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Schmitz v. Diao

United States District Court, Tenth Circuit

November 7, 2013

NORMAN M. SCHMITZ and STEVEN R. DIEHL, Individually, On Behalf of All Others Similarly Situated, and Derivatively On Behalf of Nominal Defendant


SCOTT W. SKAVDAHL, District Judge.

This matter came before the Court on three motions to dismiss: (1) Defendants Xiqing Diao, Wenhua Guo, Christopher Patrick Holbert, William D. Suh, Lianjun Cai, Punan Xie, and Sik Siu Kwan's "Motion to Dismiss the Complaint Pursuant to Rule 12(b)(2)" [ECF No. 77]; (2) Defendants Xiqing Diao, Wenhua Guo, Christopher Patrick Holbert, William D. Suh, Lianjun Cai, and Punan Xie's "Motion to Dismiss the Complaint Pursuant to Rule 12(b)(1) and 12(b)(6)" [ECF No. 79]; and (3) Defendant Sik Siu Kwan's "Motion to Dismiss the Complaint" [ECF No. 81]. Having considered the motions, the memoranda submitted in support and opposition, the record herein, and being otherwise fully advised, the Court FINDS and CONCLUDES that it has subject matter jurisdiction but lacks personal jurisdiction over the Individual Defendants.


1. Nominal Defendant Duoyuan Printing, Inc. (hereafter "Duoyuan" or "the corporation") is incorporated in Wyoming with its principal place of business located in Beijing, China. It supplies offset printing equipment solely in the People's Republic of China.

2. Plaintiffs Schmitz and Diehl were shareholders in Duoyuan at the time of the actions complained of, and they have continuously held shares in Duoyuan since. Plaintiff Schmitz is a resident of the State of Missouri while Plaintiff Diehl is a resident of the State of Colorado.

3. The Individual Defendants[1] are all current or former officers and/or directors of Duoyuan. All Individual Defendants resided and continue to reside in China, Hong Kong (which is an autonomous territory falling within the sovereignty of the People's Republic of China), or Africa.

4. Plaintiffs filed a two-count complaint on April 27, 2011. Count I is a shareholder derivative action that seeks recovery of damages, alleging the Individual Defendants breached their fiduciary duties to the corporation and their breaches injured the corporation by reducing its stock value. Count II alleges a class action on behalf of all persons who held stock in the corporation and requests the Court to order the directors to hold an annual shareholder meeting, which they have not done since October 2009 in violation of Wyoming Statute § 17-16-701(a).


5. Taken in the light most favorable to Plaintiffs, as required at this stage in the litigation, Dudnikov v. Chalk & Vermilion Fine Arts, Inc., 514 F.3d 1063, 1068 (10th Cir. 2008), the facts establish that Duoyuan was a privately-held corporation first incorporated in Wyoming in 2005 under the name "Asian Financial, Inc." In late 2009, after several allegedly profitable years, Asian Financial, Inc. changed its name and held an Initial Public Offering (IPO), where its corporate stock became available for public purchase on the New York Stock Exchange under the ticker symbol "DYP." Following the IPO, Duoyuan reported continued positive financial results in February 2010 and May 2010.

6. In March 2010, in more apparently good news, Duoyuan announced it was changing its independent auditor from the relatively small and unknown Frazer Frost, LLP, to the much larger Deloitte Touche Tohmatsu CPA Limited, an affiliate of a "Big Four" auditing firm.

7. In late summer of 2010, Deloitte encountered several serious discrepancies in Duoyuan's financial records. Deloitte informed the corporation and its audit committee of the inconsistencies and requested more information in an attempt to resolve the issues. Duoyuan's corporate officers and directors either refused to tender the information requested or stated that they did not have access to the information sought by Deloitte. Deloitte then questioned whether it could rely on future representations from the corporation's officers and directors.

8. In early September 2010, a meeting of the corporation's board members and audit committee members resulted in Duoyuan terminating the auditing services of Deloitte. Duoyuan announced on September 6, 2010, that it had fired Deloitte. Duoyuan has yet to retain a new independent auditor. The board and committee members who had voted against dismissing Deloitte resigned from their positions in the corporation within the next few days.

9. In October 2010, the U.S. Securities and Exchange Commission initiated a formal investigation into whether the corporation had committed securities fraud. Additionally, following the dismissal of Deloitte, the corporation was unable to fulfill its obligations under the SEC to file its required annual and quarterly reports, resulting in it being delisted from the New York Stock Exchange. Since Duoyuan's public troubles began, its stock value has plummeted, from a high of $11.00 per share to a current value of approximately $0.04 per share.

10. Plaintiffs spent much of 2011 and 2012 trying to obtain service on the Individual Defendants. The parties also spent much of 2012 in mediation negotiations, which have proved unsuccessful. Plaintiffs ultimately served Individual Defendants in May 2013 by alternative service, as permitted by the Court [ECF Nos. 55, 56, 58.] In answering the complaint, the Individual Defendants filed the instant motions to dismiss.


11. The Court will address each motion to dismiss separately. When faced with a challenge to both subject matter and personal jurisdiction, "there is no unyielding jurisdictional hierarchy, " but, "[c]ustomarily, a federal court first resolves doubts about its jurisdiction over the subject matter...." Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 578 (1999).


12. Individual Defendants filed a motion to dismiss under F.R.C.P. 12(b)(1) for lack of subject matter jurisdiction and 12(b)(6) for failure to state a claim upon which relief could be granted.[2] The Court will only address Individual Defendants' claim of lack of subject matter jurisdiction at this time, not answering the question of whether Plaintiffs stated a claim upon which relief could be granted because it lacks personal jurisdiction over Individual Defendants.

A. Applicable Law

13. Individual Defendants contend this Court lacks subject matter jurisdiction over this action because Plaintiffs lack standing to sue. Absent a plaintiff with proper standing, the Court lacks subject matter jurisdiction over the plaintiffs' claims. See Warth v. Seldin, 422 U.S. 490, 501-02 (1975) (federal court's jurisdiction may be invoked only by a party with proper standing). Once challenged, the plaintiff has the burden to demonstrate that it has standing. Lujan v. Defenders of Wildlife, 504 U.S. 555, 561 (1992).

14. Individual Defendants assert that Plaintiffs lack standing to bring this shareholder derivative because they "fail to allege the date that they acquired stock and give no indication they purchased in the IPO." (Defs.' Brief Supporting Mot. Dismiss Pursuant to 12(b)(1) and 12(b)(6) at 5-6, ECF No. 80.) This constitutes a facial attack on the complaint's allegations as to the existence of subject matter jurisdiction, which requires the Court to accept the allegations in the complaint as true. Holt v. United States, 46 F.3d 1000, 1002 (10th Cir. 1995).

15. Wyoming statutory law provides:

A shareholder may not commence or maintain a derivative proceeding unless the shareholder:
(i) Was a shareholder of the corporation at the time of the act or omission complained of, or became a shareholder through transfer by operation of law from one who was a shareholder at the time; and
(ii) Fairly and adequately represents the interests of the corporation in enforcing the right of the corporation.

Wyo. Stat. Ann. § 17-16-741(a) (2013). Similarly, the federal rules require a plaintiff to be a "shareholder or member at the time of the transaction complained of, or that the plaintiff's share or membership later devolved on it by operation of law." Fed.R.Civ.P. 23.1(b)(1).

B. Analysis

16. The Court need not spend much discussion on this issue. In their Complaint, each named Plaintiff specifically alleges he "is a shareholder of nominal defendant Duoyuan, was a shareholder of Duoyuan at the time of the wrongdoing alleged herein, and has been a shareholder of Duoyuan continuously since that time." (Compl. ¶¶ 9-10, ECF No. 1 at p. 4.) Accepting Plaintiffs' assertions as true, as is required here, the Court finds that Plaintiff's have satisfied ...

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