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Industrial Piping, Inc. v. Xia

United States District Court, D. Idaho

September 28, 2016



          Edward J. Lodge United States District Judge

         This matter is before the Court on Defendant Tao (Mike) Zhang and Dayi (Sean) Liu's Motion to Dismiss for Failure to State a Claim (Dkt. 15). Having fully reviewed the record, the Court finds the facts and legal arguments are adequately presented in the briefs and record. Accordingly, in the interest of avoiding further delay, and because the Court conclusively finds that the decisional process would not be significantly aided by oral argument, this matter shall be decided on the record before this Court without oral argument.


         In February 2007, Hoku Corporation incorporated Hoku Materials, Inc. as a wholly owned subsidiary for the manufacture of polysilicon to be used in the manufacture of solar panels. In March 2007, Hoku Corporation incorporated Hoku Solar, Inc. as a wholly owned subsidiary for the installation of arrays of solar panels. Hoku Corporation, Hoku Materials and Hoku Solar, Inc. are collectively referred to hereinafter as “Hoku.” In 2007, Hoku selected Pocatello, Idaho as the site for a polysilicon production facility (the “Project”).

         When Hoku experienced financial trouble in 2009, Defendant Tianwei New Energy Holdings Co., Ltd (“Tianwei”) bought a controlling interest in the company. Tianwei installed Defendant Wei Xia (“Xia”), a resident of China, as Chairman of the Hoku Corporation Board. Xia controlled the degree to which Defendant Tianwei would provide funding to Hoku, and thereby determined directly whether Hoku had enough working capital to meet its obligations to contractors. Defendant Tao (Mike) Zhang (“Zhang”) became Director of Hoku Corporation and President of Hoku Materials. Zhang was authorized to execute contracts for Hoku, but did so only after getting approval from Xia. Both Xia and Zhang continued to be employed and compensated by Tianwei, and only Zhang worked fulltime at the Project. Tianwei also installed Defendant Dayi (Sean) Liu (“Liu”), its accounting manager, as Vice President of Finance for all aspects of Hoku's finances. Liu worked fulltime at the Project.

         In 2011, Plaintiff Industrial Piping, Inc. (“IPI”), a North Carolina company, entered into several contracts with Hoku to provide various construction services for the Project.[2] First, by contract dated April 7, 2011 (“Tank Farm Contract”) Hoku hired IPI to fabricate and install process piping in the tank farm area of the Project in exchange for payment in excess of $13 million, including change orders. By contract dated on or about July 1, 2011, Hoku contracted with IPI to supply structural steel for the Plant in exchange for payment in excess of $9 million (“Steel Supply Contract.”) Finally, by contract dated on or about September 28, 2011, Hoku hired IPI to provide miscellaneous construction services pursuant to a series of “task orders” issued by Hoku (“Master Construction Services Agreement” or “MCSA”).[3]

         IPI alleges Hoku was entirely dependent on Tianwei for capital, and that, for the first five quarters Tianwei controlled Hoku, the working capital deficiency averaged about negative $30 million. Concerned that Hoku had negative working capital, Hoku's auditor (KPMG) refused to sign off on the annual financial statement for Fiscal Year 2011 without expressing concern that Hoku did not qualify as a “going concern” able to meet financial obligations over the next year. To convince the auditor to sign off on Hoku's financial statement, Tianwei issued a letter of support in which it committed to provide financial support for Hoku's operations, capital expenditures, and debt service at least through April 1, 2012. Tianwei also committed to “provide such support to the extent and when deemed necessary” by Hoku. (Dkt. 1, ¶ 70.)

         Instead of providing the funding to properly capitalize Hoku, IPI alleges Tianwei opted to keep Hoku cash poor and arranged loans on a month-to-month basis to cover only immediate construction expenses. The minutes of Hoku Corporation's June 7, 2011 Executive Team meeting showed that the Executive Team determined Hoku Materials needed an infusion of $300 million to achieve financial independence and for it to meet its obligations to contractors on the Project. Zhang was a member of the Executive Team and attended such meetings. Although IPI alleges Liu worked closely with the Executive Team, it does not state whether Liu also attended the Executive Team meetings.

         By June 30, 2011, Hoku had negative $101 million in working capital. IPI was unaware Hoku was in financial distress when it contracted to provide services for the Project. Over the nine month period from April to December 2011, IPI performed over $30 million in work on the Project. Up until September, 2011, IPI was paid for its services on a timely basis. IPI alleges defendants became aware on October 5, 2011 that they were late paying IPI's and other contractors' invoices and that Hoku would not be able to make timely payment on a number of invoices that would come due in October. However, on October 6, 2011, Zhang executed the MCSA with IPI.[4]

         Sections 3.9.4 and 3.9.7 of the MCSA provided IPI with the following assurances:

3.9 Representations and Warranties of Owner Owner [Hoku Materials] makes the following express representations and warranties to Contractor, which shall be continuing during the term of this Agreement:
3.9.4 Owner has thoroughly and carefully examined and fully understands the terms of this Agreement and is fully able to perform all of Owner's duties and obligations hereunder.
3.9.7 Owner is financially solvent, able to pay its debts as they mature and has sufficient working capital to complete its obligations under this Agreement.

(Id., ¶ 86.)

         On October 11, 2011, IPI e-mailed Zhang to express concern that Hoku was late in paying six invoices totaling in excess of $2.8 million. On October 17, 2011, a representative of IPI e-mailed Liu, “Mr. Liu, please advise when I can expect payment. My vendors and subcontractors are beginning to be concerned.” (Id., ¶ 98.) Hoku made a payment to IPI on or about October 20, 2011. On November 14, 2011, IPI contacted Zhang about another late payment. On November 18, 2011, Zhang informed IPI by e-mail:

The short of it is that it gets harder and harder to move U.S. Dollars from China to the U.S. as we approach the end of the year. By the end of the year, it is mostly used up. This isn't to say that there is nothing left to transfer. We're working hard with Tianwei to receive an allocation of what's left. ...

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