MercAsia USA, LTD v. Zhu

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF INDIANA

SOUTH BEND DIVISION

MERCASIA USA LTD,

Plaintiff,

v. Case No. 3:17-CV-718 JD

3BTECH, INC.,

Defendant.

OPINION AND ORDER

Plaintiff MercAsia USA has moved the Court for leave to amend and supplement its first

amended complaint to add former defendant Jianqing “Johnny” Zhu back into the proceedings as

a co-defendant with current Defendant 3BTech, Inc. (DE 174.) The Court previously dismissed

Mr. Zhu from the case after it found that MercAsia’s amended complaint did not contain

sufficient allegations to pierce 3BTech’s corporate veil and proceed against Mr. Zhu as an

individual. (DE 46.) MercAsia claims that it has now compiled enough information through

discovery to warrant placing Mr. Zhu back into the lawsuit in his individual capacity. MercAsia

has additionally moved to seal its filings related to its motion to amend and supplement. For the

following reasons, the Court denies MercAsia’s motion to seal and grants MercAsia’s request for

leave to file its supplemental complaint.

I. Factual Background

This lawsuit at its core is based on MercAsia’s allegations that 3BTech is fraudulently

infringing on a patent licensed to MercAsia. But in the approximately three and a half years this

case has been pending, most of the parties’ time and effort has been put not into the merits of the

claims but instead into a long and contentious discovery process. While there are still several

motions pending tied to discovery disputes, MercAsia’s motion to file its supplemental

complaint indicates the parties may now be ready to finally advance this case to a consideration

of the merits of the underlying claims and bring the lawsuit closer to a resolution.

Plaintiff MercAsia is an Illinois corporation that markets a “one-touch, luxury wine

aerator” product that makes use of patented technology licensed to MercAsia. (DE 27 at 1, 3.)

Defendant 3BTech is an Indiana corporation that has allegedly marketed its own wine aerator,

called the Waerator, that uses the same patented technology licensed to MercAsia and has

attempted to steer consumers away from MercAsia’s product in favor of its own. 3BTech

allegedly uses a number of other corporate identities to sell and service the Waerator product,

including corporate entities named Better Choice Online and Warranty Pro. An additional

corporate entity, Zake IP Holdings, LLC, allegedly holds the trademark for the Waerator. Each

of these entities is allegedly connected to 3BTech and is allegedly controlled to some extent by

Mr. Zhu, who is 3BTech’s president. Mr. Zhu has also allegedly been involved in creating and

operating several other corporate entities in Indiana, some of which MercAsia believes have also

played a role in fraudulently infringing on its aerator technology patent. (Id. at 2.)

When MercAsia originally brought this lawsuit, it named both 3BTech and Mr. Zhu as

defendants. But Mr. Zhu quickly moved to dismiss the claims against him because he argued that

MercAsia had failed to allege facts that would justify piercing 3BTech’s corporate veil and

holding him individually liable for the patent infringement and misrepresentations. The Court

agreed with Mr. Zhu and dismissed the claims against him in a 2017 order. (DE 46.) The case

then proceeded with 3BTech as the sole defendant.

As already mentioned, progress in this case has been slow since that time. Both MercAsia

and 3BTech have traded numerous filings during discovery alleging bad faith litigation tactics,

misrepresentations, and failures to comply with discovery requirements. MercAsia filed two

different motions to compel discovery (DE 66; DE 106) because it alleged 3BTech was not

providing timely or sufficient responses. (DE 66; DE 106.) MercAsia also resorted to third-party

discovery involving, among others, Mr. Zhu and Zake Holdings. (DE 175 at 3–4.) The Court has

granted MercAsia’s first motion to compel in full and MercAsia’s second motion to compel in

part. (DE 146.) While the discovery process has been arduous, MercAsia alleges the process

allowed it to compile previously unavailable information about 3BTech, Mr. Zhu, and the other

related corporate entities that justifies a supplemental complaint placing Mr. Zhu back into the

case as a defendant based on a veil piercing theory. Part of that information is MercAsia’s

discovery on July 27, 2021, that Mr. Zhu was allegedly actively lying, through 3BTech’s

counsel, about not having been served during the discovery process in an effort to undermine

MercAsia’s ability to obtain full discovery. (DE 174-1 ¶ 9; DE 175-3; DE 175-4.) It was after

MercAsia received that July 27 correspondence from Mr. Zhu that MercAsia decided it had

gleaned enough information to seek to supplement its complaint and bring Mr. Zhu back into the

case in his individual capacity.

MercAsia filed its motion for leave to amend and supplement its complaint on August 27,

2021. It contemporaneously moved to seal the motion and the documents that accompanied and

supported it. (DE 173; DE 174.) The filing came approximately thirteen months after the prior

July 30, 2020, deadline the Court had set in its scheduling order for MercAsia to make any

amendments to its complaint. (DE 59 at 3.) The filing also came while fact discovery was still

ongoing, as the Court had extended the deadline for fact discovery to October 18, 2021. (DE

183.)

II. Discussion

The two motions this order covers, while related, require different analyses and the

application of different standards. The Court thus foregoes a separate standard of review section

in favor of a specific discussion of the applicable standards for each motion at the time the

motion is discussed below. The Court first addresses MercAsia’s motion to seal and then moves

to address MercAsia’s motion to file a supplemental complaint.

A. Motion to Seal

MercAsia filed its motion to seal seeking permission to seal six documents: (1)

MercAsia’s Motion to Amend and Supplement the First Amended Complaint; (2) MercAsia’s

Proposed First Supplemental Complaint; (3) MercAsia’s Brief in Support of Its Motion to

Amend and Supplement; (4) the Declaration of Brian F. McMahon in support of the motion; and

(5) all exhibits attached to the McMahon Declaration. (DE 173 at 1.) MercAsia explained that

counsel had not yet conferred about the need to seal the documents at the time MercAsia moved

to seal but that MercAsia filed anyway out of “an abundance of caution and as a courtesy” to

3BTech and its principals. (Id.) MercAsia only provided broad reasons for why a seal might be

necessary, stating that some of the information contained in the filings was produced during the

discovery process “under an expectation of confidentiality” and that some of the allegations

included in the filings “if made public, could injure the reputation of 3BTech and/or its

principals.” (Id. at 1–2.)

3BTech never responded to the motion. It later made clear that it viewed its lack of a

response as its indication that it agreed with MercAsia’s motion. (DE 180.) But MercAsia

viewed 3BTech’s non-response as a failure by 3BTech “to take any steps to preserve the

confidential nature of any information” contained in the documents. (DE 179 at 2). Thus, before

3BTech had clarified what it had intended with its lack of response, MercAsia filed a “reply” to

its own motion in which it sought to withdraw the motion because of 3BTech’s failure to take

action. (Id.) MercAsia cited no authority in its reply to justify it treating 3BTech’s lack of a

response as a failure to protect confidential information. (DE 179.) And 3BTech subsequently

argued that because its lack of response was meant to indicate agreement, it would be unfair to

interpret its failure to respond as a failure to protect confidential information. (DE 180 at 2.) The

Court notes the parties’ debate about how 3BTech’s lack of a response should be construed, but

the Court need not resolve that debate or determine whether MercAsia properly moved to

withdraw its motion because the Court would deny MercAsia’s motion anyway.

A party seeking to seal documents has the burden of specifically demonstrating to a court

why an order to seal is appropriate. When information is filed with a court, it may “influence or

underpin the judicial decision” and thus should be “open to public inspection unless” the

information “meets the definition of trade secrets or other categories of bona fide long-term

confidentiality.” Baxter Int’l, Inc. v. Abbott Labs., 297 F.3d 544, 545 (7th Cir. 2002). A motion

to seal thus has “no prospect of success” unless it analyzes “in detail, document by document, the

propriety of secrecy, providing reasons and legal citations.” Id. at 548. It is also not enough if

litigants simply argue that the contents of filings are private or should be kept confidential. See

Union Oil Co. of Cal. v. Leavell, 220 F.3d 562, 567–68 (7th Cir. 2000) (“Many a litigant would

prefer that the subject of the case . . . be kept from the curious (including its business rivals and

customers), but the tradition that litigation is open to the public is of very long standing.”);

Citizens First Nat’l Bank of Princeton v. Cincinnati Ins. Co., 178 F.3d 943, 945–46 (7th Cir.

1999) (warning courts not to allow parties “to seal whatever they want” and urging “a neutral

balancing of the relevant interests” connected to any good-cause determination presented by a

motion to seal).

MercAsia never pointed to any caselaw that supported sealing the specific documents and

never specifically explained why the contents of any of the documents warranted a seal. (DE

173; DE 179; DE 180.) That shortcoming prevents the Court from granting MercAsia’s motion

at the outset. See Baxter, 297 F.3d at 545. But that result is also clear from even a cursory review

of most of the documents themselves. The first three documents MercAsia asked the Court to

seal, MercAsia’s motion to supplement its complaint, the proposed supplemental complaint

itself, and MercAsia’s brief in support of its motion, are all either pleadings or briefing that

should be available to the public. Each document is simply an argumentative filing before the

Court and, while each may reference issues that 3BTech might wish were not being alleged,

contain arguments and allegations that are integral to the judicial resolution of the issues in this

case. See Union Oil, 220 F.3d at 567–68; see also Baxter, 297 F.3d at 545–46. Similarly, the

Court finds nothing in Mr. McMahon’s declaration attached to MercAsia’s brief in support of its

motion that discloses information or references issues that may be subject to seal based on

Baxter standards. (DE 173; DE 180); 297 F.3d at 545–46; see also In re Specht, 622 F.3d 697,

701 (7th Cir. 2010).

It is also unclear to the Court why the remaining documents, the exhibits attached to Mr.

McMahon’s declaration, would need to be filed under seal. They are simply examples of

discovery attempts also discussed in the parties’ briefing. Without any specific articulated basis

to seal the documents, the Court denies MercAsia’s motion with regard to these documents as

well. See Baxter, 297 F.3d at 545–46. However, the Court notes that the documents making up

the attachments do appear to have come from the discovery process between the parties, a

process MercAsia broadly argued the parties participated in with an understanding of

confidentiality. (DE 173 at 1; DE 175-2; DE 175-3). Thus, the Court, out of an abundance of

caution, will leave the documents filed as attachments to Mr. McMahon’s declaration sealed for

the time being. If either party believes the documents should remain sealed, that party must file a

new motion to seal the documents within fourteen days of the date of this order. The new motion

must explain with required specificity why the documents qualify for under-seal filing given the

Seventh Circuit’s standards. See Malibu Media, LLC v. Harrison, 2014 WL 127604, at *3 (S.D.

Ind. Dec. 31, 2014). If no motion is filed after fourteen days, the Court will unseal the

documents.

B. Leave to Supplement and Amend Complaint

Having dealt with the motion to seal, the Court moves to considering MercAsia’s motion

for leave to file its proposed supplemental complaint. Because MercAsia made its request at the

end of August 2021, approximately thirteen months after the July 30, 2020, deadline by which it

was allowed to amend its pleadings under the Court’s scheduling order, MercAsia must

independently demonstrate why its complaint and the Court’s prior scheduling order should be

amended at this later date. Under Federal Rule of Civil Procedure 15(d), a “court may, on just

terms, permit a party to serve a supplemental pleading setting out any transaction, occurrence, or

event that happened after the date of the pleading to be supplemented.” Saratoga Potato Chips

Co. v. Classic Foods, Inc., 2014 WL 2930495, at *2 (N.D. Ind. June 27, 2014). Leave to

supplement the pleadings should be granted “when there is no apparent reason for denying leave

such as undue delay, bad faith or dilatory motive on the part of the movant, repeated failure to

cure deficiencies by amendments previously allowed,” or “undue prejudice to the opposing

party.” Id. (citing Foman v. Davis, 371 U.S. 178, 182 (1962); Ind. Funeral Dirs. Ins. Trust v.

Trustmark Ins. Corp., 347 F.3d 652, 655 (7th Cir. 2003)). Further a party must show it has “good

cause” to amend a court’s prior scheduling order. Fed. R. Civ. P. 16(b)(4); Pringle v. Garcia,

2013 WL 1911483, at *2 (N.D. Ind. May 8, 2013). A district court has “substantial discretion” to

either permit or deny a motion to file a supplemental pleading. Chicago Reg’l Council of

Carpenters v. Vill. of Schaumburg, 644 F.3d 353, 356 (7th Cir. 2011).

MercAsia argued that it has met those requirements to justify filing its supplemental

complaint, but 3BTech opposed MercAsia’s motion for three reasons. First, 3BTech argued that

MercAsia could not demonstrate “good cause” because MercAsia had not been diligent in

bringing its new motion. (DE 178 at 2.) Second, 3BTech argued that MercAsia’s supplemental

complaint would be futile because it still fails to properly allege that Mr. Zhu could be

individually liable under a veil piercing theory. (Id. at 5–9.) And third, 3BTech argued that

allowing MercAsia’s proposed supplemental complaint would result in undue prejudice to both

itself and Mr. Zhu. (Id. at 9–10.)

1. Good Cause

The Court takes each argument in turn, starting with whether MercAsia has shown good

cause. The good cause standard that guides a court’s decision “primarily considers the diligence

of the party seeking amendment.” Trustmark Ins. Co. v. Gen & Cologne Life Re of Am., 424 F.3d

542, 553 (7th Cir. 2005). Moving parties must “show that despite their diligence the time table

could not have reasonably been met.” Tschantz v. McCann, 160 F.R.D. 568, 571 (N.D. Ind.

1995).

MercAsia pointed to five pieces of evidence it uncovered through discovery after the

prior scheduling order’s July 2020 deadline to amend as well as “Mr. Zhu’s continued apparent

reticence to honor his discovery obligations” despite MercAsia’s extensive efforts as the basis

for finding that it has proceeded diligently. (DE 175 at 5–6.) The five pieces of evidence

MercAsia discovered after the prior July 2020 scheduling order deadline include a 3BTech offer

of settlement from April 2021 that represented 3BTech was expecting to file for bankruptcy

protection, MercAsia’s commercial purchase of a Waerator product in April 2021 following

notification of the settlement offer describing the likelihood of bankruptcy, discovery materials

revealing an additional corporation MercAsia believes is involved in the infringing activity that

forms the basis of this case, 3BTech financial documents from 3BTech’s outside accountant, and

“[f]acially inconsistent 3BTech Annual Meeting Minutes.” (Id.) These documents, along with

Mr. Zhu’s ongoing individual involvement in the litigation by at times fraudulently directing

3BTech’s discovery and other decisions could not have been known before the prior July 2020

amendment deadline and only came to light because of MercAsia’s “persistence in discovery,”

MercAsia argued. (DE 175 at 7–9.)

3BTech countered by arguing that MercAsia’s discoveries were not actually new and did

not showcase diligence. 3BTech’s argument rested on the fact that all of the materials MercAsia

obtained through discovery and cited as the basis for its reinvigorated veil piercing theory were

known to MercAsia by the end of April 2021 at the latest. Despite that, 3BTech argued,

MercAsia waited until the end of August 2021 to file its motion to amend and supplement. (DE

178 at 2–4.) 3BTech provided several cases supporting the proposition that a party that waits too

long to file after having all of the information necessary to file cannot be found to have exercised

the required diligence to meet the good cause standard. (DE 178 at 3–4) (citing Alioto v. Town of

Lisbon, 651 F.3d 715 (7th Cir. 2011) (holding that a party that waits “more than two months to

file . . . after he had all the information he needed to file the motion” could not show good

cause); Eastern Minerals & Chems. Co. v. Mahan, 225 F.3d 330, 340 (3d Cir. 2000); Johnson v.

Mammoth Recreations, Inc., 975 F.2d 604 (9th Cir. 1992)). But importantly, 3BTech did not

challenge any of MercAsia’s arguments that 3BTech improperly made the discovery process in

this lawsuit drag on or that Mr. Zhu played a role in 3BTech’s lack of compliance with

MercAsia’s attempts to obtain full discovery. (DE 178 at 2–4.)

The Court’s consideration of the facts and arguments from both parties suggests that

MercAsia was properly diligent. 3BTech is right that MercAsia had the last of the documents on

which it relied in moving to file a supplemental complaint by April 2021, four months before it

actually filed, but those documents were not all that MercAsia claims to have relied on.

MercAsia also clearly stated it relied on 3BTech’s alleged continued obstructive conduct in the

discovery process and Mr. Zhu’s individual role in that conduct that became clear on July 27,

2021, when Mr. Zhu allegedly falsely claimed that MercAsia had never served him with a

discovery request. (DE 175-2; DE 175-3; DE 175-4; DE 181 at 3–5.) It was only at that time,

according to MercAsia, that it conclusively determined Mr. Zhu was engaging in activity that

justified veil piercing and realized that any further efforts to build evidence for a supplemental

complaint would be “conclusively futile.” (DE 181 at 1–3.) 3BTech does not dispute that Mr.

Zhu waited until the end of July 2021 to make that disclosure and it did not present any argument

to rebut that the time it took MercAsia to move to file its supplemental complaint is most

accurately measured from July 27, 2021, given MercAsia’s clear reliance on Mr. Zhu’s response

from that date instead of April 2021.

The approximately one month MercAsia took from the time of Mr. Zhu’s response to the

filing of its motion does not constitute undue delay and does not show a lack of diligence or bad

faith, particularly because fact discovery was still ongoing. One month is far shorter than any of

the timelines in the cases 3BTech cited in opposition to a finding of good cause. And the fact that

the filing came before the end of fact discovery makes this case further distinguishable from any

case that 3BTech cited in opposition. See Alioto, 651 F.3d 715; Edmonson v. Desmond, 551 F.

App’x 280 (7th Cir. 2014); Johnson, 975 F.2d 604; Eastern Minerals, 225 F.3d 330.

Additionally, the Court notes that there is ample evidence of MercAsia’s substantial diligence in

the lengthy discovery process this lawsuit has seen given evidence of MercAsia having served

numerous third-party discovery requests and having filed two motions to compel on 3BTech to

ensure it was able to continue to collect relevant information that 3BTech was, at best, reluctant

to provide. (DE 146; DE 181 at 3.) Based on that collective evidence, the Court finds that

MercAsia had good cause to file its supplemental complaint at the time that it did.

2. Futility

Having found MercAsia has shown good cause to file, the Court next moves to determine

whether 3BTech is correct that allowing MercAsia to amend would be futile. 3BTech argued that

MercAsia’s supplemental motion is futile because MercAsia’s new allegations are still

insufficient to justify piercing the corporate veil and thus would lead to MercAsia’s claims

against Mr. Zhu individually being dismissed if Mr. Zhu were to file a new motion to dismiss.

(DE 178 at 6, 11.) Therefore, the Court looks to the new allegations in MercAsia’s proposed

supplemental complaint to determine whether they are sufficient to potentially justify veil

piercing and could survive a motion to dismiss.

In determining whether to pierce the corporate veil, courts typically apply the law of the

state of incorporation. Secon Serv. Sys. v. St. Joseph Bank & Trust Co., 855 F.2d 406, 413 (7th

Cir. 1988); Chapel Ridge Invs., LLC v. Petland Leaseholding Co., 2013 WL 6331095, at *2

(N.D. Ind. Dec. 4, 2013). 3BTech is incorporated in Indiana, so the Court looks to Indiana’s

standard for piercing the corporate veil. In Indiana, “the burden on a party seeking to pierce the

corporate veil is severe.” Escobedo v. BHM Health Assocs., Inc., 818 N.E.2d 930, 933 (Ind.

2004). Indiana permits the corporate veil to be pierced “only where (1) the corporate form is so

ignored, controlled, or manipulated that it is merely the instrumentality of another, and (2) the

misuse of the corporate form constitutes a fraud or promotes injustice.” Id. at 934–35. Indiana

courts have identified a number of “guideposts” that can be considered in determining whether

those elements are met, including:

(1) undercapitalization; (2) absence of corporate records; (3) fraudulent

representation by corporation shareholders or directors; (4) use of the corporation

to promote fraud, injustice, or illegal activities; (5) payment by the corporation of

individual obligations; (6) commingling of assets and affairs; (7) failure to observe

required corporate formalities; or (8) other shareholder acts or conduct ignoring,

controlling, or manipulating the corporate form.

LDT Keller Farms, LLC v. Brigitte Holmes Livestock Co., 722 F. Supp. 2d 1015, 1031–32 (N.D.

Ind. 2010) (quoting Cmty. Care Ctrs., Inc. v. Hamilton, 774 N.E.2d 559, 564–65 (Ind. Ct. App.

2002). While the guideposts are not mandatory and need not all be satisfied to justify veil

piercing, they are helpful in reaching a decision. See Four Seasons Mfg., Inc. v. 1001 Coliseum,

LLC, 870 N.E.2d 494, 506 (Ind. Ct. App. 2007). Whether the party seeking to disregard

corporate existence has met its burden “is a highly fact-sensitive question.” CBR Event

Decorators, Inc. v. Gates, 962 N.E.2d 1276, 1282 (Ind. Ct. App. 2012).

A review of MercAsia’s proposed supplemental complaint in light of those standards

suggests to the Court that the supplemental complaint would not be futile. When faced with

MercAsia’s initial pleadings attempting to hold Mr. Zhu individually liable for 3BTech’s

fraudulent and infringing conduct, the Court dismissed MercAsia’s claims because MercAsia had

not alleged facts to establish many of the guideposts and did not allege that the fraudulent or

unjust conduct at issue in the lawsuit was tied to misuse of the corporate form. (DE 46 at 6–7.)

MercAsia has changed that in its supplemental complaint. (DE 174-1 ¶ 34.)

First, MercAsia clearly alleges that Mr. Zhu is controlling and manipulating 3BTech’s

corporate form, as well as the corporate forms of other entities with which he is involved, to

promote the fraud that gave rise to this lawsuit. The underlying fraud in this lawsuit is the

promotion of the Waerator product as a patented wine aerator in a way that infringes the patent

MercAsia holds for its own aerator product. (DE 174-1 ¶¶ 9–18.) MercAsia has specifically

alleged that Mr. Zhu is using 3BTech and other corporate entities he controls to pursue his own

interest in marketing the Waerator product and is manipulating the entities’ corporate forms “in

order to continue illicit sales of the Accused product, to minimize if not altogether avoid any

money judgment in this matter, and to otherwise improperly and prohibitively interfere with

MercAsia’s ongoing attempts to pursue its patent rights in this matter.” (DE 174-1 ¶ 34(a)(ii).) In

short, MercAsia is alleging that Mr. Zhu is using 3BTech as his corporate shield as he infringes

on MercAsia’s patent and has created and manipulated other corporate entities to ensure he can

escape individual liability, avoid paying any potential legal judgment, and continue infringing

even if 3BTech itself is barred from continuing to infringe. (Id.) The Court thus finds MercAsia

has alleged a causal connection between Mr. Zhu’s misuse of the corporate form and the

promotion of fraud and injustice in this case. See Escobedo, 818 N.E.2d at 933; Gates, 962

N.E.2d at 1282–83.

MercAsia has also alleged specific facts that support its veil piercing theory and fit into

the various categories Indiana courts have identified as guideposts for determining whether veil

piercing is warranted. See Escobedo, 818 N.E.2d at 933.

a. Undercapitalization

MercAsia alleges that Mr. Zhu has worked to deliberately undercapitalize 3BTech. (DE

174-1 ¶ 34(b).) “Capitalization is inadequate, as would support piercing the corporate veil, when

it is very small in relation to the nature of the entity’s business and the risks attendant to such

business.” Blackwell v. Superior Safe Rooms LLC, 174 N.E.3d 1082, 1096 (Ind. Ct. App. 2021),

transfer denied, 176 N.E.3d 443 (Ind. 2021). In support of its undercapitalization allegation,

MercAsia pointed to 3BTech’s proffered settlement communication on April 27, 2021, wherein

3BTech stated that it “expects to be filing for protection under the bankruptcy laws in the coming

months, as it has no sources of income, and few assets.” (DE 174-1 ¶ 34(b).) MercAsia

additionally cited to correspondence from 3BTech dated April 20, 2021, that confirmed that

3BTech “no longer has any assets to speak of.” (Id.) It then juxtaposed those statements with the

fact that 3BTech’s most recent tax returns from before those communication allegedly showed

3BTech had assets in excess of $26 million as well as the fact that MercAsia was still able to

purchase a Waerator device despite 3BTech having stated it has no sources of income. Those

allegations plausibly allege a potentially rapid decline in 3BTech’s assets, which could support

MercAsia’s overarching allegation that Mr. Zhu is manipulating 3BTech’s corporate form to

ensure Waerator devices continue to be marketed while avoiding potential legal liability.

b. Absence of corporate records

MercAsia also alleges that 3BTech fails to maintain adequate corporate records. (DE

174-1 ¶ 34(d).) The inadequacies, according to MercAsia, are apparent from Mr. Zhu’s alleged

intermingling of the business affairs of 3BTech and the other corporate entities he controls,

including generating sales records and communications that do not differentiate between each of

the entities’ products. They are also apparent, according to MercAsia, because 3BTech, under

Mr. Zhu’s control, fails to maintain a book of minutes for 3BTech’s annual board of directors

meetings. (DE 174-1 ¶ 34(d)(i)); see Cmty. Care Centers, Inc. v. Hamilton, 774 N.E.2d 559, 566

(Ind. Ct. App. 2002) (recognizing minutes from shareholder and board of directors meetings

must be kept as permanent records). Further, MercAsia alleged 3BTech does not maintain profit

and loss statements and completely lacks any internal accounting documents despite 3BTech and

Mr. Zhu having indicated that 3BTech has a separate accounting department and at least thirty-

three employees in its multi-million-dollar operation. (DE 174-1 ¶ 34(d)); see Community Care

Centers, 774 N.E.2d at 566 (“A corporation must also maintain appropriate accounting records”

and “financial statements furnished for the past three years under Indiana Code § 23-1-53-1”).

c. Fraudulent representation by corporation shareholders or directors

MercAsia alleges that Mr. Zhu has made fraudulent representations in his capacity as a

3BTech director. Specifically, it alleges inconsistencies in documents that Mr. Zhu executed for

3BTech that make it unclear who 3BTech’s directors actually are. MercAsia alleges the

inconsistent documents are an example of Mr. Zhu fraudulently trying to create evidence of

3BTech having annual director meetings when none actually occur. (DE 174-1 ¶ 34(f)(i).)

MercAsia additionally alleges that Mr. Zhu’s fraudulent activities as a director stretched into his

conduct during the course of this litigation when he, in his capacity as a 3BTech director, made

false statements about 3BTech’s inability to comply with some of MercAsia’s discovery

requests. (DE 174-1 ¶ 34(f)(ii).)

d. Use of the corporation to promote fraud, injustice, or illegal activities

The Court has already explored MercAsia’s allegations that would fit under this

guidepost earlier in the order. To recap, however, MercAsia has alleged that Mr. Zhu is trying to

use 3BTech and the other corporate entities he controls to: promote the false narrative to

potential customers that the Waerator product contains patented technology; direct business

away from MercAsia’s product that relies on truly patented technology; and avoid personal

liability for that conduct by playing a sort of shell game with the corporate entities he controls.

(DE 174-1 ¶ 34(a)(i)–(iv).)

e. Payment by the corporation of individual obligations

MercAsia also included allegations that Mr. Zhu “is using at least 3BTech, if not other

Zhu Entities, to pay off individual obligations.” (DE 174-1 ¶ 34(g).) MercAsia specifically

pointed to alleged evidence that Mr. Zhu directed 3BTech funds to another corporate entity as a

“loan” that was never properly recorded or paid back. (Id.) The “loan” was thus more of a grant,

according to MercAsia, and shows Mr. Zhu’s readiness to distribute assets between entities he

controls or to himself for personal use without adequate recordkeeping and under questionable

circumstances. (Id.)

f. Commingling of assets and affairs

MercAsia also alleges that Mr. Zhu commingles 3BTech’s assets and affairs with the

other corporate entities he controls. (DE 34(c).) “In order to be recognized as an entity separate

from its shareholders, a corporation should be operated as a distinct and separate business and

financial unit, with its own books, records, and bank accounts.” Community Care Centers, 774

N.E.2d at 569 (citing 1 William Meade Fletcher, Fletcher Cyclopedia of the Law of Private

Corporations § 41.50) (internal quotations omitted). “Indiana courts will not recognize

corporations as separate entities where evidence shows that several corporations are acting as

one.” Hipps v. Biglari Holdings, Inc., 136 N.E.3d 629, 638 (Ind. Ct. App. 2019). The alleged

commingling can be seen in part by the fact that MercAsia claims Mr. Zhu regularly conducts

3BTech business through multiple email accounts, the vast majority of which are either his own

personal accounts or accounts belonging to other corporate entities. (DE 174-1 ¶ 34(c)(ii).) The

commingled email accounts greatly impeded MercAsia’s ability to receive full discovery in this

lawsuit because it was often told that the information it was seeking was in emails outside of

3BTech’s control. (Id.) MercAsia further alleges, based on some 3BTech accounting records it

received, that 3BTech’s financial documents show commingling between at least three other

Zhu-controlled entities’ assets and potentially Mr. Zhu’s own accounts. (DE 174-1 ¶ 34(c)(iii).)

g. Failure to observe required corporate formalities

There are also allegations of failures by 3BTech, at the hands of Mr. Zhu, to observe

required corporate formalities. “Failure to observe corporate formalities includes such activities

as commencement of business without the issuance of shares, lack of shareholders’ or directors’

meetings, lack of signing of consents, and the making of decisions by shareholders as if they

were partners.” Community Care Centers, 774 N.E.2d at 569 (internal quotations omitted).

MercAsia alleges that 3BTech documents show “significant irregularities” in convening annual

shareholder meetings, including documents from 2017 that appear to establish that 3BTech held

its annual shareholder meeting two different times on the same day, that the meetings were held

without proper notice to shareholders, and that there was no waiver to justify the lack of notice.

(DE 174-1 ¶ 34(e).) MercAsia additionally alleges that “discovery improperly withheld from [it]

will show additional instances of Mr. Zhu and 3BTech failing to observe required corporate

formalities to promote fraud and injustice.” (Id.)

h. Other shareholder acts or conduct

Finally, MercAsia alleges other acts and conduct by Mr. Zhu in support of bringing Mr.

Zhu into the case in his individual capacity. Specifically, MercAsia pointed to a separate lawsuit

in which Mr. Zhu allegedly filed counterclaims against a prior counsel seeking relief in his

personal capacity and in his official capacity on behalf of 3BTech. MercAsia alleges that the

only entities that actually engaged the prior counsel were two other entities Mr. Zhu allegedly

controls, not 3BTech. (DE 174-1 ¶ 34(h).) Thus, Mr. Zhu’s filing of a counterclaim in his

individual capacity and in his official capacity on behalf of 3BTech shows that Mr. Zhu readily

ignores the corporate form not only of 3BTech but also of the other corporate entities he controls

and views harm done to the corporate entities he controls as harm done to himself personally.

(Id.)

* * *

The allegations in MercAsia’s proposed supplemental complaint fit into the established

guidepost categories for veil piercing and suggest the supplemental complaint would not be futile

as 3BTech has argued. (DE 178 at 6, 11.) If it were presented with a motion to dismiss as

3BTech proposes, the Court would have to construe MercAsia’s supplemental complaint in the

light most favorable to MercAsia while accepting all of MercAsia’s factual allegations as true

and drawing all reasonable inferences in MercAsia’s favor. Reynolds v. CB Sports Bar, Inc., 623

F.3d 1143, 1146 (7th Cir. 2010). Nothing in 3BTech’s futility arguments suggests 3BTech would

succeed on such a motion and the Court thus cannot find allowing the supplemental complaint

would be futile.

3BTech largely premises its futility argument on disputing the accuracy of the allegations

MercAsia makes in its proposed supplemental complaint. (DE 178 at 6.) For example, 3BTech

responded to MercAsia’s allegations about Mr. Zhu commingling his personal assets with

3BTech’s assets by broadly stating, without any citation, that “MercAsia has no evidence” of

commingling and that “Mr. Zhu and 3BTech have separate bank accounts.” (DE 178 at 9.)

3BTech also offered broad denials of various other MercAsia allegations, stating that it “follows

corporate formalities,” that it “maintains formal business records,” that it “is not logical” that Mr.

Zhu would undercapitalize 3BTech simply to avoid liability in this lawsuit, and that it and Mr.

Zhu are legally using alternate corporate entities to complete service work and hold intellectual

property for the Waerator product. (DE 178 at 7–9.) The Court acknowledges that each of these

arguments, assuming there are facts to support them, may be valid and ultimately defeat

MercAsia’s attempt to hold Mr. Zhu individually liable under a veil piercing theory. But those

arguments, which simply dispute the accuracy of MercAsia’s allegations, must be saved for, at

earliest, the summary judgment stage when the Court can more readily address the facts that each

side can bring to either support or defeat MercAsia’s claims. A disagreement with the allegations

or a feeling that the facts will eventually show them to ring hollow is not enough to succeed at

the motion to dismiss stage and show futility in this case. See Reynolds, 623 F.3d at 1146.

For now, the Court finds that MercAsia’s factual allegations already described in detail

above, when taken together, plausibly suggest that piercing the corporate veil and holding Mr.

Zhu individually liable in this lawsuit may be appropriate. The allegations sufficiently suggest

that the corporate form may be so ignored, controlled, or manipulated that it is merely the

instrumentality of Mr. Zhu and that Mr. Zhu’s personal misuse of the corporate form plausibly

has caused the perpetration of the fraud at the center of this case and would promote injustice by

allowing him to escape full liability for his conduct by hiding behind a corporate shield. See

Escobedo, 818 N.E.2d at 934–35. A renewed motion to dismiss the claims against Mr. Zhu as an

individual would be denied based on the strength of MercAsia’s allegations and the other reasons

described above in this order and itself would be futile. 3BTech’s arguments against MercAsia’s

allegations can be more fully considered at a later stage of these proceedings when the Court can

properly dig into the facts underlying the “highly fact-sensitive inquiry” that is an attempt to

pierce the corporate veil. See Four Seasons, 870 N.E.2d at 504.

3. Undue Prejudice

Having resolved 3BTech’s futility argument in favor of allowing MercAsia to file the

supplemental complaint, the Court turns finally to 3BTech’s argument that it and Mr. Zhu would

be unduly prejudiced by MercAsia’s filing of the supplemental complaint. 3BTech contends that,

because fact discovery has now closed, neither it nor Mr. Zhu “would have any opportunity to

propound any discovery relating to the ‘corporate veil’ factual issues raised in the proposed”

supplemental complaint if MercAsia is allowed to file. (DE 178 at 9.) 3BTech stated that its

concern specifically stems from MercAsia’s allegations about activities related to the other

corporate entities with which Mr. Zhu is involved. (Id. at 10.)

3BTech’s prejudice argument falls short though. All of the “new” information MercAsia

pointed to in its supplemental complaint “is entirely in the exclusive possession, custody, and

control of Mr. Zhu and his companies” and was only brought to MercAsia’s attention because

3BTech, Mr. Zhu, or a third-party entity with which Mr. Zhu is involved produced that

information to MercAsia during discovery. (DE 181 at 8–9.) 3BTech and Mr. Zhu, who has kept

up a presence in this litigation despite no longer being named as an individual defendant (DE 46;

DE 89-2 ¶¶ 6–7; DE 150-1 ¶ 2), thus do not need to propound any formal discovery on MercAsia

or the other corporate entities under the circumstances because they either have the information

already or have ready access to it given Mr. Zhu’s involvement with the third-party corporate

entities. Additionally, any potential extra time it takes to gather that information will not be

unduly prejudicial to 3BTech or Mr. Zhu because there are no impending deadlines, like a trial

date, to meet and because the proceedings in the case have already been anything but prompt due

in large part to 3BTech and Mr. Zhu’s reluctance to fully participate in discovery. See Pierce v.

Sys. Transp., Inc., 2004 WL 2481038, at *4 (N.D. Ill. Nov. 2, 2004) (finding no undue prejudice

in part because the defendants had contributed to a lack of timeliness in the three-year-old case

and because there was no trial date set). Based on those facts, the Court cannot find that 3BTech

and Mr. Zhu would be unduly prejudiced by MercAsia’s filing of its supplemental complaint.

III. Conclusion

For the foregoing reasons, the Court DENIES MercAsia’s motion to seal (DE 173) and

GRANTS MercAsia’s motion for leave to amend and supplement its first amended complaint

(DE 174). The Court DIRECTS the Clerk to unseal docket entries 174, 174-1, and 174-2 as well

as docket entries 175 and 175-1. Docket entries 175-2, 175-3, and 175-4 will remain sealed for

the time being and will be unsealed if neither party files a new motion to seal within fourteen

(14) days of the date of this order. The Court further DIRECTS the Clerk to file MercAsia’s

attached First Supplemental Complaint as a separate docket entry (DE 174-1).

SO ORDERED.

ENTERED: March 24, 2022

/s/ JON E. DEGUILIO

Chief Judge

United States District Court