A Brief Discussion of SPC’s First Case Involving a Malicious Lawsuit
Recently the Supreme People’s Court (the “SPC”) published the lawsuit between Liaoning Telaiwei Property Development Co., Ltd. (“TLW Company”) and Shanghai Oubao Biotechnology Co., Ltd. (“OB Company”), in which the SPC applied Article 112 of the Civil Procedure Law for the first time. The SPC dismissed the action by holding that both parties committed abuse of process by participating in a malicious (i.e. false and fabricated) lawsuit, and imposed a fine of RMB500,000 on each party. This is the first case in which the SPC has ruled on malicious lawsuits in judicial practice since this offense was formally established in the Provisions of the Supreme People’s Court on Several Issues Concerning the Application of the Law in the Trial of Private Loan Disputes.
This case first originated from a contract dispute between TLW Company and an individual named Tao Xie. In 2006, Tao Xie signed an agreement with TLW Company in which the parties agreed to cooperate in a real estate development project. Specifically, the parties agreed that upon completion of the project, TLW Company would return Tao Xie’s investment and distribute profits based on the two parties’ investment ratio. Later, Tao Xie sued TLW Company, claiming that TLW Company did not distribute the profits as agreed and demanding that TLW Company return Tao Xie’a initial investment together with the agreed-upon profits. During the trial, Tao Xie discovered that TLW Company had already been sued by OB Company, that the judgment in that case had already taken effect, and that TLW Company’s assets had already been seized by the court. Furthermore, Tao Xie discovered through an investigation that OB Company was substantially affiliated with TLW Company. Consequently, Tao Xie filed a complaint with the Liaoning Provincial Higher People’s Court. On January 4th, 2012 the Liaoning Higher Court issued a retrial ruling that revoked the trial judgment and dismissed OB Company’s claims; however, the ruling did not mention whether or not the lawsuit at issue had been malicious. OB Company objected to the retrial ruling and appealed to the SPC. During the trial and the investigation, the SPC held that since OB Company and TLW Company were both under the control of the same two people, since the senior executives and ordinary employees of the two companies were largely co-extensive, and since bank transfers between the companies were circulating between or among two or more bank accounts, the inter-enterprise loan lawsuit between OB Company and TLW Company was malicious. The SPC therefore imposed a fine of RMB500,000 on each of the parties.
The two main issues in this dispute were: (i) whether or not the two companies were affiliated; and (ii) whether or not there were actual loans between the two companies. The SPC held that:
(i) Since OB Company and TLW Company were both under the control of the same two people, namely Zuoxin Wang and Yeli Qu, and since the senior executives and ordinary employees of the two companies and certain other affiliated companies were co-extensive, OB Company and TLW Company were affiliated;
(ii)OB Company and TLW Company knew of the creditors’ rights asserted by Tao Xie and certain other creditors, yet OB Company nevertheless permitted TLW Company to sell products (instead of seizing them) during the execution of the judgment. According to the SPC, these facts establish that OB Company filed its lawsuit for the purpose of preventing other creditors from enforcing their creditors’ rights from TLW Company’s assets through judicial seizure, rather than for the purpose of enforcing its own creditor’s rights.
(iii)A comprehensive review of the company formation processes, the dates and amounts of the loans between the companies, capital flows, circulating transfers between the parties’ accounts, inconsistency between the usage of the loans and the terms of the loan contracts revealed that the loans between the two companies were fraudulent. For these reasons, the SPC held that OB Company and TLW Company executed a malicious conspiracy that aimed to jeopardize the legitimate rights and interests of others by means of abuse of process (the filing of a malicious lawsuit). The SPC therefore imposed a severe penalty upon each party.
For quite some time, it has been distressingly common for parties to file malicious civil actions by falsifying legal relationships and fabricating case facts, thereby misleading courts into issuing erroneous judgments or executions of judgments, thereby allowing the unjust enrichment of the conspiring parties. The TLW v. OB case is a typical example of this phenomenon. China has been amending its legislation in order to more effectively curb malicious lawsuits. A special provision on malicious lawsuits was added to the 2012 Amendments to the Civil Procedure Law. Specifically, Article 112 provides that “Where parties maliciously conspire to infringe another party’s legitimate rights and interests by means such as litigation and/or mediation, the People’s Court shall dismiss the parties’ claims and impose penalties such as a fines or detention based on the seriousness of the circumstances. Where a crime was committed, the parties shall be prosecuted for their corresponding criminal liability.” The judicial interpretations for the Civil Procedure Law promulgated by the SPC in 2015 dealt with malicious lawsuits for the first time, in Article 190.2. Specifically, “If the parties to the original case filed a lawsuit arising from a malicious conspiracy, Article 112 of the Civil Procedure Law shall apply.”
Afterwards, in order to further regulate the evasion of debts though the filing of malicious lawsuits, Article 20 of the Provisions on Several Issues Concerning the Application of the Law in the Trial of Private Loan Disputes promulgated by the SPC on September 1st, 2015 expressly provides that “Where parties or other persons maliciously file and/or participate in a malicious lawsuit, the People’s Court shall impose penalties such as fines or detention in accordance with Articles 111 to 113 of the Civil Procedure Law. If a crime was committed, the case shall be transferred to the competent judicial authority for criminal prosecution. Where an entity maliciously files or participates in a malicious lawsuit, the People’s Court shall impose a fine on such entity, and may impose a fine or detention on the entity’s principal or person directly responsible for such malicious lawsuit. If a crime was committed, the case shall be transferred to the competent judicial authority for criminal prosecution.” In this case, the SPC cited Article 112 to uphold the Liaoning Higher Court’s judgment that dismissed OB Company’s claims, and to impose a large monetary fine on each of OB Company and TLW Company for engaging in a malicious lawsuit.
The judgment in this case constituted SPC guidance for similar cases, and displayed its determination to crack down on malicious lawsuits. Furthermore, the SPC’s trial proceedings also indicate that malicious lawsuits can be identified through strict, rigorous and discreet judicial reasoning and empirical rules, all of which are of precedential and demonstration value for trials of similar cases in the future.
It can be concluded from the foregoing case that in practice, a third party whose rights are infringed by a malicious lawsuit can seek remedy through objection to enforcement of the original judgment, a retrial petition, or objection to the original judgment. Nevertheless, in view of the trial proceedings, the injured party’s difficulty in enforcing its rights in a malicious lawsuit case lies in proving the existence of affiliated transactions and falsified debts that support the malicious conspiracy.
The third party in the foregoing case successfully initiated trial supervision proceedings because it was able to gather a large amount of evidence proving the existence of the malicious lawsuit. Consequently, during litigation, the third party should collect evidence proving the existence and nature of a malicious lawsuit between the plaintiff and the defendant in various ways. First of all, the third party can inquire and collect the AIC registration information of the two parties to identify the controlling shareholder or the actual controller of the relevant company, and to determine whether or not senior executives of the companies are co-extensive and whether or not there is a sufficient affiliation between the parties to establish a conspiracy.
Secondly, the third party can petition the court to collect evidence of the bank accounts of the parties and their affiliated companies as well as account transaction details, financial sources and fund flows. The third party can then compare the evidence to identify any significant conflict of interest by analyzing the contacts between the transaction parties as well as the record of the hearing. Thirdly, the third party can prove the existence of malicious transactions by analyzing whether or not the parties’ acts during litigation were reasonable, and by determining whether or not the submitted evidence conflicts with the parties’ actual behavior.
In conclusion, the foregoing SPC case demonstrates the government’s attitude towards the regulation of malicious lawsuits. Publication of the case will also encourage local People’s Courts at all levels to further enhance protections against malicious lawsuits and strengthen sanctions against offenders. Nevertheless, it remains to be seen whether or not these measures will efficiently resolve the problem of malicious lawsuits.
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