-1). Thereafter, CALI's accounting firm resigned because CALI prevented the accounting from completing an audit of the company by refusing to provide reliable information. Id.

         On January 28, 2019, defendants removed this action to federal court. (ECF No. 1). Now, Barna moves to remand this case back to state court. (ECF No. 15).

         II. ...

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