Seiden v. Kaneko

EFiled: Nov 03 2015 11:55AM EST
Transaction ID 58105196
Case No. 9861-VCN
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
ROBERT W. SEIDEN, ESQ., in his capacity as :
Receiver for Southern China Livestock, Inc., :
:
Plaintiff, :
:
v. : C.A. No. 9861-VCN
:
SHU KANEKO a/k/a JOSEPH KANEKO, :
LIQIANG SONG a/k/a LIQUANG SONG, :
a/k/a LI SONG a/k/a SONG LIQIANG a/k/a :
LI QIANG SONG a/k/a RICHARD LEE, :
:
Defendants. :
MEMORANDUM OPINION AND ORDER
Date Submitted: June 10, 2015
Date Decided: November 3, 2015
Jonathan M. Stemerman, Esquire of Elliott Greenleaf, Wilmington, Delaware, and
Douglas E. Spelfogel, Esquire and Katherine R. Catanese, Esquire, of Foley &
Lardner LLP, New York, New York, Attorneys for Plaintiff.
Andrew D. Cordo, Esquire and Toni-Ann Platia, Esquire of Ashby & Geddes,
Wilmington, Delaware, and Adrienne M. Ward, Esquire and John B. Horgan,
Esquire of Ellenoff Grossman & Schole LLP, New York, New York, Attorneys for
Defendant Shu Kaneko.
NOBLE, Vice Chancellor
I. INTRODUCTION
Plaintiff Robert W. Seiden, Esq. (“Plaintiff” or the “Receiver”) in his
capacity as receiver for Southern China Livestock, Inc. (“SCLI” or the
“Company”), brought this action against Defendants Shu Kaneko (“Kaneko” or
“Defendant”) and Liqiang Song (“Song” and together with Kaneko, the
“Defendants”). Plaintiff seeks $7,594,965 plus pre- and post-judgment interest and
legal expenses in compensation for Defendants’ allegedly fraudulent transfers of
stock, Company funds, and personal real estate. Plaintiff’s seventeen-count
Complaint alleges, in connection with the above transfers, breach of fiduciary duty,
aiding and abetting breach of fiduciary duty, conversion, aiding and abetting
conversion, fraud, conspiracy to defraud and convert property, four counts of
fraudulent transfer, corporate waste, and unjust enrichment, and seeks imposition
of a constructive trust and an accounting. The Court now addresses Kaneko’s
Motion to Dismiss under Court of Chancery Rule 12(b)(6).
1
II. BACKGROUND1
A. Corporate Structure
Plaintiff brings this action against Kaneko and Song, former directors and
officers of SCLI and Southern China Livestock International, Inc. (“SCL
International”) for allegedly fraudulent transfers made in violation of their
fiduciary duties.2 SCLI, formerly known as Expedite 4, Inc. (“Expedite”), is a
Delaware corporation that wholly owns SCL International, a Nevada corporation
incorporated on July 28, 2009.3 SCL International is the holding company for
Beijing Huaxin Tianying Livestock Technology, Limited (“Beijing Huaxin”). 4
Beijing Huaxin is in the business of breeding, raising, and selling live hogs in the
People’s Republic of China (“PRC”), and holds a 100% interest in Jiangxi Yingtan
Huaxin Livestock Limited (“Jiangxi Huaxin”), an operating subsidiary.5 Kaneko
was at one time President, Treasurer, Director of Business Development, and
Secretary of SCLI, and President, Treasurer, Director, Secretary, and Chief
1
The factual background is based on allegations in the First Amended Verified
Complaint (“Complaint” or “Compl.”) and on documents integral to or
incorporated into the Complaint. In re Gardner Denver, Inc., 2014 WL 715705,
at *2 (Del. Ch. Feb. 21, 2014).
2
Compl. ¶ 1.
3
Id. ¶ 3.
4
Id.
5
Id.
2
Financial Officer of SCL International.6 He is currently President, Director, and
sole officer of Dyna Flo International, Inc. (“Dyna Flow”) and LKD International,
Inc. (“LKD”).7 Song was the Vice President and principal shareholder of SCLI,
part of the management of SCLI, and custodian for the majority of the SCLI
shares.8 Non-party Blue Moon Irrevocable Family Trust (“Blue Moon Trust”) is a
family trust benefitting Kaneko and his family with Song as trustee.9
B. Reverse Merger
Expedite was incorporated in Delaware on September 27, 2007 for the
purpose of acquiring an operating company.10 On March 29, 2010, Expedite
acquired 100% of SCL International’s outstanding stock—ten million shares—in
return for 99.97% of Expedite’s total common stock—5,623,578 shares—pursuant
to the “Share Exchange Agreement.”11 Under the Share Exchange Agreement,
Song received 90% of the Expedite shares transferred to SCL International
6
Id. ¶ 4.
7
Id.
8
Id. ¶ 5.
9
Id. ¶ 6.
10
Id. ¶ 9. As of October 29, 2009, Sheila Hunter (“Hunter”) was the sole director
and officer of Expedite. Expedite 4, Inc., Annual Report (Form 10-K) (Oct. 29,
2009). Hunter owned 100,000 Expedite shares. Id. “At the time of a business
combination, [however,] management expect[ed] that some or all of the shares of
common stock owned by Sheila Hunter[] [would] be purchased by the target
company or retired by the Company.” Id.
11
Compl. ¶ 10; Southern China Livestock, Inc., Current Report (Form 8-K) Ex. 2.1
(Apr. 1, 2010) (“Share Exch. Agmt.”).
3
(5,061,220 of the 5,623,578 shares).12 Of the 5,061,220 shares Song received,
4,386,438 (the “Song Held Shares”) were transferred to him as custodian for the
former shareholders of the operating subsidiary Jiangxi Huaxin (the “Jiangxi
Shareholders”) because certain PRC laws and regulations prevented the Jiangxi
Shareholders’ direct acquisition of such shares.13 The Jiangxi Shareholders and
Song agreed that Song would acquire the Song Held Shares on their behalf, and
they would receive options to purchase the shares for nominal consideration.14 On
the same day, and as part of the same transaction, Expedite and Song entered into a
lockup agreement (the “Lockup Agreement”) whereby Song agreed not to sell any
Expedite common stock for eighteen months following May 6, 2010—the equity
financing closing date.15 Upon the completion of the merger, Expedite owned
100% of SCL International, and therefore wholly owned the operating subsidiary
Jiangxi Huaxin.16 On April 8, Expedite appointed Kaneko as its CFO and
Director.17
12
Compl. ¶ 11; Share Exch. Agmt. 20. The remaining 10% of Expedite shares
were allocated between seven individuals and entities in quantities ranging from
843 shares to 261,377 shares. Share Exch. Agmt. 20.
13
Compl. ¶ 11.
14
Id.
15
Id. ¶ 12; Southern China Livestock, Inc., Current Report (Form 8-K) Ex. 10.8
(Apr. 1, 2010).
16
Compl. ¶ 13.
17
Id. ¶ 14.
4
C. Alleged Fraudulent Activity
1. Private Placement Proceeds
On May 6, 2010, Expedite closed its equity financing through a private
placement (the “Private Placement”) by which it raised $7,594,965 (the “Private
Placement Proceeds”) to fund the merger with SCL International.18 The Private
Placement Proceeds were deposited into three separate SCL International bank
accounts (the “Bank Accounts”), each naming Kaneko as a signatory. 19 While
Kaneko’s successor as director and CFO of SCLI, Wei He, is listed on the
signature cards of two of the three Bank Accounts, only Kaneko signed checks
from the Bank Accounts.20 On May 28, Expedite registered the Private Placement
shares, but the United States Securities and Exchange Commission (the “SEC”)
never declared them effective.21 On July 9, Expedite changed its name to Southern
China Livestock, Inc.22
In January 2010, Kaneko began transferring from the Bank Accounts
millions of dollars of Private Placement Proceeds, much of which Plaintiff alleges
18
Id. ¶ 15.
19
Id. ¶ 19.
20
Id.
21
Id. ¶ 17.
22
Id. ¶ 18. To the extent the Court refers to actions taken by SCLI, the Court
infers, for purposes of this Motion to Dismiss, that such actions were taken,
whether or not approved by the remainder of the seven-member board, under
Kaneko’s alleged influence and control.
5
was paid for improper or personal use or is still unaccounted for.23 Specifically,
Plaintiff alleges that from March 2010 to July 2011 Kaneko illicitly transferred
over one million dollars in Private Placement Proceeds for personal uses, including
“lawn service, maid service, and condo maintenance fees.”24 Other alleged
improper transfers include a payment of $125,000 on June 28, 2010 to Meirong
Song, a “possible relative of Song,” and a payment of $51,000 on July 9, 2010 to
Liqiang Song Ltd (Song’s company).25
2. Transfer of the Song Held Shares and Going Dark
Further, in September 2010, Song, in an alleged breach of the Lockup
Agreement, transferred the Song Held Shares to a British Virgin Islands company,
Shu Mei Yu, Ltd. (“Shu Mei,” named after Song’s mother), for no consideration.26
23
Id. ¶ 20. Kaneko disputes the impropriety of such transfers. Opening Br. in
Supp. of Def. Shu Kaneko’s Mot. to Dismiss First Am. Compl. (“Def.’s Opening
Br.”) 10-13. The Court, however, accepts as true well-pleaded factual allegations
in the Complaint and draws reasonable inferences therefrom. Cent. Mortg. Co. v.
Morgan Stanley Mortg. Capital Hldgs. LLC, 27 A.3d 531, 536 (Del. 2011).
Plaintiff has pleaded facts sufficient to infer that Defendant’s transfer of the Private
Placement Proceeds was improper.
24
Compl. ¶ 20.
25
Id. ¶¶ 21-22.
26
Id. ¶ 23. Kaneko argues that Song’s transfer of the Song Held Shares to Shu Mei
did not violate the Lockup Agreement or the Share Exchange Agreement because
the transfer was “subject to [the Lockup Agreement], which, among other
provision[s], prohibits any further transfer of the Shares.” Southern China
Livestock, Inc., Amendment to S-1 Registration Statement (Form S-1/A) Ex-10.14
(“Oct. 1 Registration Statement”) 1 (Oct. 1, 2010); Def.’s Opening Br. 13-14.
6
Kaneko is the director of Shu Mei.27 The transfer of the Song Held Shares to Shu
Mei is disclosed in SCLI’s February 2011 annual report filed with the SEC, as is
Song’s justification for making the transfer, namely, “not wanting to be personally
responsible for the administration of voting . . . when he has no pecuniary interest
with respect to the shares.”28 Plaintiff alleges that Song’s transfer of the Song Held
Shares damaged SCLI by preventing it from “not only collapsing the offshore
structure but from taking any action including selling SCLI to private investors.”29
On October 8, 2010, Wei He replaced Kaneko as CFO and director of SCLI,
and Kaneko was appointed instead as “Director of Business Development.”30
Kaneko, however, remained Director, President, Treasurer and Secretary of SCL
International, SCLI’s wholly-owned subsidiary, from incorporation in July 2009 to
dissolution in March 2012.31 Kaneko also represented himself as CEO of SCLI on
the Bank Accounts, despite Luping Pan being listed as CEO on SCLI’s SEC
disclosures.32 The Company filed a Form S-1 registration statement on
October 19, 2010 in preparation for an initial public offering (“IPO”) of its
27
Compl. ¶ 23.
28
Southern China Livestock, Inc., Amendment No. 1 to 2010 Annual Report
(Form 10-K/A) (“2010 Annual Report”) 39-40 (Feb. 7, 2011); accord Compl. ¶ 24.
29
Compl. ¶ 25.
30
Id. ¶ 26; Southern China Livestock, Inc., Current Report (Form 8-K) (Oct. 14,
2010) (“Oct. 14 Form 8-K”).
31
Compl. ¶ 26.
32
Id.; see Oct. 14 Form 8-K.
7
common stock on the NASDAQ Capital Market, as was promised during the
Private Placement to induce investment.33 The registration statement further stated
that the Company intended to use the IPO proceeds “to increase [its] inventory of
both sows and hogs, to enter into the organic fertilizer business and for other
general corporate purposes.”34 Over one year later, SCLI withdrew its registration
statement pursuant to SEC Form 15 filed on August 15, 2011, and thus “went
dark.”35 In a letter filed with the SEC on the same day, SCLI indicated the
withdrawal was “because it has elected not to pursue the sale of the securities
included therein at this time.”36
3. Private Real Property
Song and Kaneko shared at least five addresses throughout the United
States.37 On March 26, 2012, Kaneko gifted two properties to the Blue Moon
Trust for no consideration; one located at 15 Warren Street, Unit 113, Jersey City,
New Jersey (the “Jersey City Property”), and one located at 11990 Market Street,
33
Compl. ¶¶ 27-28; Southern China Livestock, Inc., Registration Statement (Form
S-1/A) (Oct. 19, 2010) (“Oct. 19 Form S-1/A”).
34
Oct. 19 Form S-1/A at 25; Compl. ¶ 28.
35
Southern China Livestock, Inc., Certification and Notice of Termination of
Registration (Form 15-12G) (Aug. 15, 2011); Compl. ¶ 31.
36
Southern China Livestock, Inc., Registration Withdrawal Request (Form RW)
(Aug. 15, 2011) (Letter from Luping Pan, CEO of SCLI, to Lauren Nguyen,
Attorney-Advisor to the SEC).
37
Compl. ¶ 42.
8
Reston, Virginia (the “Reston Property”).38 On April 12, 2012, Kaneko gifted to
the Blue Moon Trust for no consideration property located at 3476 Lloyd Hill
Court, Oakton, Virginia (the “Oakton Property”).39 Song gifted the Oakton
Property to Kaneko on August 30, 2010, five days after Song was sued in the
United States District Court for the Southern District of New York (the “Carret
Lawsuit”) for alleged self-dealing, fraud, and breach of fiduciary duty with respect
to a series of transactions unrelated to the pending matter.40 The Complaint
suggests the Carret Lawsuit was withdrawn for failure to locate Song for service of
the complaint.41
The Blue Moon Trust then sold all three properties: the Reston Property on
June 18, 2013 for $748,000; the Jersey City Property on June 19, 2013 for
$675,160; and the Oakton Property on July 3, 2013 for $1,168,000.42 Song, in his
personal capacity and in his capacity as trustee of the Blue Moon Trust, then
purchased property located at 28 Hedgerow, Irvine, California, for $1.55 million,
38
Id. ¶¶ 42-44.
39
Id. ¶ 45.
40
Id. ¶¶ 34-38. The suit was captioned Carret (Beijing) Investment Management
and Advisory Company Ltd., Carret China Opportunity Investment Co., Ltd. v. Yu
Xiaohong (a/k/a Sean Yu) and Song Liqiang (a/k/a Li Song), Case No. 10-CIV-
06358. Id. ¶ 34.
41
Id. ¶ 39.
42
Id. ¶ 47.
9
which Song and the Blue Moon Trust still own.43 On September 12, 2013,
Kaneko, through the newly-registered entity LKD, purchased property located at
2372 Morse Avenue, Unit 416, Irvine, California for $1.2 million, which LKD
currently owns.44 The Complaint alleges that such “transfers were made with the
effect, if not the intent[,] of[] removing these assets from the reach of SCLI and
Kaneko’s and Song’s creditors.”45
D. The Alleged Settlement and Release
The Complaint acknowledges Kaneko’s argument that an alleged release
agreement (the “Release”) bars all of the Receiver’s claims.46 According to
Kaneko, an SCLI consultant, Alan Lewis (“Lewis”), contacted him in January
2013 to negotiate a settlement that would release him from all liability for the
allegedly fraudulent activity enumerated in the Complaint in exchange for his
cooperation in returning to SCLI the Song Held Shares.47 Kaneko signed the
Release in February 2013, though by this point the Song Held Shares were “lost,”
and so he could return them only by sending Lewis an affidavit of loss and a stock
43
Id. ¶ 48.
44
Id. ¶ 49.
45
Id. ¶ 50.
46
Id. ¶ 51; Aff. of Def. Shu Kaneko in Supp. of his Mot. to Dismiss Compl. or, in
Alternative, Mot. for Summary Judgment (“Kaneko Aff.”) Ex. 3 (email from
Lewis to Kaneko attaching the Release).
47
Id. ¶ 52.
10
power signed by the shareholders.48 Plaintiff, however, alleges potential defects in
the substance and execution of the Release, including SCLI’s failure to authorize
the transaction, fraudulent transfer to the extent SCLI did authorize the transaction,
and lack of consideration.49
E. Procedural Posture
Frustrated over SCLI’s failed IPO and general management conduct, the
Private Placement investors (the “Investors”) filed a Section 220 action on
August 29, 2013 seeking inspection of SCLI’s books and records (the “Section 220
Complaint”).50 SCLI failed to respond to both the Investors’ July 30, 2013 demand
and the August 29, 2013 Section 220 Complaint.51 The Court accordingly entered
a default judgment requiring SCLI to permit inspection of the requested books and
records by November 26, 2013 (the “Default Judgment”).52 Upon SCLI’s failure
to do so, the Court, on January 17, 2014, entered an order holding SCLI in
48
Opening Resp. to Def.’s Mot. to Dismiss First Am. Compl. (“Pl.’s Answering
Br.”) 20-21; Compl. ¶ 51.
49
Compl. ¶¶ 53, 121-31.
50
Id. ¶¶ 54-55; Verified Compl. for Inspection of Books and Records, 2013 WL
6003017 (Del. Ch. Nov. 12, 2013) (“Section 220 Compl.”).
51
The Complaint states that the demand was served on SCLI’s registered agent on
August 30, 2013, Compl. ¶ 56, but the Section 220 Complaint dates service of the
demand “[o]n or about July 30, 2013”). Section 220 Compl. ¶ 2.
52
Compl. ¶ 56; Order Granting Default Judgment, 2013 WL 6003017 (Del. Ch.
Nov. 12, 2013).
11
contempt, appointing a receiver pursuant to 8 Del. C. § 322, and allowing the
Investors to “put” their SCLI shares at fair market value.53
The Contempt Order invested in the Receiver all “powers generally
available to a receiver appointed pursuant to 8 Del. C. §§ 291 & 322,” except as
inconsistent with the Contempt Order, including authority and control over SCLI
property and assets as necessary to comply with the Contempt Order (including the
authority to deal or dispose of the property), unrestricted access to the books and
records specified in the Default Judgment, control over Company Bank Accounts
as necessary to comply with the Contempt Order, authority to bring suit in the
name of the Company including proceedings to avoid transactions that may hinder
the Company’s compliance with the Court’s past orders, authority to enlist the help
of Company employees, and authority to exercise power that the Company
possesses with respect to its wholly owned subsidiaries necessary to ensure
compliance with the Court’s orders including exercising voting rights and
replacing directors.54 Because Kaneko held effective control of SCLI, the
Complaint alleges, it was not until the Receiver’s January 17, 2014 appointment
53
Compl. ¶¶ 57-58; Order Granting Plaintiffs’ Motion for Contempt, In re
Southern China Livestock, Inc. Litig., C.A. No. 8851-VCN, 2 (Del. Ch. Jan. 17,
2014) (“Contempt Order”).
54
Contempt Order 3-5.
12
that the Company had knowledge or reason to know of the alleged fraudulent
transactions.55
III. CONTENTIONS
The Complaint asserts seventeen causes of action against Defendants,
thirteen of which implicate Kaneko and are therefore relevant to this Motion to
Dismiss. The first, third, fourth and sixth causes of action allege, respectively:
breach of fiduciary duty, aiding and abetting breach of fiduciary duty, conversion,
and aiding and abetting conversion by improperly diverting the Private Placement
Proceeds and assisting in the transfer of the Song Held Shares while Kaneko was
director of Shu Mei.56 The seventh, eighth, and ninth causes of action allege,
respectively: fraud; conspiracy to defraud and convert property; and fraudulent
transfer with respect to Kaneko’s allegedly improper diversion of the Private
Placement Proceeds.57 The tenth and eleventh causes of action allege fraudulent
transfer and waste with respect to the Release, arguing that SCLI entered into the
Release intending to hinder or delay creditors and that the Release was not
supported by consideration.58 The twelfth cause of action alleges fraudulent
transfer against Kaneko for improperly “gift[ing]” personal real property to the
55
Compl. ¶ 61.
56
Id. ¶¶ 63-68, 75-85, 92-97.
57
Id. ¶¶ 98-120.
58
Id. ¶¶ 121-136.
13
Blue Moon Trust intending to hinder, delay or defraud his creditors.59 Finally, the
fourteenth, fifteenth, and sixteenth causes of action seek, respectively, equitable
relief in the form of unjust enrichment, imposition of a constructive trust, and an
accounting with regard to the allegedly improper diversion of the Private
Placement Proceeds and transfer of the Song Held Shares.60
Kaneko filed this Motion to Dismiss Plaintiff’s claims under Court of
Chancery Rule 12(b)(6), contending that the Release bars all of Plaintiff’s claims,
and in the alternative, that each claim fails for one or a combination of laches,
failure to state a claim, or failure of standing.61 The Court addresses in turn each of
Defendant’s arguments below.
IV. ANALYSIS
A. Procedural Standard of Review under Court of Chancery Rule 12(b)(6)
On a motion to dismiss under Court of Chancery Rule 12(b)(6), the pleading
standards are minimal.62 The Court must accept all well-pleaded factual
allegations in the Complaint—including “vague allegations” so long as they
provide sufficient notice of the claim—and “draw all reasonable inferences in
59
Id. ¶¶ 137-148.
60
Id. ¶¶ 157-175.
61
Def.’s Opening Br.
62
Cent. Mortg., 27 A.3d at 536.
14
favor of the plaintiff.”63 The Court is not, however, “required to accept conclusory
allegations” or inferences not logically linked to the alleged facts.64 The Court will
grant Defendant’s Motion to Dismiss only if Plaintiff “could not recover under any
reasonably conceivable set of circumstances susceptible of proof.”65 Therefore, the
Court will deny Defendant’s motion to the extent that any of Plaintiff’s claims are
reasonably conceivable.66
B. The Release Fails for Lack of Consideration
Delaware law recognizes that releases are “an important tool for settling
disputes precisely because they are designed to provide ‘complete peace.’” 67 As
such, Delaware courts generally “recognize the validity of general releases.”68
Defendant argues that the Release bars all claims against Kaneko the Company
possessed as of the date of the Release, including those alleged in the Complaint.69
The parties are in general agreement regarding the facts surrounding the Release:
in January 2013, Lewis contacted Kaneko offering to release any potential claim
the Company had against Kaneko in consideration for Kaneko facilitating the
63
Id.
64
In re Gen. Motors (Hughes) S’holder Litig., 897 A.2d 162, 168 (Del. 2006).
65
Cent. Mortg., 27 A.3d at 536.
66
Id.
67
Seven Invs., LLC v. AD Capital, LLC, 32 A.3d 391, 397 (Del. Ch. 2011).
68
Deuley v. DynCorp Int’l, Inc., 8 A.3d 1156, 1163 (Del. 2010).
69
Def.’s Opening Br. 25.
15
return of the Song Held Shares.70 Because the shares had been “lost,” Kaneko
replied in February 2013 by signing the Release and returning not the shares, but
an affidavit of loss and stock power signed by the shareholders. 71 As Plaintiff
contends, however, the Release is invalid due to lack of consideration.72
Plaintiff argues that because the Song Held Shares were not permitted to be
transferred under the Lockup Agreement, SCLI was already entitled to return of
the Song Held Shares, and therefore their return does not constitute consideration
for the Company releasing claims worth potentially $7.5 million in Private
70
In an email attached as Exhibit 1 to Kaneko’s affidavit supporting his Motion to
Dismiss Plaintiff’s original complaint, Lewis stated that SCLI had retained outside
counsel to “initiate a lawsuit against you in the US to seize your properties that you
conveyed to the Blue Moon Trust in April, in an attempt to recoup some of the
alleged misappropriated funds, along with” the Song Held Shares. Kaneko Aff.
Ex. 1 (January 2013 email from Lewis to Kaneko). Lewis further stated that he
“convince[d] the [C]ompany that it’s in their best interest . . . to come to a peaceful
resolution,” and that “management seems open to offering you . . . a full liability
waiver . . . in exchange for your cooperation in turning over the [Song Held
Shares].” Id. Other than this email from Lewis to Kaneko, however, the record is
largely devoid of information surrounding the relationship among Lewis, Kaneko,
and SCLI, and the Court is therefore unable, at this stage in the proceeding, to
develop an opinion regarding the propriety of the relationship, the Release
negotiations, or the Release itself.
71
Pl.’s Answering Br. 20-21; Compl. ¶ 51; Def.’s Opening Br. 20. Such
documents provide the same rights and privileges as would the return of the stock
itself. 8 Del. C. § 167; Corrected Reply Br. in Further Supp. of Def. Shu Kaneko’s
Mot. to Dismiss First Am Compl. (“Def.’s Reply Br.”) 8 n.3.
72
Pl.’s Answering Br. 22-31.
16
Placement Proceeds.73 Defendant offers two arguments in response. First,
Defendant notes that Lewis approached Kaneko with the alleged agreement,
insinuating that Lewis would not offer a deal to Kaneko that would result in the
Company receiving no consideration.74 Plaintiff’s allegations regarding Kaneko’s
extended control over SCLI and SCL International,75 however, cast doubt on this
reasoning and, with all reasonable inferences drawn in Plaintiff’s favor, suggest
that the Company may have offered this deal intending to insulate Kaneko from
liability for his alleged fraudulent scheme while receiving in return only a portion
of its entitlement, that is, possession of the Song Held Shares.76 Second,
73
Id. at 25; Sabatoro Const. Co. v. Formosa Plastics Corp. USA, 1996 WL
453460, at *3 (Del. Super. June 10, 1996) (“A releaser . . . must receive something
of value to which it is otherwise not previously entitled.”), aff’d, 692 A.2d 415
(Del. 1997). The Release identifies, as additional consideration, Kaneko’s release
of the Company from any lawsuit or other legal proceeding Kaneko had against the
Company at the time of the Release. Id.; Kaneko Aff. Ex. 3 (email from Lewis to
Kaneko attaching the Release). While the Court refrains from questioning the
“adequa[cy]” of bargained-for consideration, it may still inquire as to its
“existence.” Newell Rubbermaid Inc. v. Storm, 2014 WL 1266827, at *9 (Del. Ch.
Mar. 27, 2014). Defendant never contends, however, that Kaneko had any viable
claims against SCLI. Pl.’s Answering Br. 25. This alleged consideration is
therefore nonexistent and accordingly insufficient to support the Release.
74
Def.’s Opening Br. 18.
75
Pl.’s Answering Br. 35-36; Compl. ¶ 133 (the Release was “one-sided, part of a
broader scheme, orchestrated by a financially incentivized ‘advisor,’ with Kaneko
providing no consideration to SCLI while SCLI allegedly released significant
claims against Kaneko”).
76
In making his argument, Plaintiff assumes that, if Song’s transfer of the Song
Held Shares to Shu Mei violated the Lockup Agreement, SCLI is entitled to
possession of the shares. Plaintiff, however, offers no basis for this assumption,
17
Defendant argues that Kaneko’s assistance in transferring the Song Held Shares to
SCLI was, in fact, valuable consideration sufficient to validate the Release.77 He
bases this conclusion on the fact that SCLI had no “possessory right” to the shares,
and therefore receiving possession amounts to sufficient consideration.78
Defendant’s arguments fail for two reasons. First, instead of pointing to a
specific benefit resulting from the transfer to SCLI of the Song Held Shares,
Defendant simply states that the transfer must have had value because Plaintiff
claims that the transfer of the shares to Shu Mei caused the Company $7,594,965
in damages.79 This reasoning assumes, however, that simply because Song’s initial
transfer to Shu Mei caused damages by preventing SCLI from collapsing its U.S.
operations,80 the transfer to SCLI of the Song Held Shares would increase the
Company’s value. To the contrary, Plaintiff based his decision to allege over
$7 million in damages on factors additional to the Company’s alleged inability to
and the Court, in accepting Plaintiff’s argument regarding lack of consideration,
makes no finding with respect to entitlement of the Song Held Shares upon any
breach of the Lockup Agreement and notes that, for purposes of this Motion to
Dismiss, the Release fails for lack of consideration whether or not the allegedly
improper transfer somehow imbued SCLI with the right to possession of the Song
Held Shares.
77
Def.’s Opening Br. 29.
78
Id.
79
Id.
80
The Court expresses no opinion regarding the validity of this claim.
18
collapse its operations, including a reduction in SCLI’s share price.81 Defendant
fails to reason how Kaneko’s return of the Song Held Shares to SCLI would
remedy such a reduction. Second, the Song Held Shares were held by Song in a
custodial capacity on behalf of the Jiangxi Shareholders.82 Accordingly, the
economic interest was, at all times after the reverse merger (including after the
transfer to Shu Mei), held by the Jiangxi Shareholders.83 Defendant fails to
identify any benefit SCLI would receive by holding the Song Held Shares in a
custodial capacity on behalf of the Jiangxi Shareholders. Therefore, the Release
transaction lacks consideration, and the Motion to Dismiss is denied to the extent
that it argues the Release bars Plaintiff’s claims.84
C. Laches Bars Plaintiff’s Claims to the Extent they Rely on Song’s Transfer of the
Song Held Shares, but Does Not Bar the Remaining Claims
Defendant claims that the doctrine of laches (and the three year statute of
limitations applicable by analogy) bars all claims based on fraud, breach of
fiduciary duty, conversion, and unjust enrichment.85 Specifically, this argument
81
Pl.’s Answering Br. 42.
82
Oct. 1 Registration Statement 10, 54.
83
Id.
84
Plaintiff also argues that the Release is invalid, in addition to lack of
consideration, because it constitutes a fraudulent transfer and corporate waste,
Compl. ¶¶ 121-31, and implicates factual issues not ripe for decision at this stage
in the proceeding. Pl.’s Answering Br. 19-21. Because the Release fails for lack
of consideration, however, the Court does not reach these arguments.
85
Def.’s Opening Br. 33.
19
attempts to bar Plaintiff’s first (breach of fiduciary duty), third (aiding and abetting
breach of fiduciary duty), fourth (conversion), sixth (aiding and abetting
conversion), seventh (fraud), eighth (conspiracy to defraud and convert property),
and fourteenth (unjust enrichment) causes of action. Defendant’s Reply Brief also
argues laches as a defense to Plaintiff’s requests for a constructive trust and an
accounting,86 and challenges his claim for fraudulent transfer of the Private
Placement Proceeds87 under the applicable four year statute of limitations.88
1. Legal Standard
Unless late filing is excused by a tolling doctrine, “a plaintiff must file a
claim for breach of fiduciary duty within three years of the conduct that gives rise
to the claim.”89 The same limitations apply with regard to fraud90 and unjust
enrichment.91 To bar a cause of action under a laches argument, a defendant must
prove (1) the plaintiff “unreasonabl[y] delay[ed] in bringing a claim . . . with
86
Plaintiff’s fifteenth and sixteenth causes of action.
87
Plaintiff’s ninth cause of action.
88
6 Del. C. § 1309(1); Def.’s Reply Br. 16 & n.8.
89
In re Sirius XM S’holder Litig., 2013 WL 5411268, at *4 (Del. Ch. Sept. 27,
2013); 10 Del. C. § 8106.
90
Van Lake v. Sorin CRM USA, Inc., 2013 WL 1087583, at *6 (Del. Super.
Feb. 15, 2013) (“Pursuant to 10 Del. C. § 8106, claims ‘arising from a promise,’
including fraud, must be brought within three years after the claim has accrued.”);
see also Krahmer v. Christie’s Inc., 903 A.2d 773, 783 (Del. Ch. 2006).
91
Vichi v. Koninklijke Philips Electronics N.V., 62 A.3d 26, 42 (Del. Ch. 2012)
(“In this case, the analogous statute of limitations under Title 10, Section 8106 of
the Delaware Code for both unjust enrichment and fraud is three years.”).
20
knowledge thereof, and [(2)] resulting prejudice to the defendant.”92 Though this
Court’s equitable jurisdiction is not subject to rigid application of the statute of
limitations,93 “a limitations period analogous to the statute of limitations will
presumptively bar equitable relief, and conclusively bar legal relief.”94 The
general rule in Delaware is that “the cause of action accrues[] at the time of the
alleged wrongful act, even if the plaintiff is ignorant of the cause of action.”95
Plaintiff filed the Complaint on July 7, 2014, and therefore, Defendant contends,
all conduct prior to July 8, 2011 is shielded by laches.96
Plaintiff responds by arguing that his claims remain valid, notwithstanding
their origin prior to July 8, 2011, because the statute of limitations has been tolled.
92
Levey v. Brownstone Asset Mgmt., LP, 76 A.3d 764, 769 (Del. 2013).
93
See O’Brien v. IAC/Interactive Corp., 2009 WL 2490845, at *7 n.39 (Del. Ch.
Aug. 14, 2009).
94
Lehman Bros. Hldgs. Inc. v. Spanish Broad. Sys., Inc., 2014 WL 718430, at *7
(Del. Ch. Feb. 25, 2014) (footnote omitted), aff’d, 105 A.3d 989 (Del. 2014);
accord Levey, 76 A.3d at 769 (“A filing after the expiration of the analogous
limitations period is presumptively an unreasonable delay for purposes of
laches.”).
95
In re Dean Witter P’ship Litig., 1998 WL 442456, at *4 (Del. Ch. July 17,
1998), aff’d, 725 A.2d 441 (Del. 1999); Jepsco, Ltd. v. B.F. Rich Co., 2013
WL 593664, at *8 (Del. Ch. Feb. 14, 2013).
96
The Receiver is subject to the same statute of limitations and laches defenses as
the Company. Haas v. Sinaloa Exploration & Dev. Co., 152 A. 216, 218 (Del. Ch.
1930) (“As a general rule, the mere appointment of a receiver to take charge of
property in dispute will not suspend the operation of the statute . . . .”); Stewart v.
Wilmington Trust SP Servs., Inc., 112 A.3d 271, 312-13 (Del. Ch. 2015) (“I see no
cogent reason for sparing the innocent Receiver the effect of in pari delicto while
equally innocent stockholders or policyholders would be barred from relief in the
derivative context.”), aff’d, __ A.3d __ (Del. 2015).
21
Delaware recognizes three situations that may result in the tolling of the applicable
statute of limitations: fraudulent concealment, an “inherently unknowable” injury,
or where equitable tolling is warranted.97 Plaintiff’s argument for tolling the
statute of limitations focuses on equitable tolling. The doctrine of equitable tolling
suspends the statute of limitations for the duration of a plaintiff’s reasonable
reliance “upon the competence and good faith of a fiduciary.”98 While no evidence
of actual concealment of wrongdoing is necessary, “the statute is only tolled until
the investor ‘knew or had reason to know of the facts constituting the wrong.’”99
Though the Complaint need not plead equitable tolling as such, it must, at a
minimum, “plead facts that support the existence of equitable tolling.”100
2. Kankeo May Have Remained a Fiduciary of SCLI After
Resigning in October 2010.
To succeed on its equitable tolling claims, Plaintiff must allege facts
sufficient for the Court to infer reasonably that Kaneko was a fiduciary at the time
of his alleged acts, and that “[P]laintiff has reasonably relied upon [his]
97
Krahmer, 903 A.2d at 778-79.
98
In re Tyson Foods, Inc., 919 A.2d 563, 585 (Del. Ch. 2007).
99
Id. (“[N]o theory will toll the statute beyond the point where the plaintiff was
objectively aware, or should have been aware, of facts giving rise to the wrong.”).
100
In re Am. Int’l Gp., Inc., 965 A.2d 763, 812 (Del. Ch. 2009), aff’d sub nom.,
Teachers’ Ret. Sys. of La. v. PricewaterhouseCoopers LLP, 11 A.3d 228 (Del.
2011).
22
competence and good faith.”101 Defendant argues that Plaintiff has made only
“conclusory allegations” that Kaneko was a fiduciary or insider of SCLI after his
October 2010 resignation, and that Kaneko did nothing that the Company could
have relied on after Kaneko’s resignation became public.102 The Complaint,
however, alleges that Defendant, even after resigning as director and CFO,
continued to “loot” the Company’s Bank Accounts (and was the only person to
sign checks therefrom), remained as a signatory on the Bank Accounts, represented
himself as CEO of SCLI on the Bank Accounts, and held executive positions in
SCL International, SCLI’s wholly-owned subsidiary, including director, president,
treasurer and secretary, until its dissolution on March 6, 2012.103 While Kaneko
resigned from his director and officer positions at SCLI in October 2010, the fact
that he remained as a director and officer of SCL International, SCLI’s wholly
owned subsidiary, suggests that his fiduciary relationship to SCLI may have
survived his resignation.104 Therefore, the Complaint alleges facts sufficient for
101
Am. Int’l Gp., 965 A.2d at 812 (quoting Tyson, 919 A.2d at 585).
102
Def.’s Reply Br. 20-21.
103
Compl. ¶¶ 19-20, 26, 143.
104
Hamilton P’rs, L.P. v. Englard, 11 A.3d 1180, 1208 (Del. Ch. 2010) (“The
fiduciary duties owed by directors of . . . wholly owned subsidiaries run only to the
parent.”).
23
the Court, on Defendant’s Motion to Dismiss, to infer reasonably that Kaneko’s
fiduciary relationship with SCLI survived his October 2010 resignation.105
3. Laches Bars All Claims Related to the Transfer of the Song Held Shares
Defendant argues that laches bars Plaintiff’s claims related to the transfer of
the Song Held Shares because such transfer occurred in September 2010, more
than three years prior to the filing of the Complaint.106 Plaintiff responds,
unsuccessfully, that such claims should be equitably tolled due to lack of
knowledge or reasonable reliance on a fiduciary.107 SCLI reported, in its annual
report filed in February 2011, that Shu Mei held the Song Held Shares, and that
“Song transferred these shares to Shu Mei . . ., subject to the terms of the option
[agreement] and [the Lockup Agreement].”108 Therefore, SCLI had “reason to
105
While the case cited by Plaintiff suggesting that effective control of the
corporation imputes fiduciary duties to the controller relates to controlling
shareholders, Quadrant Structured Products Co. v. Vertin, 102 A.3d 155, 183-84
(Del. Ch. 2014), Plaintiff has alleged sufficient facts to infer reasonably, on a
motion to dismiss, that while Kaneko was not a controlling shareholder, he
sufficiently controlled SCLI and its subsidiaries to maintain his fiduciary capacity.
Kahn v. Lynch Commc’n Sys., Inc., 638 A.2d 1110, 1113 (Del. 1994) (“[A]
shareholder owes a fiduciary duty only if it owns a majority interest in or exercises
control over the business affairs of the corporation.”).
106
Compl. ¶ 23.
107
Pl.’s Answering Br. 37.
108
2010 Annual Report 39-40; Jepsco, 2013 WL 593664, at *8 (“To toll the time
at which an analogous statute of limitations begins to run, a plaintiff must plead
specific facts to demonstrate that the facts underlying his claim were so hidden that
a reasonable plaintiff could not have discovered them within the limitations
24
know” of the transfer of the Song Held Shares prior to July 8, 2011.109 Further,
given SCLI’s public disclosure of the Lockup Agreement in April 2011, Plaintiff is
charged with notice of not only the fact of the transfer, but also its impropriety.
Plaintiff claims that, once equitable tolling is argued in the context of a
motion to dismiss, Defendant’s statute of limitations defense necessarily fails
because such an argument implicates factual issues not yet ripe for
determination.110 Here, however, Plaintiff has alleged no facts disputing the timing
of the Company’s public disclosure of Song’s allegedly improper transfer of the
Song Held Shares, and, to be sure, bases his entire equitable tolling argument on
Kaneko’s fraudulent concealment of the Private Placement Proceed transfers.
Plaintiff’s equitable tolling argument therefore fails with respect to his claims
regarding the transfer of the Song Held Shares, and the Court accordingly grants
Defendant’s Motion to Dismiss with respect to the following claims against
Kankeo: breach of fiduciary duty to the extent that it relies on the transfer of the
Song Held Shares; aiding and abetting breach of fiduciary duty; aiding and
abetting conversion; fraud to the extent that it relies on the transfer of the Song
period. . . . But, even if tolling applies, once the information underlying the
plaintiff's claim is readily available, that plaintiff is on inquiry notice.”).
109
Jepsco, 2013 WL 593664, at *11 (“The public filings . . . provided Jepsco
ample notice that the Underlying Action had been resolved in a way that materially
could affect its rights as a shareholder of RRI.”).
110
Pl.’s Answering Br. 33.
25
Held Shares; conspiracy to defraud and convert property to the extent it relies on
the transfer of the Song Held Shares; and imposition of a constructive trust to the
extent it relies on the transfer of the Song Held Shares (the “Dismissed Claims”).111
4. Laches Does Not Bar Claims Related to Kaneko’s Alleged Diversion
of the Private Placement Proceeds
a. Breach of Fiduciary Duty, Fraud, Accounting, and Constructive
Trust
The Complaint contains facts sufficient to state a claim that Kaneko
breached his fiduciary duty and committed fraud by improperly diverting the
Private Placement Proceeds, and that he concealed this alleged diversion thereby
precluding SCLI’s knowledge of such transfers. Plaintiff concedes that these
actions took place more than three years prior to the filing of the Complaint. He
argues, however, and the Court agrees, that such claims remain viable due to
equitable tolling for two reasons. First, as established above, Kaneko owed
fiduciary duties to SCLI, and therefore SCLI’s shareholders were entitled to
111
Additionally, Plaintiff’s claims related to the transfer of the Song Held Shares
would fail notwithstanding Plaintiff’s laches argument. The Receiver, standing in
SCLI’s shoes, had no possessory interest in the Song Held Shares. Such shares
were transferred to Song as custodian for the Jiangxi Shareholders, and then to Shu
Mei subject to the same ownership restrictions. As this Court has held, to recover
for conversion, Plaintiff must prove he had a property interest in the allegedly
converted property and had a right to possession in the same. Facciolo Const. Co.
v. Bank of Delaware, 514 A.2d 413, 1986 WL 17356, at *2 (Del. 1986) (TABLE).
Therefore, the claims against Kaneko based on Song’s transfer to Shu Mei of the
Song Held Shares are dismissed for lack of standing in addition to Defendant’s
laches argument.
26
reasonably rely on his competence and good faith in operating the Company. As
this Court has held, “it would be corrosive and contradictory for the law to punish
reasonable reliance on that good faith by applying the statute of limitations
woodenly or automatically to alleged self-interested violations of trust.”112
Second, Plaintiff has alleged facts sufficient to infer reasonably that Kaneko
concealed the alleged fraudulent transfers of the Private Placement Proceeds to the
extent that SCLI did not “kn[o]w or ha[ve] reason to know”113 of such transfers
until after July 7, 2011 (three years prior to Plaintiff’s filing of the Complaint). For
example, the Complaint states that Kaneko was the only party acting as signatory
on the Bank Accounts,114 the Private Placement Proceed transfers were concealed
from SCLI,115 and Kaneko controlled and dominated SCLI.116 The Complaint is
therefore sufficient to allow the inference that SCLI had no knowledge of
Kaneko’s allegedly illicit transfers of the Private Placement Proceeds, and that
SCLI shareholders justifiably relied on Kaneko to discharge his fiduciary duties
112
Kahn v. Seaboard Corp., 625 A.2d 269, 275 (Del. Ch. 1993).
113
Tyson Foods, 919 A.2d at 585.
114
Compl. ¶ 19.
115
Compl. ¶ 116; Pl.’s Answering Br. 8 (“The bank statements for the Bank
Accounts were sent to SCLI c/o Kaneko in Virginia, and SCLI may have not seen
the bank statements until late 2012 at the earliest . . . .”).
116
Compl. ¶ 83.
27
appropriately.117 Plaintiff’s equitable tolling argument is therefore valid at this
stage in the proceeding, and the Motion to Dismiss is accordingly denied to the
extent it relies on laches as a defense to Plaintiff’s claims for breach of fiduciary
duty and fraud for improperly diverting the Private Placement Proceeds.
Because Plaintiff’s fiduciary duty claim survives Defendant’s laches
argument, his request for an accounting survives as well. As Defendant
recognizes, the basis for the accounting claim is to identify wrongfully-transferred
Bank Account proceeds, which is “indistinguishable from the bases for the
fiduciary claim.”118 Defendant bases his argument that laches bars Plaintiff’s
constructive trust claim on the fact that a constructive trust is tantamount to a
mandatory injunction, which precludes the sale of property subject to the claim,
and therefore “necessarily invokes a stricter requirement for prompt action.”119
This argument, however, does not address the concern that arises where a
117
The Court notes for completeness Defendant’s argument that the SCLI directors
signed SCLI’s audited financial statements, and therefore had notice of the transfer
of the Private Placement Proceeds. Def.’s Opening Br. 9, 40. The Court
recognizes that signing an audited financial statement generally serves as notice to
directors of the contents of the statement. See City of Roseville Employees’ Ret.
Sys. v. Horizon Lines, Inc., 686 F. Supp. 2d 404, 417 & n.19 (D. Del. 2009). Here,
however, the Complaint alleges facts sufficient to infer reasonably that, though the
directors knew of the expenses’ existence, they were unaware of the allegedly
illicit nature of the transfers. See supra notes 114-17 and accompanying text; see
infra notes 145, 174 and accompanying text.
118
Def.’s Opening Br. 36.
119
Id. at 37 (quoting Quill v. Malizia, 2005 WL 578975, at *15 n.51 (Del. Ch.
Mar. 4, 2005)).
28
defendant is alleged to have concealed a claim from a plaintiff justifying tolling of
the statute of limitations. Accordingly, Defendant’s Motion to Dismiss is denied to
the extent it relies on laches as a defense to Plaintiff’s accounting and constructive
trust claims.
b. Conversion and Unjust Enrichment
Defendant argues that Plaintiff’s claims against Kaneko for conversion of
the Private Placement Proceeds, aiding and abetting Song’s conversion, and
conspiring to defraud and convert property are barred by laches as analogized to
Delaware’s three year statute of limitations.120 Defendant cites authority
supporting the general rule under Delaware law that lack of knowledge of a cause
of action for conversion does not toll the three year statute of limitations.121 This
general rule is, however, subject to certain exceptions, including where the
plaintiff’s lack of knowledge can be attributed to concealment or fraud.122 As
discussed above, Plaintiff has alleged sufficient facts for the Court, on this Motion
to Dismiss, to infer reasonably that Kaneko concealed the alleged conversion from
Plaintiff.123 Defendant’s Motion to Dismiss is therefore denied to the extent that it
relies on laches as a defense to Plaintiff’s conversion claims. The unjust
120
Id.
121
Id. at 37-38; Layton v. Allen, 246 A.2d 794, 799 (Del. 1968); Mastellone v.
Argo Oil Corp., 76 A.2d 118, 121 (Del. Super. 1950).
122
Isaacson, Stolper & Co. v. Artisans’ Sav. Bank, 330 A.2d 130, 132 (Del. 1974).
123
See supra notes 114-17 and accompanying text.
29
enrichment claim likewise survives the Motion to Dismiss. As Defendant
acknowledges, “[t]he same analysis and three year limitations period under 10 Del.
C. § 8106 applies to the Receiver’s claim for unjust enrichment.”124
In sum, Defendant’s laches defense bars the Dismissed Claims. Plaintiff’s
remaining claims are not affected by Defendant’s laches argument at this stage in
the proceeding.125
D. The Complaint Sufficiently States a Claim for Breach of Fiduciary Duty,
Fraud, and Unjust Enrichment
With the exception of Plaintiff’s fraud claim, the Complaint need only meet
Delaware’s “rather forgiving notice pleading standard of Court of Chancery Rule 8
in order to state a claim and survive a motion to dismiss under Rule 12(b)(6).”126
Plaintiff’s fraud claim necessitates, under Court of Chancery Rule 9(b), application
of a heightened pleading standard requiring particularized facts.127
124
Def.’s Opening Br. 38.
125
Defendant also asserts that Plaintiff’s claim for fraudulent transfer of the Private
Placement Proceeds is barred under the applicable four year statute of limitations.
Def.’s Reply Br. 16 n.8; 6 Del. C. § 1309(1). This argument, however, fails for the
same reasons the laches argument fails with respect to the fraud and conversion
claims for improper transfer of the Private Placement Proceeds, namely, that for
purposes of this Motion to Dismiss, the applicable statute of limitations, and laches
by analogy, has been equitably tolled.
126
Anglo Am. Sec. Fund, L.P. v. S.R. Global Int’l Fund, L.P., 829 A.2d 143, 155-
56 (Del. Ch. 2003) (footnote omitted); accord Ct. Ch. R. 8.
127
Ct. Ch. R. 9(b); Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d
168, 207 (Del. Ch. 2006), aff’d sub nom., Trenwick Am. Litig. Trust v. Billett, 931
A.2d 438 (Del. 2007).
30
1. Breach of Fiduciary Duty
Defendant argues that he owed no fiduciary obligation to SCLI upon and
after his resignation as director and CFO of SCLI in October 2010, and therefore is
immune from liability for breach of fiduciary duty for actions taken subsequent to
such withdrawal.128 As discussed in the context of Defendant’s laches argument
above, however, Kaneko, for purposes of this Motion to Dismiss, remained a
fiduciary of the Company after his resignation due to his continued access to and
use of the Bank Accounts and fiduciary relationship with SCLI’s wholly-owned
subsidiary SCL International.129 Therefore, Defendant’s argument that Kaneko is
not liable for actions taken after October 8, 2010 is unavailing.
Plaintiff also claims that Kaneko aided and abetted Song’s alleged breach of
fiduciary duty. First, as discussed above, the Court dismissed this claim under
Defendant’s laches argument.130 Song’s alleged underlying breach—transferring
the Song Held Shares to Shu Mei for no consideration in violation of the Lockup
Agreement—occurred in September 2010, more than three years prior to Plaintiff’s
filing of the Complaint, and is therefore presumptively shielded by the doctrine of
laches.131 Because the underlying breach is dismissed, the aiding and abetting
128
Def.’s Opening Br. 41.
129
See supra notes 103-05 and accompanying text.
130
See supra text accompanying note 111.
131
See supra text accompanying notes 106-11.
31
claim must be dismissed as well.132 However, even assuming the underlying
breach is not barred by laches, Plaintiff’s aiding and abetting claim necessarily
fails. To succeed on a claim for aiding and abetting a breach of fiduciary duty, a
plaintiff must prove each prong of a four-prong test: “(1) the existence of a
fiduciary relationship; (2) a breach of that fiduciary’s duty; (3) [a non-fiduciary’s]
knowing participation in that breach; and (4) damages.”133 As Defendant argues,
and Plaintiff fails to dispute, Kaneko was a fiduciary at the time of the transfer.134
Song’s transfer of the Song Held Shares to Shu Mei occurred in September 2010—
over one week before Kaneko’s withdrawal as director and CFO of SCLI early the
following October. As stated, a successful aiding and abetting claim necessitates
improper conduct by a non-fiduciary.135 Therefore, Plaintiff’s aiding and abetting
claim fails because of, in addition to laches, Defendant’s fiduciary relationship
with SCLI at the time of the alleged underlying breach.136
132
In re Crimson Exploration Inc. S’holder Litig., 2014 WL 5449419, at *27 (Del.
Ch. Oct. 24, 2014).
133
Id.; accord Allied Capital Corp. v. GC-Sun Hldgs., L.P., 910 A.2d 1020, 1038-
39 (Del. Ch. 2006) (“Like the test for civil conspiracy, the test for stating an aiding
and abetting claim is a stringent one, turning on proof of scienter—a plaintiff must
prove: (1) the existence of a fiduciary relationship, (2) a breach of the fiduciary’s
duty and (3) knowing participation in that breach by the non-fiduciary.”).
134
Def.’s Opening Br. 42.
135
Allied Capital Corp., 910 A.2d at 1038-39.
136
Plaintiff argues that Kaneko was acting his “personal capacity” in his
involvement with the transfer of the Song Held Shares. Pl.’s Answering Br. 45.
The Court, however, fails to see the distinction—one would assume that a
32
2. Fraud
To succeed on a fraud claim, Plaintiff must meet heightened pleading
standards requiring particularized facts.137 Pleading fraud requires allegations of
(1) a false representation of material fact; (2) the defendant’s knowledge that the
representation was false or reckless indifference to the truth; (3) an intent to induce
action or inaction; (4) “the plaintiff’s action or inaction taken in justifiable reliance
upon the representation;” and (5) resulting damages.138
Here, Plaintiff alleges that Kaneko exercised complete “dominion and
control” over the Private Placement Proceeds,139 was the only person who signed
checks from the Bank Accounts,140 concealed the transfers from SCLI,141 and
failed to account for what remained of the Private Placement Proceeds,142 and that
the transfer of the Private Placement Proceeds was for Kaneko’s and Song’s
personal benefit.143 Further, while particularized facts are generally required for
fraud claims, “[c]ourts must be sensitive to the fact that application of Rule 9(b)
prior to discovery ‘may permit sophisticated defrauders to successfully conceal the
director’s breach of the duty of loyalty generally, if not always, furthers the
director’s personal interests.
137
Ct. Ch. R. 9; Trenwick, 906 A.2d at 207.
138
Gaffin v. Teledyne, Inc., 611 A.2d 467, 472 (Del. 1992).
139
Compl. ¶ 83.
140
Id. ¶ 19.
141
Id. ¶ 116.
142
Id. ¶ 101.
143
Id. ¶ 112.
33
details of their fraud.’”144 Defendant argues that Plaintiff’s claims are too broad in
that they fail to allege the specific beneficiaries of the allegedly fraudulent
transfers; however, as Defendant himself admits, Plaintiff’s records consist of a
mere list of withdrawals noting the date, account number, check number, payor,
payee, and transfer amount—information regarding the diverted funds’ ultimate
use and destination allegedly remains within Kankeo’s control.145 Plaintiff’s fraud
claim therefore satisfies each of the elements above,146 and Defendant’s Motion to
Dismiss with respect thereto is denied.
3. Unjust Enrichment
Plaintiff’s unjust enrichment claim likewise survives Defendant’s Motion to
Dismiss. Defendant argues that, to pursue an unjust enrichment claim, the claim
144
Craftmatic Sec. Litig. v. Kraftsow, 890 F.2d 628, 645 (3d Cir. 1989).
145
Def.’s Opening Br. 44; Compl. Ex. C; Pl.’s Answering Br. 8. Plaintiff argues,
and Defendant accepts, that the Court may, where facts are “peculiarly within the
defendant’s knowledge or control,” relax the particularity requirements for
pleading fraud. Craftmatic, 890 F.2d at 645; Def.’s Reply Br. 24; Pl.’s Answering
Br. 9. Without assessing the validity of this argument, the Court finds that
Plaintiff’s claims are sufficiently particularized to satisfy the heightened pleading
requirements under Rule 9.
146
As to the first element, a false representation can be by silence. Valansi v.
Ashcroft, 278 F.3d 203, 220 n.9 (3d Cir. 2002). Therefore, Kaneko’s alleged
failure to inform Plaintiff of the purpose of the transfers satisfies, for purposes of
this Motion, the first element. The second, third, and fourth elements are met by
Plaintiff’s allegations that Kaneko knew he was engaged in an illicit transfer of
corporate assets and that the Company’s inaction was due to Kankeo’s
concealment of the transfers’ impropriety.
34
must have an “independent factual basis.”147 Defendant, however, misinterprets
the scope of BAE Systems. There, the Court held that, to bring a proper claim for
unjust enrichment, the Plaintiff must allege a factual basis independent from an
alleged breach of contract.148 Because the dispute here is not confined to a
contract, Defendant’s argument is unavailing and Plaintiff’s unjust enrichment
claim survives. Therefore, Defendant’s Motion to Dismiss is denied to the extent it
attempts to dispense with Plaintiff’s fiduciary duty, fraud, and unjust enrichment
claims.
E. Plaintiff’s Fraudulent Transfer Claims Survive Defendant’s Motion to Dismiss
Plaintiff maintains fraudulent transfer claims for Kaneko’s transfer of the
Private Placement Proceeds and the real property. To maintain a cause of action
for fraudulent transfer, Plaintiff must show that the transfer was made, whether
before or after the creditor’s claim arose, “(1) with actual intent to hinder, delay or
defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent
value in exchange for the transfer or obligation, and the debtor” either: (a) was
insolvent or became insolvent as a result of the transfer, (b) was about to engage in
a transaction for which its remaining assets were unreasonably small, or
(c) intended to or reasonably should have believed it would incur debts beyond its
147
Def.’s Opening Br. 46 (citing BAE Sys. Info. & Elec. Sys. Integration, Inc. v.
Lockheed Martin Corp., 2009 WL 264088, at *8 (Del. Ch. Feb. 3, 2009)).
148
BAE Sys., 2009 WL 264088, at *8.
35
ability to pay.149 Whether the debtor exhibited “actual intent” can be inferred from
the circumstances, including whether the debtor “became insolvent shortly after the
transfer was made or the obligation was incurred.”150 Whether the debtor received
“reasonably equivalent value” depends on “(1) whether the transaction was at
arm’s length, (2) whether the transferee acted in good faith, and (3) the degree of
difference between the fair market value of the asset transferred and the price
paid.”151
1. Private Placement Proceeds
Plaintiff claims that Kaneko’s transfer of the Private Placement Proceeds
constituted a fraudulent transfer of SCLI’s assets because SCLI “had creditors at
the time the $7.5 million in funds flowed in and out of the Bank Accounts.”152
With respect to this cause of action, the Receiver has authority to act on behalf of
the Corporation to recover funds wrongfully transferred.153 The factual record at
this point in the litigation, however, is insufficient to ascertain whether this claim is
149
6 Del. C. § 1304(a)(1)-(2); In re Plassein Int’l Corp., 428 B.R. 64, 67 (D. Del.
2010).
150
6 Del. C. § 1304(b)(9).
151
Plassein, 428 B.R. at 67.
152
Pl.’s Answering Br. 41.
153
Haas, 152 A. at 219; Contempt Order 4 (granting Receiver authority to bring
suit “in the name of the Company or otherwise” as necessary to “avoid transactions
. . . that may hinder the Company’s compliance with this Court’s orders.”). This
proposition holds whether recovery of the Private Placement Proceeds ultimately
inures to the benefit of the Company or directly to the Investors as the Company’s
creditors.
36
most appropriately characterized as (1) a direct claim by the Investors for their own
benefit in recouping the Private Placement Proceeds (as Plaintiff alleges154), (2) a
derivative claim brought by the investors as creditors of SCLI for the benefit of the
Company, or (3) a direct claim by the Company to recoup the Private Placement
Proceeds to be used for Company purposes.
First, the Complaint alleged facts sufficient for the Court to infer that
Kaneko transferred the Private Placement Proceeds with an actual intent to defraud
SCLI and the Investors.155 Second, a determination as to whether Kaneko received
“reasonably equivalent value” in return for the allegedly improper transfers
requires additional factual development.156 For example, whether the Private
Placement Proceeds were distributed in accordance with a proper corporate
purpose and in return for valuable consideration is a fact subject to dispute, the
determination of which may illuminate to a greater extent the Company’s post-
transfer solvency.157 Such factual disputes necessitate denial of Defendant’s
154
Id. at 41.
155
Compl. ¶ 83.
156
See supra notes 73-76, 80-83 and accompanying text.
157
Pl.’s Answering Br. 8 n.3 (“Upon information and belief, based upon the
Receiver’s investigation, serious questions exist as to the verification of the
$125,000 paid to Tieling Bo Yi Feed Ltd. that Kaneko argues was justified because
the SEC filings disclose this transaction but which merely stated that there was a
land use agreement with Tieling, while the owner of Tieling said that he only
received $3,000 USD.”).
37
Motion to Dismiss with respect to Plaintiff’s claim for Fraudulent Transfer of the
Private Placement Proceeds.
2. Real Property
With respect to Plaintiff’s claim of fraudulent transfer against Kaneko for his
transfers of real property to the Blue Moon Trust, the Receiver, as Kaneko’s direct
creditor, acts in place of SCLI directly, given that any relief obtained inures to the
benefit of the Company. Plaintiff argues that Defendant’s transfer of his real
property to the Blue Moon Trust defrauded SCLI by shielding his assets from a
potential judgment arising from this litigation.158 Defendant responds that the
absence of a debtor-creditor relationship between Kaneko and SCLI precludes any
fraudulent transfer claim. Such an absence exists, Defendant continues, because
SCLI is not Kaneko’s creditor “[u]nless and until [it] obtain[s] a judgment against
Kaneko.”159 To the contrary, however, 6 Del. C. § 1304(a) permits a creditor’s
claim to arise “before or after the transfer was made or the obligation was
incurred,”160 and applies so long as Defendant’s transfer was made with the intent
to incur or under reasonable belief that he would incur, debts beyond his ability to
pay.161 Plaintiff pleaded facts sufficient from which the Court, on this Motion to
158
Compl. ¶¶ 137-48.
159
Def.’s Opening Br. 54.
160
6 Del. C. § 1304(a).
161
Id. § 1304(a)(2).
38
Dismiss, may infer reasonably that Kaneko had a “reasonable belief” when
transferring the Private Placement Proceeds that he would incur future debts such
as a potential judgment in this action.162
Defendant further argues that the Court must dismiss Plaintiff’s fraudulent
transfer claim because “a plaintiff is not permitted to sequester a defendant’s assets
without a lien or some other equitable interest in the actual assets sought to be
sequestered, simply on the prospect that the defendant may otherwise be unable to
satisfy a judgment that might later be entered.”163 In Grupo, the United States
Supreme Court held that “[b]ecause such a remedy was historically unavailable
from a court of equity, . . . the District Court had no authority to issue a
preliminary injunction preventing petitioners from disposing of their assets
pending adjudication of respondents’ contract claim for money damages.”164 Here,
however, Plaintiff is not seeking a preliminary injunction in anticipation of a later
judgment. Plaintiff is bringing a claim, on the merits, for fraudulent transfer. That
a plaintiff may not enjoin a potential debtor’s transfer of his assets prior to
obtaining a judgment does not preclude that plaintiff from later claiming that such
transfer was fraudulent. As stated, Delaware law supports a claim for fraudulent
162
Compl. ¶¶ 137-48.
163
Def.’s Opening Br. 54-55 (citing Grupo Mexicano de Desarrollo, S.A. v.
Alliance Bond Fund, Inc., 527 U.S. 308, 318-33 (1999)).
164
Grupo Mexicano, 527 U.S. at 333.
39
transfer so long as the transfer was made with the intent to incur or under
reasonable belief that he would incur debts beyond his ability to pay.165 Such
language in the statute anticipates transfers made prior to the vesting of a creditor’s
claims. Thus, Defendant’s Motion to Dismiss is denied with respect to Plaintiff’s
claim for fraudulent transfer of the Private Placement Proceeds.
F. Plaintiff’s Constructive Trust and Accounting Claims Survive
Defendant’s Motion to Dismiss
As discussed above, Plaintiff’s claim for imposition of a constructive trust is
dismissed under the doctrine of laches to the extent that it is based on Song’s
transfer of the Song Held Shares. The remaining arguments for imposition of a
constructive trust and an accounting, however, survive.166
1. Constructive Trust
A constructive trust is an equitable remedy whereby the court determines
whether, due to a defendant’s wrongdoing, “equitable title to property properly lies
in the plaintiff and, [if so], . . . deem[s] the defendant to have been simply holding
165
6 Del. C. § 1304(a)(2).
166
To clarify, Plaintiff’s constructive trust and accounting “causes of action” are
viewed by the Court as requests for specific remedial relief. Cochran v. F.H.
Smith Co., 174 A. 119, 121 (Del. Ch. 1934) (discussing “the equitable remedy of
an accounting.”); Hogg v. Walker, 622 A.2d 648, 652 (Del. 1993) (“The
constructive trust is a remedy . . . .”). As such, their viability depends upon the
success of Plaintiff’s claims above.
40
the property as a constructive trustee for the plaintiff.”167 A constructive trust does
not arise by mutual agreement or intent of the parties, but by “wrongful conduct of
the defendant, which induces a court to adjudge him a trustee; they are remedial in
character, and ordinarily bear little, or no, relationship to resulting trusts.”168
Defendant’s argument favoring dismissal of Plaintiff’s claim for imposition
of a constructive trust centers on his contention that Plaintiff has not identified
sufficiently specific property to which Plaintiff is entitled.169 Under Delaware law,
as Defendant argues, a “constructive trust may be imposed ‘upon specific property
[or] identifiable proceeds of specific property.’”170 Defendant concludes that
Plaintiff’s constructive trust claim must fail, as it requests a constructive trust over
“all assets owned or controlled by Kaneko.”171 This argument fails for two
reasons.
167
Heller v. Kiernan, 2002 WL 385545, at *3 (Del. Ch. Feb. 27, 2002), aff’d, 806
A.2d 164 (Del. 2002); accord Adams v. Jankouskas, 452 A.2d 148, 152 n.4 (Del.
1982).
168
Greenly v. Greenly, 49 A.2d 126, 129 (Del. Ch. Oct. 11, 1946) (citation
omitted) (internal quotation marks omitted).
169
Def.’s Opening Br. 47.
170
B.A.S.S. Gp., LLC v. Coastal Supply Co., 2009 WL 1743730, at *7 (Del. Ch.
June 19, 2009) (quoting Donald J. Wolfe, Jr., & Michael A. Pittenger, Corporate
& Commercial Practice in the Delaware Court of Chancery § 12-7[b] at 12-75, 76
(2008)); Def.’s Opening Br. 47 (citing Hogg, 622 A.2d at 652).
171
Def.’s Opening Br. 47.
41
First, Plaintiff’s claim requests a constructive trust in “all assets owned or
controlled by Kaneko and Song as detailed hereunder.”172 As noted, Plaintiff
alleged claims against Kaneko to recover, among other property, $7.5 million in
improperly diverted Private Placement Proceeds including $1 million diverted for
personal use. Therefore, the “as detailed hereunder” qualifier sufficiently limits
the scope of Plaintiff’s request to satisfy the specificity requirement. Second, to
the extent Plaintiff has not plead specific facts regarding the use and final
destination of the allegedly improperly transferred funds, such an omission is not
fatal at this stage in the proceeding as the factual record is subject to further
development.173 As noted above, while the Receiver is in possession of Bank
Account records disclosing a list of withdrawals, the list omits the diverted funds’
destination and details regarding their final use—information allegedly in
Kaneko’s possession.174 Defendant’s Motion to Dismiss with respect to Plaintiff’s
claims for imposition of a constructive trust is therefore denied.
2. Accounting
“An accounting is an equitable remedy that consists of the adjustment of
accounts between parties and a rendering of a judgment for the amount ascertained
172
Compl. ¶ 169 (emphasis added).
173
McMullin v. Beran, 765 A.2d 910, 926 (Del. 2000).
174
Compl. Ex. C.; Def.’s Opening Br. 44; Pl.’s Answering Br. 8.
42
to be due to either as a result.”175 Accounting is generally limited to the context of
fiduciaries acting as such.176 Specifically, fiduciaries must account to their
beneficiaries regarding the fact and propriety of all dispositions of property
managed in that capacity.177 Further, “included within the duty to account is a duty
to maintain records that will discharge the fiduciaries’ burden, and . . . if that duty
is not observed, every presumption will be made against the fiduciaries.”178
As discussed in the context of Defendant’s laches argument, the Complaint
sufficiently alleges facts from which the Court may infer that Kaneko, at all
relevant times, acted as a fiduciary of the Company. 179 Further, as with all
equitable remedies, a “necessary prerequisite” to a successful accounting claim is
the lack of an adequate remedy at law.180 Here, Defendant contends that the
money damages sought by the Receiver qualify as an adequate legal remedy
sufficient to abrogate Plaintiff’s accounting claim. The Receiver, Defendant
continues, need only examine the Company’s Bank Account statements and sum
175
Albert v. Alex. Brown Mgmt. Servs., Inc., 2005 WL 2130607, at *11 (Del. Ch.
Aug. 26, 2005).
176
IBM v. Comdisco, Inc., 602 A.2d 74, 78 (Del. Ch. 1991).
177
Technicorp Int’l II, Inc. v. Johnston, 2000 WL 713750, at *2 (Del. Ch. May 31,
2000).
178
Id.
179
See supra notes 103-05 and accompanying text.
180
Dairy Queen, Inc. v. Wood, 369 U.S. 469, 478 (1962).
43
the total converted monies.181 To the contrary, as stated above, the Bank Account
records do not contain sufficient detail to determine which transfers were in fact
improper.182 Such records, as Defendant acknowledges, contain only a list of
checks noting the date, account number, check number, payor, payee and transfer
amount.183 Defendant attempts to argue that such records are insufficiently
detailed to support Plaintiff’s fraud claims, but sufficiently detailed to abrogate
Plaintiff’s accounting cause of action.184 Defendant cannot have it both ways, and
his specificity argument accordingly fails.
Defendant also argues that Plaintiff may sustain a claim for equitable
accounting only where damages at law would be “too complex for the finder of
fact.”185 First, the opinion upon which Defendant relies merely states that the
plaintiffs in the case claim that complexity is a factor affecting the validity of an
accounting cause of action—it does not definitively so hold.186 Further, in arguing
that the calculations required of Plaintiff are not unduly complex, Defendant relies
on his assertion that Plaintiff can simply review the Bank Account records to
181
Def.’s Opening Br. 49-50.
182
See supra text accompanying notes 145, 174.
183
Def.’s Opening Br. 44; see supra text accompanying notes 145, 174.
184
Def.’s Opening Br. 44, 49.
185
Id. at 48 (quoting IBM, 602 A.2d at 78-79).
186
IBM, 602 A.2d at 78.
44
determine appropriate damages.187 Plaintiff, however, without additional
information allegedly in Kaneko’s possession, is unable to ascertain the propriety
of the dispositions listed in the records.188 Without providing information
sufficient to conduct his suggested calculations, Defendant’s complexity argument
must fail. Therefore, Defendant’s Motion to Dismiss with respect to Plaintiff’s
claims for imposition of a constructive trust and an accounting is accordingly
denied.
V. CONCLUSION
The doctrine of laches bars—and Defendant’s Motion to Dismiss is
accordingly granted with respect to—the Dismissed Claims. Defendant’s Motion
to Dismiss is otherwise denied.
IT IS SO ORDERED.
/s/ John W. Noble
Vice Chancellor
187
Def.’s Opening Br. 49.
188
See supra text accompanying notes 145, 174.
45