Special Masters, Receivers, and the Duty to Marshal Evidence

• Publication year: 2006
• Pages: 3

Utah Bar Journal Volume 19.

Vol. 19, No. 3 - #3. Special Masters, Receivers, and the Duty to Marshal Evidence

Utah Bar Journal
Volume 19, No. 3
May/June 2006

May 30, 2006

Special Masters, Receivers, and the Duty to Marshal Evidence: Chen v. Stewart

by Jessica G. Peterson

I. INTRODUCTION

During the summer of 2004, the Utah Supreme Court was invited to revisit special master law, receiver law, and Utah's duty of marshaling the evidence, in a case of family corporate contention of overwhelming proportions. The defendants contended that the trial court's appointment of an individual to act as an interim CEO, vested with the judicial immunity of a special master, was unconstitutional The court refused to place form over substance, and did not allow choice of words and technical meaning to outweigh what it believed was in substance a just result. The unique facts in Chen v. Stewart probably will not serve as useful precedent for another close corporation's falling out However, the case has already been cited to explain Utah's strict marshaling standard, and Chen v Stewart is a valuable primer on Utah special master, receiver, and marshaling law.

II. CHEN V. STEWART

A. Facts of the Dispute1

On January 10, 2001, Jau-Fei Chen ("Dr. Chen"), the youngest of five siblings, filed a lawsuit against her sister, Jau-Hwa Stewart ("Ms. Stewart") bringing to the Court what Chief Justice Christine Durham later characterized as a "particularly vicious dispute." Chen v Stewart, 2004 UT 82 ¦5 100 P.3d 1177. Dr. Chen amended the complaint and added E. Excel International, Inc. as a defendant on January 18, 2001. She claimed breach of fiduciary duties, corporate waste, and corporate wrongdoing. The Utah Supreme Court explained, "[o]ver 200 pages of findings of fact and conclusions of law entered by the trial court narrate a tale of intrigue, deceit, and family strife of surprising proportions." Chen v. Stewart, 2004 UT 82, ¦2.

Dr. Chen was President of E. Excel, a manufacturer of nutritional supplements and skin care products sold both nationally and internationally. In 1995, Dr. Chen transferred her interest in E. Excel to her three minor children and to her sister, Ms. Stewart. Ms. Stewart, alleging to control 100% of the shares of E. Excel, voted Dr. Chen off the board of directors and replaced her with their mother, Hwan Lan Chen ("Madam Chen"). The new board removed Dr. Chen as president of E. Excel and installed Ms. Stewart as President. Ms. Stewart and Madam Chen required all of E. Excel's distributors to sign new contracts with E. Excel forbidding any business activity with Dr. Chen. Ms. Stewart also began establishing new distributors to compete with and replace existing distributors, still loyal to Dr. Chen, in violation of the Contracts E. Excel had with existing distributors providing exclusive territories.

At the trial level Fourth District Judge Fred D. Howard issued Dr. Chen's requested temporary restraining order on June 10, 2001, prohibiting Ms. Stewart from creating new competition for E. Excel or taking away any of its current business. While the temporary restraining order was in place, Ms. Stewart and third party defendants allegedly tried to sabotage E. Excel in violation of the order.2 Judge Howard removed Ms. Stewart as President of E. Excel.

Judge Howard subsequently appointed Mr. Larry Holman as interim CEO of E. Excel. The order said the CEO could not participate in the case as an active party litigant. When Dr. Chen's counsel noted that their suggested candidates for interim CEO wanted to avoid personal liability for their acts as CEO, the trial court agreed to also designate Mr. Holman as a "special master" so he could have judicial immunity in the proceedings. The court appointed Mr. Holman to be the manager of E. Excel and gave him the judicial immunities and title of special master: "Mr. Holman is given complete executive authority in his role as chief executive officer and special master." In this role, Mr. Holman was authorized to engage in ex parte communications with both parties and witnesses.

B. Mr. Holman's Acts as Special Master and Interim CEO

On May 11, 2001, CEO Holman requested powers of a party litigant and "master claims settler." Judge Howard again expanded the powers of the Special Master and authorized him to act as an active party litigant. Judge Howard authorized him to direct and control E. Excel's litigation and possible settlement. Mr. Holman retained litigation counsel to help him as an active party litigant. On June 1, 2001, Judge Howard approved Mr. Holman's decision to enter a Master Settlement Agreement with Dr. Chen and other third party allies, and Judge Howard gave Mr. Holman authority to execute the agreement. The agreement settled all litigation between E. Excel and Dr. Chen. It further settled all of E. Excel's other litigation.3 It also restructured E. Excel, forcing Ms. Stewart, the sister, and Madam Chen, the mother, out of any type of ownership or control. The agreement changed the relationship with the territorial owners, allowing them to manufacture and obtain E. Excel products using their own manufacturer. There was no disinterested party to approve the agreement. Mr. Holman recommended Judge Howard approve the report because Mr. Holman submitted it in his capacity as special master. The trial judge did approve the actions of Mr. Holman, stating "this Court accepts the conclusion of the business judgment made by the Special Master."

Mr. Holman proceeded to authorize E. Excel to file an Amended Cross-Claim/Third Party Complaint and Motion for Preliminary Injunction against Ms. Stewart and Madam Chen. This was the first time Madam Chen was named as a party to the case.

Judge Howard granted a Preliminary Injunction in favor of E Excel based on 110 pages of Preliminary Injunction findings adopted from the Special Master's findings. Ms. Stewart...