ONTARIO
SUPERIOR COURT OF JUSTICE
COURT FILE NO.: 00-CL-3835
DATE: 20140822
BETWEEN:
MENDLOWITZ & ASSOCIATES INC., JAY CHIANG AND CHRISTINA CHIANG
Applicants
– and –
KOREA DATA SYSTEMS (USA), INC.
Respondent
Catherine Francis and Mark A Freake, for Mendlowitz & Associates Inc.,
J. Thomas Curry for Jay Chiang,
Hilary Book for Christina Chiang
Scott C Hutchison, for the Respondent
HEARD: August 14, 2014
Sanction Hearing Production ruling 1
MARROCCO A.C.J.S.C.:
[1] Mendlowitz & Associates Inc. (“the Trustee”) moves for an order requiring Korea Data Systems (USA), Inc. to produce documents and depositions from an action brought by Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc. in California against Aamazing Technologies Corporation, Julius Chang, Jay Chiang and others. These documents concerned the sale of computer monitors to Aamazing Technologies Corporation and Aamazing Technologies Inc.
[2] The Trustee also seeks the following:
• five transcripts of depositions of Jung Koh generated in the 1994 California action;
• Korea Data Systems (USA), Inc.’s financial statements from its inception to December 31, 2003;
• various documents and depositions from other California litigation involving Korea Data Systems Co. Ltd., Korea Data Systems (USA), Inc., John Hui and others; and
• an order requiring Steve Cameron (the California lawyer for Korea Data Systems USA) to answer questions relating to production of documents in this proceeding by Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd.
[3] Jay Chiang and Christina Chiang adopted the Trustee’s motion.
[4] Jay Chiang and Christina Chiang were found in contempt of court by Justice Farley in an order dated July 16, 2003. Justice Farley’s order held Jay Chiang and Christina Chiang in contempt of the following six court orders:
• an order from Justice Ferrier dated September 28, 1999 under sections 163 (2) and 167 of the Bankruptcy and Insolvency Act requiring, among other things, that Jay Chiang and Christina Chiang attend for examination and produce documents relating to Christina Chiang’s home. That order also required any financial institution holding accounts in the name of Jay Chiang to produce bank records. The moving parties on this ex parte motion were Korea Data Systems Co. Ltd., Korea Data Systems (USA), Inc. and the Trustee.
• An order from Justice Farley dated November 1, 1999 to the same effect, but which also ordered a lawyer from Miller Thomson to be examined and produce documents. The moving parties on this motion were Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc.
• A Mareva injunction and Anton Piller order issued by Justice Farley on September 22, 2000 which (among other things) froze all of the assets of Jay Chiang and Christina Chiang and required disclosure of those assets. The moving parties on this ex parte in camera motion were Korea Data Systems Co. Ltd., Korea Data Systems (USA), Inc. and the Trustee.
• An order issued by Justice Swinton on October 5, 2000 requiring, among other things, that Jay Chiang and Christina Chiang disclose current information about assets and accounts over which they had a power of attorney. The moving parties were Korea Data Systems Co. Ltd., Korea Data Systems (USA), Inc. and Mendlowitz and Associates Inc.
• An order issued by Justice Farley on May 7, 2003 requiring, among other things, that Christina Chiang produce all records of transactions greater than $1000 for all accounts at financial institutions in her name or over which she had signing authority in the Republic of China. This order was made on a cross-motion brought as part of a response to a motion by Christina Chiang seeking an anti-suit injunction. I will not repeat what I have said earlier about the circumstances surrounding the portion of Justice Farley’s order which adjourned Christina Chiang’s motion for an anti-suit injunction. See Chiang (Trustee of) v. Chiang, 2014 ONSC at paras 7-9.The cross motion was brought by Korea Data Systems Co. Ltd., Korea Data Systems (USA), Inc. and Mendlowitz and Associates Inc.
• An order issued by Justice Farley on June 24, 2003 requiring, among other things, that Christina Chiang disclose documents and information regarding the whereabouts of approximately US$520,000. This order provided for the examination of and production of documents by Jay Chiang and Christina Chiang. Finally, the order required Jay Chiang and Christina Chiang to authorize the release of information by third parties. This order was made on consent on a motion brought by Korea Data Systems Co. Ltd., Korea Data Systems (USA), Inc. and Mendlowitz & Associates Inc.
[5] Attached to Justice Farley’s contempt order were 17 Undertakings that, if complied with by Jay Chiang and Christina Chiang, would purge their contempt. Compliance with the undertakings was not mandatory. It was an opportunity afforded to Jay Chiang and Christina Chiang (see: Chiang (Trustee of) v. Chiang (2007), 2007 12203 (ON SC), 31 C.B.R. (5th) 19 (Ont. Sup. Ct.) at para. 47).
[6] Justice Lax determined that Jay Chiang and Christina Chiang had not complied with their Undertakings. She sentenced Jay Chiang to 12 months in prison and Christina Chiang to 8 months in prison for contempt of court.
[7] Pursuant to the order of Justice Farley, I was required to consider whether Jay Chiang and Christina Chiang had, subsequent to the determination of Lax J, satisfied their Undertakings. I concluded that some Undertakings remained unsatisfied. See Mendlowitz v Chiang (Undertakings Ruling), 2010 ONSC 4804.
[8] As a result of Justice Farley’s order and my determination, a further Sanction Hearing was required. It has been scheduled for October of this year. Korea Data Systems (USA), Inc. has indicated that it will seek a jail sentence for Jay Chiang in the range of 3 to 5 years and a jail sentence for Christina Chiang in the range of 8 months.
[9] The Trustee, after making its own inquiries, wishes to cancel the upcoming Sanction Hearing.
[10] I have previously made an order requiring Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd. to produce all documents relevant to this upcoming Sanction Hearing that are within their possession or control which have not previously been produced. I have already determined that the test for relevance is whether withholding the document might reasonably impair Jay Chiang or Christina Chiang’s ability to answer, negate or mitigate Justice Farley’s contempt order of July 16, 2003. See Chiang (Trustee of) 2014 ONSC 2651, 13 C.B.R. (6th) 252 at para 107
[11] With this in mind I propose to review the Trustee’s request for production.
Documents and depositions from an action brought by Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc. in California relating to the sale of computer monitors by those companies to Aamazing Technologies Corporation and Aamazing Technologies Inc.
[12] The Trustee advises that it became aware through counsel for Jay Chiang and Christina Chiang in 2003 that Korea Data Systems (USA), Inc. was a defendant in one or more lawsuits in California. In 2003 the Trustee and Korea Data Systems (USA), Inc. were represented by the same law firm, which advised the Trustee that the California litigation was “irrelevant” to the Canadian litigation.
[13] The Trustee has since January 15, 2013 retained and received independent legal advice from its current counsel. The Trustee now has a completely different view of the California litigation, and believes that a full understanding of those proceedings is necessary in order to fairly conclude the Sanction Hearing.
[14] One example offered by the Trustee to explain its change of mind was the November 21, 2002 deposition of Allison Chow pursuant to subpoena. Mr. Cameron appeared as counsel for Ms. Chow. Prior to production of the deposition transcript, Mr. Cameron had advised the Trustee that Korea Data Systems (USA), Inc. had nothing to do with the fraud alleged by the Korea Export Import Corporation.
[15] In this California deposition Ms. Chow stated that she was the Operations Manager for Korea Data Systems (USA), Inc. in July 2001. Ms. Chow indicated that she signed a letter dated July 25, 2001 on the letterhead of Princeton Graphic Systems Inc. addressed to Korea Data Systems Co. Ltd. The letter promised that Princeton Graphic Systems Inc. would pay Korea Data Systems Co. Ltd. $30 million according to a schedule set out therein. The letter was used by Korea Data Systems Co. Ltd. to obtain money from the Korea Export Import Corporation. In her deposition, Ms. Chow indicated that she had nothing to do with Princeton Graphic Systems Inc and that she prepared the letter at the direction of Mr. SD Lee, an employee of Korea Data Systems Co. Ltd. Ms. Chow deposes that SD Lee had offices at Korea Data Systems (USA), Inc. and had complete cheque signing authority for that company.
[16] The Trustee is concerned with the accuracy and completeness of the information provided to it by Korea Data Systems (USA), Inc. and accordingly seeks further information about all of the California litigation.
[17] The Trustee has a legitimate concern about its knowledge and appreciation of the California litigation.
[18] The Trustee, as a result of inquiries made by its current counsel, also has concerns about the proceedings that have taken place in this jurisdiction.
[19] The Trustee questions the adequacy of the productions and disclosure made by Korea Data Systems (USA), Inc. in the various proceedings which have taken place in Ontario. For example:
• Mr. Hui and his counsel were asked to provide a plain language summary of the Korea Export Import Corporation litigation in California. They failed to disclose that this litigation arose out of the fact that Korea Data Systems Co. Ltd. committed an invoicing fraud upon the Korea Export Import Corporation and used Korea Data Systems (USA), Inc. in part to perpetrate that fraud.
• Attacks upon Jay Chiang’s character, suggesting that he was disreputable, were made in circumstances where evidence of dishonest behavior by Korea Data Systems (USA), Inc. and Jung Koh was withheld. The Trustee believes that there is “a story not told” which would have had a “major impact” on the Trustee’s agreement to participate in these proceedings. More specifically, Counsel for the Trustee suggested at the hearing of this motion that “everything that KDS has accused the Chiangs of, KDS itself, KDS Korea and KDS USA, which was controlled by KDS Korea did the same thing only worse”.
• The Koh brothers controlled Korea Data Systems (USA), Inc. throughout the time that it was allegedly being victimized by Jay Chiang and Julius Chiang.
• At this point, the Trustee no longer believes that the $10 million, allegedly stolen by Jay Chiang and Julius Chiang from Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc., and which is at the foundation of the contempt proceeding, was actually stolen.
[20] Rule 39.01(01) of the Rules of Civil Procedure provides that evidence on a motion may be given by affidavit. The affidavit can contain statements of the deponent’s information and belief with respect to uncontested facts so long as the source of the information is disclosed (r. 39.01(5)). The Rule is apparently intended to preclude contentious hearsay. Accordingly, the evidentiary value of contentious depositions taken from individuals in California who have neither provided affidavits for the Sanction Hearing nor otherwise testified in these proceedings is questionable.
[21] I do not propose to grant the general order sought by the Trustee. My concern is that such an order would turn the Sanction Hearing into a retrial of the California proceedings. Apart from the impracticality of such an outcome, I have no intention of retrying them. My intention is to respect the outcome of those proceedings without being mechanistic and robotic when it comes to considering the imposition of a jail sentence.
[22] This portion of this Ruling is not in any way intended to discourage the Trustee from moving in the future for production or directions.
The five transcripts of the depositions of Jung Koh
[23] Jung Koh and his brother Dae Soo Koh controlled Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc. during the relevant time, although the exact corporate structure is not clear.
[24] The Trustee’s request is qualified, in the sense that the depositions are limited to those provided in the 1994 California action. This action was commenced May 9, 1994 by Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc. against Julius Chiang, Jay Chiang and others. Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc. obtained judgment in this matter in California on January 16, 1998. Accordingly, the timeframe of these depositions is reasonably proximate to the timeframe with which we are concerned.
[25] Korea Data Systems Co. Ltd. sought bankruptcy protection in Korea in November 2001. Mr. Hui testified that the Koh brothers lost control of Korea Data Systems Co. Ltd. during the Korean bankruptcy process with the result that the company emerged from that process with new arm’s-length ownership.
[26] Statements by Jung Koh may be treated as admissions of fact by Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc.
[27] The difficulties associated with production of these transcripts do not seem onerous.
[28] Of course, without the benefit of the depositions, it is impossible to know with certainty whether withholding the depositions might reasonably impair Jay Chiang or Christina Chiang’s ability to answer, negate or mitigate Justice Farley’s contempt order of July 16, 2003.
[29] After considering the circumstances I have decided to order production of the five transcripts of the Jung Koh deposition.
Korea Data Systems (USA), Inc. financial statements from inception through to and including December 31, 2003
[30] Korea Data Systems (USA), Inc. gave an undertaking concerning damages when it applied for and obtained a Mareva injunction and an Anton Piller order from Justice Farley in 2000.
[31] The nature of the undertaking given at the time of these two orders is relevant to the penalty to be assessed for violation of either or both of those orders. Moreover, material nondisclosure concerning this undertaking could support an order rescinding the Mareva injunction and the Anton Piller order.
[32] Accordingly, I am ordering the production of the financial statements of Korea Data Systems (USA), Inc. from inception through to and including December 31, 2003.
Documents and depositions relating to the “straw sale” of Korea Data Systems (USA), Inc. shares
[33] The evidence established that Korea Data Systems Co. Ltd. -- through a company called Korea Data Systems America -- commenced litigation against Mr. Hui claiming that he had never controlled Korea Data Systems (USA), Inc. This litigation was settled and Mr. Hui’s ownership of Korea Data Systems (USA), Inc. was resolved.
[34] The terms of settlement were confirmed by Mr. Hui when he was cross-examined by counsel for Mr. Chiang.
[35] Mr. Hui agreed that, pursuant to the settlement, he immediately paid Korea Data Systems America and Korea Data Systems Co. Ltd. US$400,000.
[36] Mr. Hui agreed as part of the settlement that, if Korea Data Systems (USA), Inc. recovered money in Ontario or in California from a frozen E*TRADE account, 40% of that amount would be paid to Korea Data Systems Co. Ltd. This distribution was in addition to the distribution provided for in an earlier agreement entered into when Korea Data Systems Co. Ltd assigned its interest in this litigation to Korea Data Systems (USA), Inc. The earlier assignment agreement required that 60% of all proceeds recovered by Korea Data Systems (USA), Inc. be paid to Korea Data Systems Co. Ltd. and that the first $380,000 recovered be paid to Korea Data Systems Co. Ltd. to reimburse it for legal fees and expenses. This agreement is more fully described in earlier decisions. See for example Korea Data Systems Co. Ltd. V. Aamazing Technologies Inc. 2012 ONSC 3922 paras 28-30.
[37] For its part of the settlement, Korea Data Systems Co. Ltd. agreed to execute whatever documents were necessary to show that John Hui was a 100% owner of Korea Data Systems (USA), Inc. and retroactively authorized him to act on behalf of Korea Data Systems (USA), Inc.
[38] If the sale of shares in Korea Data Systems (USA), Inc. to John Hui was a “straw sale”, then Jung Koh and his brother retained ownership of Korea Data Systems (USA), Inc. This would mean that sales of computer monitors between Korea Data Systems Co. Ltd. and Korea Data Systems (USA), Inc. could not be considered when determining whether Korea Data Systems Co. Ltd. had sufficient gross revenues to be listed on the stock exchange in South Korea. While this point may be of interest to securities regulators in Korea and may be relevant to Mr. Hui’s credibility, I cannot resolve this issue without trying it and I do not propose to do so.
[39] Mr. Hui testified in these proceedings before and after settlement of the California ownership proceedings. I have a sense of the claims that were made in that California proceeding and I know the terms of the settlement of that proceeding. In my view it would be impractical for me to inquire further into the matter.
[40] Accordingly I am not ordering production of additional documents and depositions concerning the “straw sale” allegation.
Mr. Cameron’s pending cross examination
[41] As I indicated at the conclusion of argument, when Mr. Cameron is cross-examined he is to answer questions objected to on the grounds of relevance. Arguments concerning relevance may be made at the Sanction Hearing.
Costs
[42] Both the applicants and the respondent were successful on this motion and accordingly there will be no order for costs.
MARROCCO A.C.J.S.C.
Released: 20140822
COURT FILE NO.: 00-CL-3835
DATE: 20140822
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
MENDLOWITZ & ASSOCIATES INC.,
JAY CHIANG AND CHRISTINA CHIANG
Applicants
– and –
KOREA DATA SYSTEMS (USA), INC.
Respondent
REASONS FOR JUDGMENT
MARROCCO A.C.J.S.C.
Released: 20140822