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Chengdu Gaishi Electronics, Ltd. v. G.A.E.M.S., Inc.

Court of Appeals of Washington, Division 1

December 30, 2019

CHENGDU GAISHI ELECTRONICS, LTD., a company incorporated under the laws of China, and ZHIZHENG WANG, an individual, for the WANG GROUP, Appellants,
G.A.E.M.S., INC., a Washington State corporation; DWG ACQUISITION COMPANY, LLC, a Washington State limited liability company; DEAN MERCIER and JANE DOE MERCIER, husband and wife and the marital community composed thereof; JOHN SMITH and JANE DOE SMITH, husband and wife and the marital community composed thereof; and DECATHLON ALPHA, III, L.P., a Delaware limited partnership, Respondents.


          Dwyer, J.

         Chengdu Gaishi Electronics, Ltd. (Chengdu) and the Wang Group brought this suit, seeking repayment of a debt, against G.A.E.M.S., Inc. (GAEMS), DWG Acquisition Company LLC (DWG), Dean Mercier and John Smith, two of DWG's board members, and Decathlon Alpha III, L.P. (Decathlon), another of GAEMS's creditors. The trial court denied Chengdu's motion to appoint a receiver. It then granted DWG's motion to dismiss for insufficiency of service of process. Chengdu and the Wang Group appeal, averring that DWG waived this affirmative defense and that the trial court erred in denying the motion for receivership.[1]

         In their joint brief, respondents GAEMS, DWG, and Mercier claim that the orders from which the appeal was taken are not appealable and that the appeal should be dismissed. On the other hand, respondent Decathlon views the appeal as properly taken but urges affirmance of the trial court rulings. We view the matter as properly appealable and hold that the defenses of insufficiency of process and insufficiency of service of process were waived, thus necessitating reversal of the order of dismissal. We also hold that the trial court did not abuse its discretion in denying the motion to appoint a receiver.



         In 2017, GAEMS entered into financing agreements with Chengdu, an electronics manufacturing company. That same year, DWG, GAEMS's parent company, entered into a loan agreement with the Wang Group, a consortium of several Chinese financiers led by Qiqi "Denny" Wang, with GAEMS as a guarantor. Wang, a former officer and director of GAEMS, remains a 30 percent owner of DWG.

         In June 2017, GAEMS entered into another loan agreement, this time with Decathlon. Simultaneously, DWG, GAEMS, the Wang Group and Decathlon entered into a "Subordination and Intercreditor Agreement," pursuant to which the Wang Group subordinated its loan to Decathlon's and, with limited exceptions, agreed that no payments would be made toward the Wang loan until full payment was made on the Decathlon loan. DWG, the Wang Group, and GAEMS also executed a letter agreement amending their prior loan agreement to reflect the subordination agreement's terms and confirm that the Decathlon loan would be paid off prior to the Wang Group loan.

         In October 2017, the Wang Group sued GAEMS and two DWG board members seeking payment on its loan. Later, the Wang Group voluntarily dismissed the case. However, 11 months later, the Wang Group filed this lawsuit, naming Chengdu as an additional plaintiff. The defendants in this action are GAEMS, the previously-sued DWG members, Decathlon, and DWG.

         In October 2018, Chengdu moved for the trial court to appoint a receiver to assume control of GAEMS and DWG. In its motion, it argued that GAEMS was insolvent and that Chengdu had a probable right to GAEMS's property. GAEMS and DWG, in response, disputed these contentions and presented evidence that GAEMS remained able to pay obligations as they came due, had future prospects, and was not an appropriate candidate for receivership. Separately, Decathlon opposed receivership on the basis that, as the senior lender, it had priority over the Wang Group to assert rights in GAEMS's property. After considering the parties' extensive briefing, but without comment or explanation, the trial court entered an order declining to appoint a receiver.

         Chengdu filed a motion for reconsideration of the trial court's denial of its motion to appoint a receiver, alleging that the trial court had used the incorrect test to determine whether GAEMS was insolvent, and requesting further explanation as to why the motion was denied.


         Initially, Chengdu's summons and complaint had referenced DWG, in both the caption and in the body of the complaint, as "DWG Acquisition, LLP." However, the correct name of the entity was "DWG Acquisition Company LLC." After this error was called to plaintiffs' counsels' attention, Chengdu served on DWG an amended summons and complaint, both of which referenced DWG as "DWG Acquisition Company, LLC."[2] In addition, the amended complaint still contained an isolated reference to "DWG Acquisition, LLP."[3] On November 13, 2018, Chengdu filed a praecipe, or errata sheet, seeking to replace the first page of its amended complaint. It did not style this action as a motion to amend. Indeed, it did not attempt to justify this action by referencing any court rule or case authority.

         That same day, DWG filed a motion to dismiss Chengdu's claims against it, based on the plaintiffs' failure to correctly identify it on the summons and complaint and the plaintiffs' failure to correct the error in the amended complaint. Then, while its motion was pending, DWG joined in GAEMS's counterclaims against Chengdu and filed a cross claim against Denny Wang, who, until that point, had not been named as a party.

         Chengdu opposed the motion to dismiss and, in its pleading in opposition to the motion, indicated its willingness to move to amend its amended complaint to properly name all parties. Nevertheless, on December 3, 2018, the trial court, without explanation, granted DWG's motion to dismiss.

         Meanwhile, prior to entry of the dismissal order, Chengdu filed its motion to reconsider the trial court's denial of its motion to appoint a receiver. On the same day that the trial court granted DWG's motion to dismiss, it also denied the motion for reconsideration, stating:

THIS MATTER having come before the Court on Plaintiffs' Motion for Reconsideration and/or Clarification of Court's Denial of Motion to Appoint General Receiver (the "Motion"), Motion is DENIED.*
This case was dismissed on December 3, 2018 for insufficiency of service of process.

Chengdu appeals.


         Chengdu first assigns error to the trial court's dismissal of its action on the stated basis of insufficient service of process.[4] This decision was erroneous, it asserts, because a motion based on insufficient service of process is an allegation that the trial court lacks personal jurisdiction over the defendant, and any objection by DWG to the trial court's personal jurisdiction over it was waived when it sought affirmative relief in the form of a cross claim. We agree.

         "Proper service of the summons and complaint is a prerequisite to a court's obtaining jurisdiction over a party." Harvey v. Obermeit, 163 Wn.App. 311, 318, 261 P.3d 671 (2011). Whether service of process was proper is a question of law that this court reviews de novo. Heinzig v. Seok Hwang, 189 Wn.App. 304, 310, 354 P.3d 943 (2015). A party may waive a claim of lack of personal jurisdiction by requesting the court to grant affirmative relief. Grange Ins. Ass'n v. State, 110 Wn.2d 752, 765, 757 P.2d 933 (1988). As this court has stated:

"[A] party, when he counterclaims, cross-claims, or impleads a third party, is seeking affirmative relief and is thereby invoking the jurisdiction of the court. He cannot at the same time deny that jurisdiction."

Kuhlman Eguip. Co. v. Tammermatic, Inc., 29 Wn.App. 419, 424, 628 P.2d 851 (1981) (quoting Globig v. Greene & Gust Co., 193 F.Supp. 544, 549 (E.D. Wis. 1961)).

         It matters not that the counterclaims asserted may have been of the compulsory variety. Although the assertion of compulsory counterclaims does not waive the defense of lack of personal jurisdiction, Kuhlman Equip., 29 Wn.App. at 423-24 n.4, "[u]nder CR 13(g), the assertion of a cross claim is permissive" as opposed to compulsory. Krikava v. Webber, 43 Wn.App. 217, 221, 716 P.2d 916 (1986) (citing Nautilus, Inc. v. Transamerica Title Ins. Co. of Wash., 13 Wn.App. 345, 353, 534 P.2d 1388 (1975)). By asserting its cross claim, DWG sought affirmative relief, thus invoking the jurisdiction of the court. By invoking the jurisdiction of the court, it waived its defense of lack of personal jurisdiction over it. The trial court erred by not so ruling.[5]


         Chengdu next asserts that the trial court erred by declining to appoint a receiver over GAEMS's affairs. This is so, Chengdu argues, because documentation before the trial court showed that the total of GAEMS's liabilities exceeded the total of GAEMS's assets. For their part, GAEMS and Decathlon dispute that this reflected the proper analysis to determine whether GAEMS was solvent.[6] Further, they correctly note that solvency is not the sole consideration before a trial court on a motion for appointment of a receiver, and the trial court's discretion to appoint or not appoint a receiver is not dependent solely on this measure. GAEMS and Decathlon have the better arguments.

         A receiver is "a person appointed by the court as the court's agent, and subject to the court's direction, to take possession of, manage, or dispose of property of a person." RCW 7.60.005(10). Washington statutes identify 40 circumstances in which a receiver may be appointed; in almost every circumstance, the trial court must make the determination that appointing a receiver "is reasonably necessary and that other available remedies either are not available or are inadequate." RCW 7.60.025(1). The appropriate item in RCW 7.60.025's list of scenarios provides for such appointment

(i) In an action against any person who is not an individual . . . if that person is insolvent or is not generally paying the person's debts as those debts become due unless they are the subject of bona fide dispute, or ...

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