Court: District Court, N.D. California; March 19, 2012; Federal District Court
Defendant Huan Zou’s Motion to Dismiss is denied, while Plaintiffs’ Motion for Sanctions is granted in part and denied in part, and Defendants’ Motion for Summary Adjudication is also granted in part and denied in part. The case involves a wage and hour class action filed by current and former massage therapists classified as independent contractors by A Perfect Day Franchise, Inc. and A Perfect Day, Inc. Plaintiffs allege violations of the Fair Labor Standards Act (FLSA) and California wage laws, highlighting ongoing discovery disputes regarding the corporate structure and ownership of Perfect Day.
Defendants, including individual parties and corporate entities, argue for summary judgment, claiming insufficient evidence of their control over the employment relationship. In contrast, Plaintiffs seek severe sanctions, including default judgment, due to alleged discovery abuses. The factual background reveals that Perfect Day has operated spas in California since its incorporation in 2003, with ownership split evenly between Huan Zou and the Sehriners. Zou, the initial CEO, and Tom Sehriner partnered based on their respective experiences in massage and business management, with Sehriner primarily handling operational aspects. The resolution of the case hinges on the clarification of corporate ownership and the relationships among the defendants.
Mr. Sehriner provided both practical advice and financial support for the establishment of Perfect Day, initially investing $250,000 followed by an additional $400,000, and signing a one million dollar loan for tenant improvements, which is still being repaid. Concurrently, Minjian, a California massage therapy school founded by Tailiang Li, has disputed connections with Perfect Day, despite evidence suggesting a joint business venture. Several class members reported being directed to Minjian by Perfect Day and testified that training at Minjian was a prerequisite for employment at Perfect Day, with tuition deducted from their paychecks.
Management roles at Perfect Day are held by Jade Li and Jun Ma. Jun Ma, as Human Resources Manager, oversees the hiring and management of massage therapists, although there is conflicting testimony regarding his authority over their working hours and pay. Jade Li, who also manages the Fremont branch, confirms independent contractor agreements but her management authority is less clearly defined. Evidence suggests both Jade Li and Tailiang Li may have acted as representatives for both entities, though their specific roles in directing massage therapists' work remain ambiguous.
Corporate records from the California Secretary of State reveal changes to Perfect Day’s structure and ownership between March 2006 and present, including a name change from 'A Perfect Day, Inc.' to 'A Perfect Day Spa, Inc.' in July 2005, filed by Tom and Martha Schriner.
In October 2005, the corporate name changed from 'A Perfect Day Spa, Inc.' to 'A Perfect Day Spas, Inc.,' and in March 2007, it reverted to 'A Perfect Day, Inc.' A Statement of Information filed in May 2009 listed Tom Schriner as CEO, Martha Schriner as CFO and Secretary, and Huan Zou as a director. In September 2009, the Schriner's and Zou dissolved A Perfect Day, Inc. In September 2008, Huan Zou incorporated A Perfect Day Franchise, Inc. in California. An October 1, 2009, statement identified Tom Schriner as CEO, Zou as Secretary, Martha Schriner as CFO, and Jun Ma as a director. In December 2009, the Schriner's sold their interest in Perfect Day to Zou for $600,000, after which Zou became the sole corporate officer and director of A Perfect Day Franchise, Inc. Zou claims sole ownership of Perfect Day Franchise, Inc., but documents submitted by Plaintiffs indicate that Perfect Day Spa is owned by May Team, Inc., with Anna Tong as CEO, sharing the same address as Tom Schriner. Defense counsel acknowledged that A Perfect Day Franchise, Inc. operates as Perfect Day Spa but could not clarify the relationship with May Team, Inc. Zou’s whereabouts are disputed; he states he has been in China since March 2009, while other evidence suggests since December 2009.
The procedural background shows that Defendants engaged in questionable practices, prompting court intervention and sanctions. Plaintiffs filed their initial complaint on March 22, 2010, naming only Perfect Day Franchise, Inc. A First Amended Complaint on May 12, 2010, included additional Defendants, and the Second Amended Complaint filed on April 12, 2011, added Zou, Ma, and Chuanyu Li. The operative complaint alleges that Perfect Day misclassified Plaintiffs as independent contractors, leading to violations of the Fair Labor Standards Act (FLSA) and California Labor Code regarding minimum wage, overtime, meal periods, wage statements, and wrongful deductions from wages.
The initial year of litigation involved significant disputes necessitating court intervention, including warnings to defense counsel about potential sanctions for misconduct and discovery abuses. In May 2010, Perfect Day managers Jun Ma and Jade Li conducted mandatory meetings with putative class members across three locations to discuss the lawsuit and collect opt-out forms, resulting in 38 signed forms. However, these forms differed from those submitted by Ma and Li, leading the Court to deem Perfect Day's actions coercive, invalidate the opt-out forms, and mandate a curative notice to the class. The Court also issued an order to show cause regarding potential sanctions due to misleading submissions by the Defendants. During the hearing, Ma and Li claimed they destroyed the original opt-out forms under a paperless policy but retained scanned copies. Although the Court did not impose sanctions, it indicated that future sanctions would be considered based on the complete record. In July 2010, the Defendants moved to dismiss the case and compel arbitration, revealing a practice of shredding paper documents while keeping questionable electronic versions. On January 25, 2011, the Court ruled that Perfect Day failed to prove the existence of an arbitration clause in the Independent Contractor Agreement, citing significant uncertainties in document retention and inconsistent testimonies. The Court again contemplated sanctions for document destruction but ultimately refrained, deeming existing remedies sufficient. The second year saw further discovery disputes, particularly regarding Perfect Day's corporate structure. On March 8, 2011, Plaintiffs served a deposition notice for a corporate representative, later identifying Huan Zou as knowledgeable about these matters. However, Defendants repeatedly failed to produce Zou, citing his unavailability in China, which hindered the Plaintiffs’ ability to complete class certification briefing on time and led the Court to reschedule deadlines twice. Even after a court order to agree on deposition dates, the Plaintiffs were unable to depose Zou in June or July 2011.
Plaintiffs moved to compel the deposition of Mr. Zou as Perfect Day’s corporate representative concerning its structure and ownership, seeking sanctions for non-compliance with a prior court order to schedule this deposition. On August 29, 2011, the Court mandated that Perfect Day produce a corporate deponent, either Mr. Zou or another representative, to testify. The Court awarded Plaintiffs $800 in attorneys’ fees and imposed a sanction preventing Perfect Day from using any declaration evidence concerning its corporate structure or ownership in opposition to class certification until a deponent is produced. Perfect Day was warned that ongoing non-compliance could lead to further sanctions.
Plaintiffs encountered difficulties serving Mr. Zou with the summons and complaint, as defense counsel declined to accept service on his behalf. Ultimately, Plaintiffs were directed to Mr. Zou’s address in China and left copies of the summons and complaint at a local spa, which were later mailed to him.
Additionally, the Court disqualified Plaintiffs’ counsel, Adam Wang, due to a prior consultation with a defendant regarding unrelated employment issues, although it ruled this disqualification was sufficient to avoid prejudice to Defendants. As discovery approached its deadline, both parties filed multiple motions to compel, resulting in an omnibus hearing on November 21, 2011. The Court issued oral rulings that were later documented in writing. Defendants sought discovery from unnamed class members, with mixed success.
Plaintiffs' motions primarily focused on obtaining documents regarding corporate assets, liabilities, and financial relationships within Perfect Day and related entities. The Court granted Plaintiffs’ requests to some extent, limiting the disclosure requirement to documents post-March 22, 2006, while expressing concern over Defendants' reluctance to provide necessary information about their corporate affairs. Lastly, Plaintiffs also sought to depose Anna Tong, identified as the CEO of May Team, Inc., which owns Perfect Day Spa.
Defense counsel clarified that he does not represent Anna Tong or May Team and cannot accept service of a subpoena for Ms. Tong’s deposition. The Court granted the Plaintiffs’ motion to compel Ms. Tong's deposition, expressing concern over the representation of corporate ownership, specifically regarding Huan Zou's absence from corporate documentation. The Court partially granted the Plaintiffs’ motion to compel depositions of individual defendants but imposed time limits on the depositions. The Court also fully granted Plaintiffs’ request for the production of 1099 forms for class members, documents related to third-party entities mentioned in the Joint Case Management Conference report, and employment duration details for class members at Perfect Day. Consequently, the fact discovery deadline was extended to December 16, 2011. Despite the deadline passing and the trial date approaching on April 2, 2012, Perfect Day has yet to produce financial documents or a witness to testify on the company's corporate structure. Huan Zou, identified as the sole owner of Perfect Day, is unavailable in China but filed for Chapter 7 bankruptcy on March 5, 2012, and subsequently terminated his defense counsel representation on March 16, 2012. The Court expressed significant concerns about Defendants’ tactics affecting the Plaintiffs' ability to pursue their claims.
In a separate motion, Huan Zou moved to dismiss the Plaintiffs’ Second Amended Complaint (SAC) under Federal Rule of Civil Procedure 12(b)(5) for improper service. Zou argued that service was not properly executed under Rule 4(f) for individuals in foreign countries and that the service was not completed within 120 days as required by Rule 4(m). The Court determined that Rule 4(f) applies since Zou was in China during service, and noted that Rule 4(m) does not apply to service in foreign countries. Therefore, the Court ruled that service beyond the 120-day limit does not warrant dismissal of the SAC against Zou.
An individual may be served outside any U.S. judicial district through internationally agreed means that provide reasonable notice, such as those outlined in the Hague Convention. Additionally, service may occur through other methods not prohibited by international agreements if ordered by the court. Service under Rule 4(f)(3) requires court direction and adherence to international law. The plaintiffs have not demonstrated compliance with these service rules, particularly failing to show that their attempts to serve Mr. Zou followed Hague Convention protocols or were court-directed. The court acknowledges that Mr. Zou has been evasive, with defense counsel refusing to accept service and Perfect Day not producing him for deposition, complicating service efforts. Given these circumstances, the court may intervene to facilitate service on elusive international defendants. Citing a similar case, the court determines that service on Mr. Zou, as the sole owner of Perfect Day, can be executed through Perfect Day's California office, as this approach complies with Rule 4(f)(3) and Mr. Zou’s due process rights. The court orders this method of service.
Mr. Zou has been aware of the ongoing legal action since at least April 2011, when Perfect Day identified him as the individual most knowledgeable about its corporate structure. As the sole owner of Perfect Day, it is likely he was aware of the action from when the original complaint was filed. Although service was previously attempted at Perfect Day’s Fremont, California location, it did not comply with court requirements under Rule 4(f)(3). The Court has now ordered proper service to be executed at A Perfect Day Spa, which must deliver the relevant documents to Mr. Zou within three days of the Order.
The Plaintiffs are seeking multiple forms of relief due to discovery abuses by the Defendants, including a default judgment against Perfect Day and several individuals associated with it, or alternatively, specific issue and evidentiary sanctions. Additionally, they request attorneys' fees for increased litigation costs stemming from these abuses.
Under Rule 37 of the Federal Rules of Civil Procedure, the Court has the authority to impose various sanctions for discovery violations, including taking designated facts as established, prohibiting parties from supporting or opposing claims, striking pleadings, staying proceedings, dismissing actions, rendering default judgments, or treating non-compliance as contempt. The Court emphasizes the need for diligent application of these sanctions to penalize misconduct and deter future violations. For sanctions to be imposed, the Defendants must have violated a court order, and the Court identified specific orders that were breached, giving substantial weight to its findings on this matter.
On June 17, 2011, a Case Management Order mandated the deposition of 30(b)(6) witness Huan Zou by the parties. Perfect Day violated this order and was subsequently ordered on August 29, 2011, to produce the witness, which they have failed to do to date. Additionally, Perfect Day has not provided financial information as ordered on November 21, 2011, producing virtually no relevant documents. Meanwhile, Minjian's financial disclosures are incomplete, lacking certain documents such as checks and tax filings. Although Tom Schriner produced some financial records, they did not include necessary documentation of transactions mentioned in his deposition. Perfect Day also failed to produce complete 1099 forms for class members, providing only a summary for 2007 and 2008, and did not include employment end dates for former employees. The Court found these productions incomplete, violating its orders. The defendants' claims of full compliance are deemed not credible, as plaintiffs have accessed numerous documents from third parties, contradicting the defendants’ assertions. For instance, Tailiang Li's denial of a connection between Minjian and Perfect Day is contradicted by business license applications indicating a close relationship. This suggests that the defendants likely withheld significant documents that would be unfavorable to their case.
A party resisting discovery is presumed to be withholding unfavorable information. Plaintiffs seek terminating sanctions, specifically a default judgment, against Defendants Perfect Day, Minjian, Huan Zou, Tailiang Li, Jade Li, and Jun Ma due to their noncompliance with court orders and a history of misconduct. Rule 37(b)(2)(A)(vi) allows for default judgment against a noncompliant party if their actions result from willfulness, fault, or bad faith. Before imposing such sanctions, courts must consider several factors: the public's interest in swift litigation resolution, the court's docket management needs, the risk of prejudice to defendants, public policy favoring case merit disposition, and the availability of less drastic measures. Generally, violations of court orders favor default judgment, but the risk of prejudice and availability of less drastic actions are critical. The assessment of prejudice focuses on whether the noncompliance impairs the moving party's trial ability or interferes with a rightful case decision. Evidence shows that Defendants, particularly Perfect Day, have obstructed discovery regarding financial and ownership matters, with instances of evasive behavior suggesting coordinated misconduct. Despite these findings, the Court opts not to impose drastic sanctions against the Defendants.
Dismissal or default judgment is deemed “the most severe penalty” in legal proceedings and is reserved for “extreme circumstances.” In this case, such penalties are inappropriate because several defendants, including Jun Ma, Jade Li, Tailiang Li, and Jin Qiu, have not violated any court orders, and the most serious violations were committed by Perfect Day. Imposing default judgment on all defendants except Jin Qiu would be excessive and could unfairly benefit the plaintiffs without addressing the merits of the wage and hour claims. The principle of resolving cases on their merits underlines the court's preference against severe sanctions. Lesser sanctions remain available to address discovery failures, particularly regarding Perfect Day's corporate structure and finances.
The plaintiffs also seek issue and evidentiary sanctions instead of a default judgment. Under Rule 37(b)(2), a court can establish facts pertinent to the case as a sanction for noncompliance with discovery orders, provided that such sanctions are just and directly related to the claims at hand. Plaintiffs allege that defendants, including Tom Schriner, Huan Zou, Tailiang Li, Jin Qiu, and Minjian, treat Perfect Day as a shell corporation, engaging in activities like commingling assets and diverting funds. The absence of withheld documents has significantly hindered the plaintiffs' ability to support their alter ego theory of liability, which is critical in proving their allegations against these defendants.
The 30(b)(6) deposition testimony was crucial for the Plaintiffs to investigate the corporate structure and ownership of Perfect Day, which they theorize may be a corporate shell. The Defendants have withheld this evidence, making it difficult for the Plaintiffs to substantiate their claims. The court recognizes that further investigation by the Plaintiffs is unlikely to remedy the prejudice caused by the Defendants’ actions, necessitating judicial intervention to uphold the Plaintiffs' ability to prove their allegations.
Citing Rule 37(b)(2)(A), the court opts to adopt a precedent from prior cases, establishing that the facts related to alter ego liability in paragraphs 19 and 20 of the complaint will be considered established for trial, with the burden on the Defendants to rebut these claims. This sanction is deemed appropriate as it addresses violations of court orders by Defendants Perfect Day, Minjian, and Schriner.
The court notes that the rights of other Defendants are also affected by these violations, but all impacted parties will have the chance to challenge the presumption at trial. The court emphasizes fairness in the sanction, citing evidence of collusion among all Defendants regarding corporate ownership and assets, given their shared legal representation and prior warnings about potential sanctions for discovery misconduct.
Despite the aim to limit the sanctions to specific Defendants, the broader evidence of collusion necessitates that all Defendants with interests in Perfect Day or Minjian, or those identified as officers and directors, are included in the sanctions. The Defendants have failed to provide essential financial documentation, further justifying the sanctions imposed by the court.
Both parties are prohibited from presenting documents at trial that were requested during discovery but not produced by the cut-off date of December 16, 2011. Perfect Day's refusal to produce Mr. Zou for deposition results in the exclusion of testimony from Huan Zou or any other corporate deponent regarding corporate ownership, structure, or assets. This exclusion is supported by Federal Rules of Civil Procedure (Fed. R.Civ. P.) 16(b) and 37(b)(2), as well as case law affirming the exclusion of evidence for non-compliance with discovery orders.
Additionally, Perfect Day's failure to provide a complete class list and 1099 forms has hindered Plaintiffs in determining the extent of minimum wage and overtime claims, affecting potential damage awards. The Court has postponed its decision on imposing further sanctions related to this withheld evidence, noting that existing sanctions are adequate to address the harm caused by Defendants' discovery delays. Consequently, no additional non-monetary sanctions will be imposed at this time.
Plaintiffs also seek monetary sanctions for various costs associated with motions to compel and subpoenas related to depositions and records. Under Fed. R.Civ. P. 37, monetary sanctions are mandated for parties opposing court orders to compel deposition testimony unless their position was substantially justified or other circumstances render an award unjust. The Court partially grants Plaintiffs’ request for monetary sanctions concerning successful motions to compel regarding Perfect Day’s finances, corporate structure, and class member wages, concluding that Defendants did not have a substantially justified position on these issues.
Sanctions are deemed inappropriate for the Motion to Compel Depositions (ECF No. 281) since the parties reached an agreement without court intervention, and Defendants provided substantial justifications against the depositions. Plaintiffs did not account for the hours spent on each motion to compel, hindering the assessment of reasonable fees. Plaintiffs’ counsel is permitted to submit a supplemental declaration detailing costs and fees related to three specific motions: 1) Motion to Compel Responses Regarding Financial Information (ECF No. 277), 2) Motion to Compel the Deposition of Anna Tong (ECF No. 284), and 3) Motion to Compel Production of Documents and Responses to Interrogatories (ECF No. 282). Additionally, they may include costs for attempting to serve a deposition subpoena on Anna Tong, and seek monetary sanctions for costs incurred in serving Martha Schriner with a deposition subpoena, and for third-party subpoenas and public records requests related to unproduced documents. These expenses do not arise from a discovery motion and cannot justify an attorneys’ fee award under Rule 37. Under 28 U.S.C. § 1927, the court can impose sanctions for unreasonable multiplication of proceedings, requiring a finding of subjective bad faith. Bad faith is indicated when an attorney knowingly raises frivolous arguments or uses a meritorious claim to harass an opponent. The court can also impose sanctions for discovery misconduct under its inherent powers. The Law Offices of Richard Wahng displayed bad faith by failing to produce a 30(b)(6) deponent and financial documents for over six months, despite a court order. Defense counsel was warned about possible sanctions for improper conduct. Consequently, the court orders defense counsel to pay $4,977.59 for costs incurred in obtaining records that should have been produced by Perfect Day. The excerpt also mentions the standard for summary judgment, stating it must be granted if there is no genuine issue of material fact and the movant is entitled to judgment as a matter of law, as per Fed. R. Civ. P. 56(a) and relevant case law.
Material facts are those that can influence the outcome of a case, with a dispute being considered "genuine" only when sufficient evidence exists for a reasonable jury to favor the nonmoving party. In the context of a summary judgment motion, courts interpret all reasonable inferences in favor of the nonmoving party and do not assess credibility or weigh evidence but focus on whether a genuine factual issue exists for trial. The moving party must initially demonstrate the absence of material facts, which can be done by providing affirmative evidence that negates an essential element of the opposing party's claim or by showing the inadequacy of the nonmoving party’s evidence. Once this burden is met, the nonmoving party must then prove that a genuine issue of material fact exists, supported by specific evidence from the record. Conclusory or speculative claims are insufficient to contest a properly supported summary judgment motion. Furthermore, even if the evidence is primarily in the possession of the defendant, the plaintiff must present affirmative evidence unless they have not had the opportunity for discovery.
In the analysis segment, the defendants contend that specific individuals (Tom Schriner, Jade Li, Tailiang Li, Jin Qiu, Jun Ma, and Minjian) do not qualify as "employers" under the Fair Labor Standards Act (FLSA). In contrast, the plaintiffs assert that individuals Jun Ma, Jade Li, Tom Schriner, and Tailiang Li are directly liable under the FLSA. The FLSA defines "employer" broadly, encompassing any person acting in the interest of an employer concerning an employee.
The determination of an employer-employee relationship is based on the overall circumstances rather than isolated factors, with the “economic reality” of the relationship being the key consideration. The Ninth Circuit employs a four-factor test under the Fair Labor Standards Act (FLSA) to assess employer status, which includes whether the alleged employer had the authority to hire and fire, supervised employee work conditions, determined payment methods, and maintained employment records. Individual liability under the FLSA can extend beyond corporate positions to any individual exercising significant control over the employment relationship. Specific cases illustrate that even non-corporate officials may be deemed employers if they possess substantial operational control, while those lacking financial control, despite other managerial responsibilities, may not be held liable. In the current case, there is a material factual dispute about whether Jun Ma qualifies as an employer under the FLSA, while no such dispute exists regarding Tom Schriner and Jade Li.
Ma claims to be an employee of Perfect Day, without ownership or control over the massage therapists' pay rates. However, evidence indicates that he may meet the "economic realities" test under the FLSA. Testimony reveals that Ma, as H.R. Manager, supervises and manages the massage therapists, controls personnel files, and possibly has authority over their work hours and pay rates. Additionally, there are indications that Ma may have previously held a director position, suggesting he had economic control over the therapists. Therefore, a jury could reasonably conclude that Ma is an employer under the FLSA, leading to the denial of Defendants’ Motion for Summary Adjudication regarding his status.
In contrast, regarding Jade Li, evidence does not sufficiently establish her as an "employer" under the FLSA. Although she manages the Fremont branch and has acted as a representative for Perfect Day, the evidence does not demonstrate that she had authority over the pay rates, control over scheduling, or the hiring and firing process. Consequently, Defendants’ Motion for Summary Adjudication on Jade Li’s employer status is granted.
Similarly, for Tom Schriner, the evidence presented does not support a finding that he qualifies as an "employer" under the FLSA.
Tom Schriner's operational control over Perfect Day is contested by Plaintiffs, who cite his past ownership, contributions to startup costs, and a significant loan he secured for the company. Evidence includes a class member's statement that Schriner evaluated massage therapists' performance. However, legal precedents indicate that for corporate officers to be liable as employers, they typically must supervise employees, control work schedules, and set wages. The record lacks sufficient evidence showing Schriner was involved in day-to-day operations or had authority over hiring, firing, or employee pay, undermining claims of his economic control over class members. Consequently, the court grants Defendants’ Motion for Summary Adjudication regarding Schriner's employer status under the FLSA.
In contrast, Tailiang Li's role at Perfect Day is disputed. He claims no involvement, but Plaintiffs present evidence suggesting he supervised massage therapists and had control over their compensation.
Plaintiffs have provided evidence suggesting that Tailiang Li exercised economic control over the massage therapists, potentially qualifying him as an “employer” under the Fair Labor Standards Act (FLSA). Key points include Li's supervisory role, where he issued orders to the branch manager who assigned tasks to the therapists. Testimonies indicate that Li had hiring authority, conducting interviews and requiring prospective employees to train at Minjian, a school he owned. Additionally, Perfect Day deducted tuition fees from the therapists' paychecks, with Li having financial control, implying he influenced their compensation. The accumulation of this evidence could lead a reasonable jury to conclude that Li had significant economic and operational authority over the therapists, thus denying the motion for summary adjudication regarding defendant Jun Ma's employer status.
The document also addresses Minjian's potential liability as a "joint employer" under the FLSA, which allows for the possibility of multiple employers being responsible for compliance. The concept of joint employment entails shared responsibility when workers benefit multiple employers or are employed by them successively. Regulations indicate joint employment can exist if employers share services, if one acts in the interest of another, or if they are not completely disassociated in their control over an employee. The Ninth Circuit has emphasized that joint employment typically occurs when employers are interconnected or under common control.
Minjian, although not a traditional employer as it is a school, may still be classified as a "joint employer" under the Fair Labor Standards Act (FLSA) due to disputed factual issues regarding its control over Perfect Day and its employees. Evidence suggests that Minjian, through its owner Tailiang Li, exercised common control over class members, as indicated by tuition deductions from paychecks and the intertwining of wages with amounts owed to Minjian. Several class members testified that Tailiang Li had supervisory authority over massage therapists, controlled their work, and possessed the authority to hire them. Additionally, massage therapists were required to undergo training at Minjian before working at Perfect Day. These factors could lead a jury to conclude that Minjian and Perfect Day were operated under the common control of Tailiang Li, justifying the denial of the Defendants' Motion for Summary Adjudication regarding Minjian's joint employer status under the FLSA.
Under California law, an entity can be deemed a joint employer if it meets specific criteria, including exerting control over wages, hours, or working conditions. Plaintiffs presented evidence raising material factual disputes regarding Minjian's control over the working conditions of massage therapists, contesting the Defendants' claim that Minjian lacked control over their hours and pay. Furthermore, the Plaintiffs argued that Minjian "suffered or permitted" the therapists to work, invoking specific legal definitions of these terms in employment law, thereby establishing triable issues of fact concerning joint employer liability under state law.
Liability is established based on the defendant's knowledge of and failure to prevent illegal work from occurring, as referenced in *Martinez*. While the defendants claim that Minjian was not negligent, plaintiffs present evidence indicating that Tailiang Li was involved in operations and likely aware of wage and hour violations at Perfect Day. Evidence includes Tailiang Li's role in hiring massage therapists and setting high employment standards, suggesting Minjian had the authority to control their work, thus potentially designating Minjian as a joint employer under California law. Consequently, the defendants' Motion for Summary Adjudication regarding Minjian’s employer status is denied.
Additionally, plaintiffs assert that Tom Schriner, Jade Li, Tailiang Li, Jin Qiu, Jun Ma, and Minjian could be held liable for claims against Perfect Day under an alter ego theory. Normally, corporations are viewed as separate entities from their stakeholders; however, this presumption can be challenged if a corporation is used to commit fraud or other wrongful acts. The alter ego doctrine allows courts to disregard corporate entities when necessary. To invoke this doctrine in California, the party must demonstrate a significant overlap in ownership and interests between the individual and the corporation, and that treating the corporation as a separate entity would result in an inequitable outcome. The determination of such unity of interest involves various factors considered by California courts.
Key indicators of potential alter ego liability include inadequate capitalization, commingling of funds and assets, and the failure to maintain corporate formalities. Individual Defendants Tom Sehriner, Tailiang Li, Jin Qiu, Huan Zou, and Does 1 through 10 are identified as owners or managers of Perfect Day Spa and Minjian Institute, having a unified interest that allowed them to dominate and control these entities. Evidence suggests that they commingled funds, diverted assets for personal use, treated corporate assets as their own, neglected to maintain proper corporate records, and failed to adequately capitalize the corporations. Such actions have harmed creditors, including the Plaintiffs and Class members, establishing a prima facie case of alter ego liability against these defendants.
Recognition of the separate corporate existence is deemed unjust due to the defendants’ bad faith actions. Consequently, the motion for summary adjudication by the defendants is largely denied, affirming their potential direct liability. Specifically, Tom Schriner, as a corporate officer, bears the burden to disprove the presumption of unity between himself and Perfect Day Spa, where treating their actions as solely corporate would lead to inequitable results. Additionally, under the single enterprise rule, liability can extend to affiliated companies.
Factors for the trial court to consider in assessing alter ego liability include the commingling of funds and assets, identical ownership interests, shared offices and employees, neglect of corporate formalities, and the use of one entity as a mere shell for the other. Evidence presented by plaintiffs indicates a unity of interest between Minjian and Perfect Day, particularly through Tailiang Li's management role and sole ownership of Minjian, his signing of documents for both entities, their shared physical location, and their mutual financial practices. Allegations suggest significant commingling of funds, implying the two entities functioned as one. Therefore, the defendants' motion for summary adjudication regarding Minjian's alter ego liability is denied.
Regarding Jin Qiu and Tailiang Li, the allegations in the second amended complaint (SAC) outline a lack of clear boundaries between the two corporate entities and their owners, establishing a prima facie case for alter ego liability. They must demonstrate at trial that a unity of interest exists and that treating their actions as separate from the corporation would lead to inequitable results. Consequently, the motion for summary adjudication concerning their alter ego liability is denied.
For Jun Ma, identified as a director of Perfect Day, the SAC's admitted facts show commingling of assets and disregard for corporate formalities, leading to a prima facie case of alter ego liability. He bears the burden at trial to counter the presumption of unity of interest with Perfect Day. Thus, the motion for summary adjudication regarding Ma's alter ego liability is also denied.
In contrast, Jade Li is not supported by the facts or state documents as an owner, director, or corporate officer of either Perfect Day or Minjian, indicating a lack of basis for alter ego liability against her.
Plaintiffs have failed to demonstrate a prima facie case of alter ego liability between Jade Li and Perfect Day, leading to the grant of Defendants’ Motion for Summary Adjudication regarding Jade Li. The court has issued several orders:
1. Defendant Huan Zou’s Motion to Dismiss is denied, and Plaintiffs must serve him again through A Perfect Day Spa within three days.
2. Plaintiffs’ Motion for Sanctions is partially granted and partially denied; specifically, certain paragraphs of the Second Amended Complaint (SAC) will be deemed admitted unless rebutted at trial by specified Defendants. Plaintiffs may submit a declaration for costs related to various motions, due within 14 days.
3. Defendants’ Motion for Summary Adjudication is granted in part, with summary judgment on all claims against Jade Li, while other Defendants may be found liable as alter egos or directly under the Fair Labor Standards Act (FLSA).
The document also notes that while the Schriners were officers of Perfect Day, they did not consistently follow corporate formalities, such as formal meetings or proper documentation of financial transactions. Additionally, there is ambiguity regarding Jade Li's authority over the massage therapists' pay rates. Plaintiffs also seek penalties under the Private Attorney General Act, and a motion to stay litigation pending arbitration review was denied. Lastly, there is uncertainty about whether legal documents were properly served to Mr. Zou in China.
Plaintiffs have requested various financial documents from Tom Schriner related to Minjian’s assets, including profit and loss statements and bank records, as well as any income or compensation received from Perfect Day and the Defendants. Defendants allege that Plaintiffs have not met their discovery obligations and have violated a court order from November 21, 2011. However, the Court does not need to address these allegations since Defendants have not filed for sanctions or demonstrated any prejudice from Plaintiffs' actions. The case experienced a stay due to Perfect Day’s bankruptcy from March 5 to March 14, 2012, and a subsequent stay for Tailiang Li and Jin Qiu’s bankruptcy from March 6 to March 19, 2012. Mr. Zou, who was granted asylum due to persecution in China, signed the bankruptcy petition and terminated his attorneys during the lawsuit, although he has been in China for most of the proceedings. The Court maintains authority to sanction for discovery misconduct under its inherent powers, particularly if a party acts in bad faith. The depositions of Tailiang Li, Jun Ma, Jin Qiu, and Anna Tong were ordered but not conducted due to Plaintiffs’ counsel canceling them, claiming a lack of necessary document production. Perfect Day provided an incomplete Excel spreadsheet instead of actual checks. The Court has rejected Defendants' objections to Plaintiffs’ motion for sanctions, citing non-compliance with Civil Local Rule 7-3(a). Additionally, the Court has previously deemed Jun Ma's testimony not credible, which reinforces the conclusion that he is part of a coordinated effort by all Defendants to obscure the true ownership and control of Perfect Day.
Plaintiffs sought a default judgment against defendants Jade Li and Jun Ma for perjury during depositions, rather than a breach of a discovery order. Although the Court found their testimony to lack credibility, it chose not to impose terminating sanctions at this time but reserved the right to revisit the issue if the defendants contest corporate ownership at trial. Any documents obtained from recent discovery regarding Perfect Day's accounting practices will be admissible at trial, and Plaintiffs retain the option to file motions regarding discovery abuses. The Court declined to sanction defense counsel related to costs from a subpoena for Martha Schriner, as counsel had not received prior warning of potential bad faith conduct. Most evidence submitted by Plaintiffs against the Defendants was sourced from third-party subpoenas, indicating that relevant material may have been withheld by the Defendants but still allowing the Plaintiffs to pursue their case effectively. Plaintiffs filed objections to a motion for summary judgment, which the Court did not consider for failing to comply with local rules. The excerpt also outlines two tests from the Ninth Circuit for determining "joint employer" status under the FLSA: an eight-factor economic reality test for vertical relationships and a description of horizontal relationships involving shared operations. Plaintiffs cited a test applicable to FEHA claims, which diverges from the wage and hour context.
The applicable test for state wage and hour claims is not recognized, as established in Martinez, 49 Cal.4th at 50. The California Supreme Court's ruling in Reynolds v. Bement, 36 Cal.4th 1075, precludes plaintiffs from holding a corporation's directors, officers, and shareholders personally liable for state law wage and hour violations. Plaintiffs acknowledge that individual defendants are not directly liable for these claims. However, Reynolds did not address personal liability under an alter ego theory but indicated that such a theory remains viable for recovering unpaid wages. Defendants' argument that a Rule 37 sanction motion cannot impede a summary judgment is countered by the unique circumstances of this case, where the court granted a Rule 37 sanction to deem certain facts admitted, limiting plaintiffs' ability to prove their liability theory due to defendants' noncompliance with discovery orders. Granting summary judgment to a party that has withheld crucial evidence would be unreasonable. The court rejects defendants’ claim that it cannot accept deemed facts as establishing a prima facie case for summary judgment. Additionally, Jin Qiu has contested her status as a corporate officer of Minjian, but plaintiffs have submitted state documents showing that she presented herself as the President of Minjian.
