Opinion
INDEX NO.: 653187/2021
01-06-2023
DRAGONS 516 LIMITED, Plaintiff, v. KNIGHTS GENESIS INVESTMENT LIMITED, Genesis Development Company LLC, Shanghai Municipal Investment (Group) Corporation (a/k/a Shanghai Chengtou Group Corporation ), Shanghai SMI Assets Management (Group) Co., Ltd., SMI USA Group LLC (f/k/a Shanghai Municipal Investment (Group) USA LLC ), SMI 138 E 50 ST LLC, Ceruzzi Holdings LLC, Ceruzzi Properties LLC, IC 50 Development LLC, 50 Lex Development LLC, Dunfei (William) Chen, Qianyi (Vincent) Xie, Jincheng (Jason) Yuan, Jia Ju (Tom) Tao, Feng (Kevin) Gao, Defendant.
The following e-filed documents, listed by NYSCEF document number (Motion 002) 44, 45, 46, 47, 48, 49, 107, 110, 111, 112, 113, 114, 134, 136, 137, 146, 156 were read on this motion to DISMISSAL.
The following e-filed documents, listed by NYSCEF document number (Motion 003) 50, 51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 67, 108, 115, 116, 117, 118, 119, 133, 135 were read on this motion to DISMISS.
The following e-filed documents, listed by NYSCEF document number (Motion 012) 204, 205, 206, 207, 208, 209, 210, 211, 212, 213 were read on this motion for STAY.
Motions sequence numbers 002, 003 and 012 are consolidated herein for disposition.
Plaintiff Dragons 516 Limited ("Dragons") alleges that defendants Knights Genesis Investment Limited ("Knights Genesis"), Genesis Development Company LLC ("GDC," together with Knights Genesis, "Knights Genesis/GDC"), Shanghai Municipal Investment (Group) Corporation (a/k/a Shanghai Chengtou Group Corporation) ("SMI"), Shanghai SMI Assets Management (Group) Co., Ltd. ("SMI Assets"), SMI USA Group LLC (f/k/a Shanghai Municipal Investment (Group) USA LLC) ("SMI-USA"), SMI 138 E 50 St LLC ("SMI-USA SPV"), Ceruzzi Holdings LLC ("Ceruzzi Holdings"), Ceruzzi Properties LLC ("Ceruzzi Properties"), IC 50 Development LLC ("Ceruzzi SPV", together with Ceruzzi Holdings and Ceruzzi Properties, "Ceruzzi"), 50 Lex Development LLC ("Project Co.," together with Ceruzzi, the "Ceruzzi Defendants"), Dunfei (William) Chen ("William Chen"), Qianyi (Vincent) Xie ("Vincent Xie"), Jincheng (Jason) Yuan ("Jason Yuan"), Jia Ju (Tom) Tao ("Tom Tao") and Feng (Kevin) Gao ("Kevin Gao") fraudulently conspired to misrepresent the ownership structure of a real estate development project to Dragons to induce it to provide financing. The complaint asserts causes of action for: (1) fraud and conspiracy to defraud against all defendants; (2) conversion against SMI, SMI Assets and SMI-USA; and (3) aiding and abetting conversion against Knights Genesis, GDC, SMI-USA SPV, Ceruzzi, Project Co., William Chen, Vincent Xie, Jason Yuan, Tom Tao and Kevin Gao.
In motion sequence number 002, defendants SMI-USA, SMI-USA SPV, Tom Tao and Kevin Gao (collectively, the "SMI defendants") move to dismiss the complaint pursuant to CPLR 3211 (a) (3), (4), (5), and (7) and for costs and sanctions pursuant to 22 NYCRR 130-1.1.
Originally, this motion also sought dismissal on behalf of defendants SMI and SMI Assets (see NYSCEF Doc No. 44). However, the motion was withdrawn with respect to these defendants (see NYSCEF Doc No. 146), who have separately moved to dismiss the complaint in motion sequence number 007 (see NYSCEF Doc No. 138).
In motion sequence number 003, the Ceruzzi defendants move to dismiss the complaint pursuant to CPLR 3013, 3016 (b) and 3211 (a) (5) and (7).
In motion sequence number 012, the Ceruzzi defendants move for a stay of discovery due to the pendency of the within motions to dismiss (NYSCEF doc. no. 204).
I. Background
According to the complaint, in early 2017, defendant Knights Genesis approached Dragons, "an exempted company registered by way of continuation with limited liability in the Cayman Islands" (NYSCEF Doc No. 1, complaint, ¶ 1), "with an ‘opportunity’ to loan $30 million" to non-party GDC SPV—a special purpose vehicle created by Knights Genesis's wholly owned subsidiary, defendant GDC—"to finance an investment in ‘The Centrale,’ a real estate development project at 138 East 50th Street," New York, New York (the "Project") (id. , ¶¶ 3,9, 34). Dragons initially declined to participate, allegedly "because the proposal did not include sufficient protections to guarantee the loan in the event of default by GDC SPV" (id. , ¶ 35).
In May 2017, Knights Genesis/GDC allegedly renewed its efforts to secure a loan from Dragons (id. , ¶ 36). Knights Genesis/GDC proposed to use the loan to finance GDC SPV's 8.5% preferred interests in defendant Project Co., the owner of the Project. Other investors were to provide capital to finance another 1.5%, thus giving GDC SPV a total of 10% preferred interest in Project Co. (Id. , ¶ 38). Knights Genesis/GDC allegedly represented that another Knights Genesis affiliate, non-party KG Manhattan 126 Finance Ltd., already owned a 28% preferred interest in Project Co. and that defendants SMI-USA SPV, a special purpose vehicle created by defendant SMI-USA for the purpose of investing in the Project, owned a 45.3% common interest in Project Co., while defendants Ceruzzi SPV, a special purpose vehicle allegedly used by affiliates of defendant Ceruzzi Holdings and its wholly owned subsidiary, defendant Ceruzzi Properties, to investment in the Project, owned the remaining 16.7% common interest in Project Co. (id. , ¶¶ 17, 21-23, 40). Knights Genesis/GDC allegedly represented that, in addition to being the largest shareholder in Project Co., SMI-USA was also managing the Project (id. ¶ 40). To provide Dragons with additional reassurance, Knights Genesis/GDC allegedly represented that:
"Dragons’ loan would be backed by pledge agreements and a ‘put right’ option, such that if the loan was not repaid when due, Dragons would stand in place of GDC SPV with respect to its preferred interests in Project Co., or alternatively, Dragons could put GDC SPV's preferred interests to SMI-USA, which would be obligated to purchase the preferred interests and pay the purchase price directly to Dragons" (id. , ¶ 39).
According to Dragons, in reliance on these representations, it agreed to provide a $30 million loan to GDC SPV. On June 1, 2017, the two entities entered into a facility agreement ("Facility Agreement"), which was also executed by GDC, as "Borrower Parent", and SMI-USA. Defendant Tom Tao, then President and now CEO of SMI-USA, signed the Facility Agreement on behalf of SMI-USA and defendant Kevin Gao, Chief Investment Officer of SMI-USA, notarized it. (Id. , ¶¶ 45-47 and exhibit 1, Facility Agreement).
In pertinent part, the Facility Agreement states that the $30 million loan is intended solely to fund GDC SPV's 8.5% preferred interest in Project Co. (id. , ¶ 45; Facility Agreement, § 3.1). In addition, it contains the following representations as to Project Co.’s ownership, that: (1) GDC SPV does and shall continue to own a 10% preferred interest; (2) KG Manhattan 126 Finance Ltd. does and shall continue to own a 28% preferred interest; (3) SMI-USA SPV does and shall continue to own a 45.3% common interest, which interest "shall remain legally and beneficially owned directly or indirectly by SMI USA"; and (4) Ceruzzi SPV does and shall continue to own a 16.7% common interests (complaint, ¶ 48; Facility Agreement, ¶ 14.17 [b], [e], [f], [g], [h]). Notably, the Facility Agreement states that "SMI USA makes the representations and warranties set out in this Clause 14 with respect to itself and [SMI-USA SPV]" (Facility Agreement, ¶ 14).
The Facility Agreement also contains a "[p]ut right" provision, which states that, in the event of a default, after Dragons forecloses on the security for the loan and either obtains an 85% interest in GDC SPV or its 8.5% preferred interest in Project Co., SMI-USA shall purchase the preferred interest in Project Co. and "pay the Purchase Price directly to [Dragons]" (complaint, ¶ 49; Facility Agreement, ¶ 17.16). This provision relates to a later executed "Pledge Agreement," dated June 9, 2017, in which GDC SPV pledged its 8.5% preferred interest in Project Co. and GDC pledged 85% of its interest in GDC SPV as security for prompt payment and performance under the Facility Agreement ("Pledge Agreement") (complaint, ¶ 57, exhibit 8, Pledge Agreement; see also Facility Agreement, ¶ 1.1 [defining "Share Pledge"]).
Allegedly, on June 2, 2017, Dragons and Knights Genesis met with SMI-USA, represented by Tom Tao (complaint, ¶ 52). At this meeting, Tom Tao allegedly stated that: "Knights Genesis had helped SMI-USA greatly since it established its New York office in 2014; that the [Project] was the first ‘relatively larger’ project that SMI-USA was developing with Knights Genesis/GDC; and that SMI-USA was managing the [Project]" (id. , ¶ 53). Tom Tao allegedly also made it appear as if SMI-USA had the financial backing of defendant SMI, a "state-owned enterprise headquartered in Shanghai, China," and its subsidiary, defendant SMI Assets (id. , ¶¶ 11, 52, 54). Following this meeting, SMI-USA and Knights Genesis then jointly led Dragons on a site visit of the Project (id. , ¶ 53). According to Dragons, "SMI-USA's significant involvement in the project; and the ‘put right’ materially enhanced the credit-worthiness of the project and provided significant reassurance to Dragons without which it would have never funded the loan" (id. , ¶ 54).
Under the Facility Agreement, Dragons was not obligated to fund the loan until the satisfaction of various conditions precedent, including the completion of various due diligence reports (id. , ¶ 50; Facility Agreement, ¶ 4.1, Schedule 1). As part of this due diligence process, Knights Genesis/GDC allegedly provided Dragons with numerous documents, which Dragons claims "turned out to be fake and/or ... contain[ed] blatantly false information" (complaint, ¶ 55). These documents allegedly included an Amended and Restated Limited Liability Company Agreement for Project Co., dated February 28, 2017 ("February 28, 2017 LLC Agreement"). The February 28, 2017 LLC Agreement was ostensibly signed by Tom Tao for SMI-USA SPV, William Chen for KG Manhattan 126 Finance Ltd., Vincent Xie for GDC SPV, and Louis L. Ceruzzi, Jr. for Ceruzzi SPV and echoed the Facility Agreements’ representations concerning the members’ ownership interests in Project Co. (id. ). In addition, Knights Genesis/GDC also allegedly supplied the following documents: (1) an Officer's Certificate of Project Co., dated June 13, 2017 and signed by Tom Tao, which specifically referenced the Facility Agreement, reiterated the various ownership interests set forth in the February 28, 2017 LLC Agreement and stated that the agreement was in full force and effect, had not been amended, and that no amendment was pending; (2) an Officer's Certificate of SMI-USA, also dated June 13, 2017 and signed by Tom Tao, which specifically referenced the Facility Agreement and stated that SMI-USA SPV owned 45.3% of common interests in Project Co.; (3) a certification dated January 16, 2015, signed by the Chairman of the Board of SMI-USA and notarized by Kevin Gao, stating that SMI-USA is a financing and management entity of SMI for projects and business in the United States and that Tom Tao is its President; and (4) a resolution of SMI-USA, adopted at a June 5, 2017 meeting of the Management Board, approving the Facility Agreement (id. , ¶ 55, exhibits 3, 4). Notably, the complaint alleges that Kevin Gao also "signed" the Officer's Certificate of SMI-USA dated June 13, 2017. However, a review of the document reveals that Kevin Gao did not execute the document, but merely certified that Tom Tao was the President of SMI-USA and that it was Tom Tao's genuine signature appearing on the document (id. , ¶ 55 [c], exhibit 4).
In addition, Dragons alleges that "Knights Genesis/GDC provided Dragons with letters of undertaking from SMI-USA, intended to enhance Dragons’ confidence in the project by emphasizing that SMI-USA was managing the project, providing liquidity support, and securing financing" (id. , ¶ 56). These letters of undertaking were purportedly signed by Tom Tao on behalf of SMI-USA and were addressed to GDC SPV and/or "[t]o whom it may concern" (id. , ¶ 56, exhibits 5, 6). Also included was a letter of "Subordination of Equity in Project Co.", dated December 6, 2016, issued in favor of GDC SPV by SMI-USA SPV and Ceruzzi SPV. The document was purportedly signed by Tom Tao on behalf of SMI-USA SPV and Louis L. Ceruzzi, Jr. on behalf of Ceruzzi SPV and stated that GDC SPV owned preferred shares in Project Co., and that SMI-USA SPV and Ceruzzi SPV's interests were junior to those shares (id. , ¶ 56 [c], exhibit 7).
Dragons also alleges that, in response to its due diligence questions regarding the Project, Knights Genesis/GDC provided "non-public information and documents that could only have been obtained with the knowledge and participation of SMI-USA, SMI-USA SPV, Ceruzzi and Project Co." (id. , ¶ 60). These allegedly included, among other things, financial account records for Project Co., zoning reports, contracts for interior design, architect and construction management agreements, and construction reports. Many of the documents provided were allegedly addressed to, or executed by, Ceruzzi (id. ).
In addition, Dragons alleges that, when it raised issues concerning the Project with Knights Genesis/GDC, SMI-USA immediately conveyed those concerns to, and sought an explanation from, the architect and the construction manager for the Project. Dragons alleges that this demonstrates "that SMI-USA and Knights Genesis/GDC were acting in concert to address Dragons’ concerns and induce it to transfer the $30 million" (id. , ¶ 61).
On June 15, 2017, Dragons funded the loan by wiring $30 million to a TD Bank account in New York ("TD Bank Account") (id. , ¶ 62). "Knights Genesis/GDC ... [allegedly] represented to Dragons that the TD Bank Account belonged to Project Co." (id. , ¶ 63). Dragons claims that "the wire instructions for the bank account were emailed to ... Knights Genesis/GDC by Kevin Gao of SMI-USA on June 14, 2017" (id. , ¶ 63). Dragons states that the account was in Project Co.’s name, but that it had the same address as SMI-USA (id. , ¶ 64). In addition, Dragons alleges that, in subsequent litigation, "counsel for SMI-USA admitted that SMI-USA has access to the [TD Bank Account] statements" (id. , ¶ 97).
On June 20, 2017, Knights Genesis/GDC sent Dragons an amendment to the February 28, 2017 LLC Agreement, dated June 16, 2017 ("June 16, 2017 Amendment"). It was purportedly signed by Tom Tao for SMI-USA SPV, and the respective representatives for KG Manhattan 126 Finance Ltd., GDC SPV and Ceruzzi SPV. The June 16, 2017 Amendment stated that GDC SPV "ha[d] used the loan proceeds under that certain US$30,000,000 Facility Agreement, dated June 1, 2017 ... to make a capital contribution to [Project Co.]" (id. , ¶ 65., exhibit 10, June 16, 2017 Amendment at 1). It also confirmed that: (1) GDC SPV owned a 10% preferred interest in Project Co., with 8.5% pledged in favor of Dragons; (2) KG Manhattan 126 Finance Ltd. owned a 28% preferred interest; (3) SMI-USA SPV owned a 45.3% common interest; and (4) Ceruzzi SPV owned a 16.7% common interest (id. , ¶ 65; June 16, 2017 Amendment, exhibit A).
Dragons alleges that, after the loan was funded, "consistent with certain obligations under the Facility Agreement, Knights Genesis/GDC provided Dragons with additional non-public documents and information about the [Project] that could only have been obtained with the knowledge and participation of SMI-USA, SMI-USA SPV, Ceruzzi, and Project Co." (complaint, ¶ 69). These documents allegedly included, among other things, financial statements as well as construction and design reports in connection with the Project. Many of these documents were allegedly either addressed to, or executed on behalf of, Ceruzzi or Tom Tao (id. ). Dragons also alleges that Kevin Gao, of SMI-USA, provided Knights Genesis/GDC with many of these documents, knowing that they would be shown to Dragons (id. ).
On July 31, 2017, allegedly without Dragons’ knowledge, SMI-USA SPV and Ceruzzi SPV executed a Second Amended Restated Limited Liability Company Agreement of Project Co. ("July 31, 2017 Second Amended LLC Agreement"), which "purported to amend a prior Amended LLC Agreement, dated September 30, 2015, which was signed by Tom Tao (on behalf of SMI-USA SPV) and Louis L. Ceruzzi, Jr. (on behalf of Ceruzzi SPV) (’September 30, 2015 LLC Agreement’)" (id. , ¶ 73). The September 30, 2015 LLC Agreement allegedly "identifie[d] SMI-USA, SMI-Assets, and SMI as the relevant parties controlling SMI-USA SPV (each a 100% wholly owned subsidiary of the next), and ma[de] clear that SMI-USA SPV only [held] a 49.9% interest, while Ceruzzi SPV own[ed] 50.1%." of Project Co. (id. , ¶ 94). It did not include "any ownership interest by Knights Genesis/GDC" (id. ). Pursuant to the July 31, 2017 Second Amended LLC Agreement, SMI-USA SPV and Ceruzzi SPV transferred all of their interest in Project Co. to a newly formed entity, non-party 50 Lex Development Mezz LLC, which is allegedly "wholly owned by an entity called 50 Lex Development Holdings LLC, whose members solely consist of SMI-USA SPV and Ceruzzi SPV" (id. ). "50 Lex Development Mezz LLC and 50 Lex Development Holdings LLC were [allegedly] incorporated on June 7, 2017" (id. , ¶ 71), before Dragons funded the loan on June 15, 2017.
In the fall of 2017, Dragons allegedly learned that, in violation of the Facility Agreement, Project Co. "had taken on additional debt and undergone organizational changes that resulted in the new tier of ownership by 50 Lex Development Mezz LLC" (id. , ¶ 74). Notably, Dragons alleges that, at this point, it remained unaware of the September 30, 2015 LLC Agreement (see id. ). To address Dragons’ concerns, Knights Genesis/GDC allegedly "proposed that the parties enter into a guaranty agreement (’Guaranty Agreement’) under which SMI-USA would guarantee all of GDC SPV's obligations under the Facility Agreement" (id. , ¶ 75).
Pursuant to the Guaranty Agreement, which was purportedly executed on March 6, 2018, SMI-USA provided Dragons with an unconditional guarantee of all sums owed by GDC or GDC SPV under the Facility Agreement (id. , ¶ 76, exhibit 11, Guaranty Agreement, ¶ 2). Additionally, Appendix A to the Guaranty Agreement "acknowledge[ed] the Pledge Agreement" and "stat[ed] that the February 28, 2017 LLC Agreement remain[ed] in full force and effect and [could not] be changed without prior written consent of Dragons" (id. , ¶ 77; Guaranty Agreement, appendix A). Notably, SMI-USA denies executing the Guaranty Agreement and claims that it is a forgery (see NYSCEF Doc No. 45, SMI-USA's brief at 7).
On September 14, 2018, following various breaches of the Facility Agreement, Dragons sent a demand letter to Knights Genesis/GDC and GDC SPV, accelerating the loan (complaint, ¶¶ 78, 79).
On March 21, 2019, Dragons commenced a lawsuit in the New York Supreme Court to enforce the Facility Agreement and the Guaranty Agreement against GDC SPV and SMI-USA, entitled Dragons 516 Limited v GDC 138 E 50 LLC , Sup Ct, NY County, index No. 651690/2019 (the "Contract Action") (id ., ¶ 82).
On June 15, 2019, the Facility Agreement's loan matured (id. , ¶ 83).
On February 3, 2020, the court in the Contract Action "entered judgment against GDC SPV in the amount of $41,138,614.84 for breach of the Facility Agreement ... and ordered GDC SPV to comply with the terms and provisions of the Pledge Agreement" (id. , ¶ 84). Dragons’ claim for breach of the Guaranty Agreement against SMI-USA is still pending (id. , ¶ 86).
Allegedly on "February 14, 2020, Kevin Gao of SMI-USA provided sworn deposition testimony that the $30 million loan was used by GDC SPV to invest in Project Co., and that GDC SPV was, in fact, an investor in Project Co." (id. , ¶ 66). However, Dragons claims that GDC SPV has no assets or property to satisfy the Contract Action judgment (id. , ¶ 85). What is more, it claims that "the ‘collateral’ for the Pledge Agreement is non-existent because GDC SPV does not— and apparently never did—have any ownership interest in the [Project]" (id. , ¶ 86). Dragons allegedly came to this realization on February 18, 2020, when it reached out to counsel for Ceruzzi concerning additional loans that 50 Lex Development Mezz LLC and Project Co. were obtaining from Industrial Bank of Korea (id. , ¶ 88). Counsel for Ceruzzi allegedly informed Dragons, for the first time, that: (1) neither Knights Genesis nor any of its affiliates ever had an interest in Project Co.; (2) the February 28, 2017 LLC Agreement and June 16, 2017 Amendment "were fake and have never had any force or effect "; (3) Ceruzzi's signatures on those documents was forged; (4) Ceruzzi SPV indirectly holds a 50.1% interest in Project Co. and manages the Project, while SMI-USA SPV indirectly holds a 49.9% interest; (5) the $30 million "never reached Project Co. and was not used to purchase any interest in Project Co."; and (6) Ceruzzi had no knowledge of the TD Bank Account or what happened to the $30 million (id. ).
Allegedly to avoid imperiling the loan from Industrial Bank of Korea, SMI-USA SPV, KG Manhattan 126 Finance Ltd., GDC SPV and Ceruzzi SPV executed an acknowledgement, dated February 19, 2020 ("2020 Acknowledgement"), stating that neither the February 28, 2017 LLC Agreement nor the June 16, 2017 Amendment has ever been valid or enforceable and that neither KG Manhattan 126 Finance Ltd. nor GDC SPV has "any direct or indirect right, title or interest in [Project Co.] or [its] limited liability company interests as a result of the [i]nvalid [agreement and amendment] or otherwise" (id. , ¶ 89, exhibit 12 at ¶ 1). Tom Tao allegedly executed the 2020 Acknowledgement on behalf of SMI-USA SPV (id. , ¶ 90). SMI-USA SPV and Ceruzzi SPV also allegedly executed a separate side letter agreement, stating that they, respectively, owned 49.9% and 50.1% of 50 Lex Development Holdings LLC, the indirect holding company of Project Co. (id. , ¶ 91, exhibit 13 at 1 and exhibit A).
Dragons states that Project Co.’s limited liability agreements—the purportedly legitimate ones, rather than the versions that Dragons received—"reflect that SMI-USA has never been a majority shareholder in Project Co., and that Knights Genesis/GDC and their affiliates have never been members of Project Co." (id. , ¶ 93).
Based on the foregoing discoveries, Dragons moved to amend its complaint in the Contract Action. Its proposed second amended complaint ("PSAC") sought to add SMI-USA SPV as a defendant and to add the following causes of action against SMI-USA and SMI-USA SPV: (1) aiding and abetting GDC SPV's fraud to induce Dragons to loan the $30 million; (2) conspiracy to commit fraud; and (3) unjust enrichment for receiving the $30 million from Dragons. In the event the Guaranty Agreement was found to be invalid, the PSAC proposed alternative claims against SMI-USA and SMI-USA SPV for: (1) money had and received; (2) conversion; and (3) aiding and abetting conversion. By decision and order dated October 13, 2020 (the "Contract Action Decision"), the court (Sherwood, J.) denied the motion. (See NYSCEF Doc No. 48, Contract Action Decision.)
As concerns the PSAC's aiding and abetting claim, the parties disputed whether there was a viable underlying fraud claim. SMI-USA argued that no fraud claim had been asserted and that, "had one been asserted, it would [have] be[en] dismissed as duplicative of the breach of contract claim" (id. at 3). Dragons argued that "it ha[d] alleged an unclaimed underlying fraud in the inducement, which [could] co-exist with a contract claim." In addition, it argued that "the claims [could] coexist since [SMI-USA] ha[d] not yet conceded the Guaranty Agreement ... [was] a valid and enforceable contract" (id. ). The court in the Contract Action rejected Dragon's argument concerning the Guaranty Agreement, because "that is not what plaintiff ha[d] alleged in the PSAC" (id. ). The court found that the claim "clearly attempt[ed] to allege that [SMI-USA] and [SMI-USA SPV] aided and abetted [GDC SPV's] alleged fraudulent inducement of plaintiff to enter into the Facility Agreement" and that plaintiff had already prevailed on its claim for breach of the Facility Agreement (id. ). The court concluded that, because Dragons "ha[d] not asserted an underlying fraud claim related to the Guaranty Agreement which would support this aiding and abetting claim," the claim was without merit (id. ). It also held that the conspiracy claim lacked merit, because a "conspiracy claim stands or falls with the underlying tort" and the alleged underlying fraud—that "[GDC SPV] made misrepresentations to induce plaintiff to enter into the Facility Agreement"—"fail[ed] as duplicative of the breach of contract claim, since the damage from both claims [were] the same, the loss of the $30 million loaned" (id. ).
The court found that the proposed unjust enrichment and money had and received claims failed, because the validity of the Facility Agreement was not in dispute and the existence of a valid agreement governing the subject matter barred the quasi-contract claims (id. at 4).
The court held that the proposed conversion claim "fail[ed] as a matter of law," because "the damages sought pursuant to this claim [were] the same damages sought in the breach of contract claims" (id. at 4-5). Finally, the court found that "[w]ithout an underlying conversion, the aiding and abetting claim also ... fail[ed]" (id. at 5).
In other pertinent part, the court found that the "[k]ey allegations in the PSAC [were] made in vague and conclusory fashion or upon information and belief, with the only indication of how plaintiff came to its conclusion that [SMI-USA] and [SMI-USA SPV] received the funds being the allegation that [SMI-USA], [SMI-USA SPV], and the [TD Bank Account] all used the same address" (id. at 2).
Dragons commenced the instant action on May 14, 2021.
By decision and order dated January 11, 2022, the Appellate Division, First Department affirmed the Contract Action Decision. In pertinent part, the court found that:
"Plaintiff's aiding and abetting and conspiracy to commit fraud claims against defendant [SMI-USA] and the proposed new defendant, [SMI-USA SPV] necessarily hinge[d] on a viable underlying fraud claim against GDC.... Because plaintiff already obtained a judgment against GDC for a breach of contract and duplicative damages for fraudulent inducement are not recoverable, there [was] no viable fraud claim against GDC [and] New York does not recognize conspiracy to commit fraud as a standalone cause of action" ( Dragons 516 Ltd. v GDC 138 E 50 LLC , 201 AD3d 463, 463-464 [1st Dept 2022] [internal citations omitted]).
In other pertinent part, the First Department also found that the PSAC's allegations were not sufficient to support a claim for conversion. The court found that Dragons’ speculation that [SMI-USA] and [SMI-USA SPV] received the funds, "because the bank account where the funds were transferred bore the same office address as [SMI-USA] and [SMI-USA SPV]," was not sufficient to allege that these entities "[are] in the unauthorized possession of the funds" ( id. at 464 ). The court concluded that the adding and abetting claim failed without an underlying conversion claim (id. ).
II. Analysis
A. SMI's Motion to Dismiss (Motions Sequence Number 002)
The SMI Defendants contend that their motion to dismiss should be granted, because: (1) Business Corporation Law ("BCL") § 1312 (a) requires dismissal for lack of capacity; (2) based on the Contract Action Decision, the instant action is barred under the doctrines of res judicata and collateral estoppel; (3) there is another action pending (i.e., the Contract Action); (4) the fraud and conversion causes of action are duplicative of the breach contract claims in the Contract Action; (5) the conversion claim is untimely; and (6) there is no basis to name Tom Tao and Kevin Gao, the officers of the entity defendants, in their individual capacities. In addition, they argue that the instant action is frivolous and seek costs and sanctions against Dragons.
i. Capacity
The SMI Defendants contend that this action must be dismissed, pursuant to BCL § 1312 (a), because Dragons is a foreign corporation doing business in New York, but is not registered with the Department of State. They argue that Dragons’ $30 million dollar loan in connection with a real estate development in New York constitutes "doing business" in New York. Dragons responds that a single transaction does not meet the definition of doing business in the state. To this, the SMI Defendants reply that, by its own admission, Dragons is a special purpose vehicle that was created solely to pursue the transaction at the heart of this litigation. Therefore, they argue, the entirety of Dragons’ business consists of the transaction in New York. They also point out that, under Cayman Island law, Dragons must carry out most of its business outside of the Cayman Islands and, as such, cannot benefit from the presumption that it is doing business in the jurisdiction of its incorporation. Lastly, the SMI Defendants argue that, should Dragons’ argument prevail, foreign corporations will be free to circumvent BCL's registration requirement simply by creating a special purpose vehicle for every transaction.
In their reply, the SMI Defendants adopt and incorporate by reference GDC's capacity arguments (NYSCEF Doc No. 136 at 14), which GDC sets forth in its reply brief in motion sequence number 006 (see NYSCEF Doc No. 128).
BCL § 1312 (a) states that "[a] foreign corporation doing business in this state without authority shall not maintain any action or special proceeding in this state...." The party relying on this statutory barrier must "rebut the presumption that the corporation does business in its state of incorporation rather than New York" by "proving that the foreign corporation's activity in New York is systematic and regular" ( AirTran NY, LLC v Midwest Air Group, Inc. , 46 AD3d 208, 214 [1st Dept 2007] [internal citations omitted]). Evidence of a single business transaction will not sustain the movant's burden (see G.P. Exports v Tribeca Design , 147 AD3d 655, 656 [1st Dept 2017] [denying a motion to dismiss for lack of capacity, because "[e]vidence of a single business transaction is insufficient to establish that a foreign corporation is doing business in the State within the meaning of the statute"]; Palisades Tickets, Inc. v Daffner , 118 AD3d 619, 620 [1st Dept 2014] [internal citations omitted] [finding that the defendant was not entitled to dismissal pursuant to BCL § 1312 (a), because the subject transaction was "insufficient to sustain defendant's burden of showing that the corporation engaged in ‘systematic and regular’ business activities in this State"]; Acno-Tec Ltd. v Wall St. Suites, L.L.C. , 24 AD3d 392, 393 [1st Dept 2005] [internal citations omitted] [explaining that "defendant's evidence, relating exclusively to a single business transaction, was insufficient to raise a triable issue as to whether plaintiffs were ... ‘doing business’ within the meaning of the statute"]). "The burden of showing ‘doing business’ is ... a heavy one since a lesser showing might infringe on Congress's constitutional power to regulate interstate commerce" ( AirTran NY, LLC , 46 AD3d at 214 ).
Here, the SMI Defendants have failed to meet their burden of demonstrating that Dragons does business in New York within the meaning of BCL § 1312 (a). While it is undisputed that Dragons was formed for the sole purpose of providing financing in connection with the Project (see NYSCEF Doc No. 120, Dragons’ response to GDC's statement of undisputed facts), this does not change the fact that the SMI Defendants have only presented evidence of a single transaction, which does not constitute "doing business" within the meaning of the statute (see Acno-Tec Ltd. , 24 AD3d at 393 ; see also Landmark Capital Invs., Inc. v Li-Shan Wang , 94 AD3d 418, 419 [1st Dept 2012] [finding that the defendant failed to raise an issue of fact as to the plaintiff's capacity, because, "(a)lthough plaintiff often purchased debt held by New York debtors, this, as an activity carried on by an Ohio company with no offices or employees in New York, (was) not sufficient to constitute doing business under section 1312"]; see also Intermar Overseas v Argocean , 117 AD2d 492, 497 [1st Dept 1986] [finding no merit to the defendants’ BCL § 1312 argument, because "(t)he facts that plaintiff maintain(ed) bank accounts in New York and that the default notices emanated from New York, where the agreements were negotiated and executed, (were) insufficient to require (the plaintiff to obtain) authorization" to do business in New York]).
The SMI Defendants’ attempt to meet their burden by negating the presumption "that the corporation does business in its state of incorporation rather than New York" ( AirTran NY, LLC , 46 AD3d at 214 ) also fails. Cayman Islands Companies Law § 163 requires that "the objects" of a company seeking to register as an exempted company under this law "be carried out mainly outside the Islands." Assuming this law applies to Dragons, which claims to be "an incorporated entity, organized under the laws of the Cayman Islands" (NYSCEF Doc No. 120, Response No. 1), this still does not demonstrate that Dragons is "doing business in this state" withing the meaning of BCL § 1312 (a).
Lastly, the SMI Defendants argue that a denial of their motion will leave foreign corporations free to circumvent the registration requirement. However, the single case they cite in support of this contention, Centurion Capital Corp. v Guarino (35 Misc 3d 1219[A], 2012 NY Slip Op 50749[U] [Civ Ct, Richmond County 2012] ), is inapposite. In that action, the court held that plaintiff, a foreign corporation not registered in the state, lacked capacity to sue (id. at *4). The court declined to treat the plaintiff's collection action as a single transaction not requiring registration under the BCL, because "the plaintiff filed more than 13,700 cases in New York City Civil Court" (id. ) and was "us[ing] the New York State court system as an arm of its collection activities without making any effort to comply with the filing requirements for a foreign corporation" (id. at *3). Unlike in Centurion Capital Corp. , here, there is no evidence that plaintiff is engaged in systematic and regular activity in the New York.
Accordingly, to the extent that the SMI Defendants seek dismissal for lack of capacity, the motion is denied.
ii. Res Judicata and Collateral Estoppel
The SMI Defendants and Dragons dispute whether the Contract Action Decision bars the instant action under the doctrines of res judicata and collateral estoppel. The SMI Defendants contend that all three causes of action—fraud, conversion and aiding and abetting conversion—have been proposed and rejected in the Contract Action and that Dragons may not resurrect these claims. Dragons responds that the Contract Action Decision was not on the merits and that, as such, res judicata is inapplicable. With respect to collateral estoppel, Dragons contends, that the SMI Defendants fail to meet their burden on the motion as they do not point to a single issue in the instant action that has already been decided in the Contract Action.
Under the doctrine of res judicata, or claim preclusion, if a claim has been determined on the merits in a prior action between the same parties, or those in privity with them, "all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy" ( Matter of Hunter , 4 NY3d 260, 269 [2005] [internal quotation marks and citation omitted]). "[T]he doctrine applies only when a claim between the parties has been previously brought to a final conclusion" ( City of New York v Welsbach Elec. Corp. , 9 NY3d 124, 127 [2007] [internal quotation marks and citation omitted]).
Collateral estoppel, or issue preclusion, "is somewhat narrower" and requires "that an issue in the present proceeding be identical to that necessarily decided in a prior proceeding, and that in the prior proceeding the party against whom preclusion is sought was accorded a full and fair opportunity to contest the issue" ( Matter of Hofmann , 287 AD2d 119, 123 [1st Dept 2001] [internal quotation marks and citation omitted]). "Preclusive effect will not be given if the particular issue ... was not actually litigated, squarely addressed and specifically decided," such as when there has been "a failure to place a matter in issue by proper pleading" ( Singleton Mgt. v Compere , 243 AD2d 213, 217 [1st Dept 1998] [internal quotation marks and citations omitted]).
The Contract Action Decision does not have res judicata effect on the first cause of action. In the Contract Action, the court held that the proposed aiding and abetting and conspiracy to commit fraud claims against SMI-USA and SMI-USA SPV failed because there was no viable underlying fraud alleged. This was because the only fraud alleged was against GDS SPV and Dragons had already secured a judgment against it for the same damages on its breach of contract claim (see Contract Action Decision at 3). Likewise, the First Department affirmed, finding that, since Dragons prevailed on its breach of contract claim, its fraud claim, which sought duplicative damages, was not viable against GDC SPV ( Dragons 516 Ltd. , 201 AD3d at 463-464 ). Both determinations hinged on the insufficiency of the underlying fraud claim against GDC SPV. Here, the underlying fraud claim is not against GDC SPV, who is not among the named defendants. The instant fraud claim is against, among others, the SMI Defendants. Setting aside, for the moment, the sufficiency of this claim, it plainly was not the subject of the Contract Action Decision. Therefore, res judicata does not bar the fraud claim against SMI-USA (see City of New York , 9 NY3d at 128 [finding that res judicata was inapplicable where the plaintiff had made no claims against the defendant in the previous action]).
Nor are the conversion claims subject to dismissal under res judicata. In affirming denial of the motion to amend to add the conversion claim against SMI-USA and SMI-USA SPV, the First Department found that the factual allegations were "not sufficient to allege that these entities [were] in the unauthorized possession of the funds" and that, without an underlying conversion, the aiding and abetting claim also failed ( Dragons 516 Ltd. , 201 AD3d at 464 ). Here, the complaint does not merely restate the previous allegation of a shared address, but adds that Kevin Gao provided the wire instructions for the TD Bank Account and that SMI-USA has admitted to having access to the account's statements (complaint, ¶¶ 63, 97). Because the previous decision was based "not on the proof but on the sufficiency of the pleadings" ( Weinberg v Kaminsky , 166 AD3d 428, 429 [1st Dept 2018] ) and because those pleadings have been augmented, the conversion claim is not barred by res judicata (see Park Slope Auto Ctr., Inc. v Papa , 190 AD3d 754, 756 [2d Dept 2021], quoting 175 E. 74th Corp. v Hartford Acc. & Indem. Co. , 51 NY2d 585, 590 n 1 [1980] [explaining that a dismissal for failure to state a cause of action has preclusive effect only "as to a new complaint for the same cause of action which fails to correct the defect or supply the omission determined to exist in the earlier complaint"]).
Importantly, the SMI Defendants do not argue that new allegations fail to state a claim for conversion.
Notably, Justice Sherwood also held that the conversion claim "fail[ed] as a matter of law" because "the damages sought pursuant to this claim are the same damages sought in the breach of contract claims" (Contract Action Decision at 4-5). However, this was a non-final disposition, and the First Department did not address this alternative ground for the Contract Action Decision (see Hudson-Spring Partnership, L.P. v P+M Design Consultants, Inc. , 112 AD3d 419, 419 [1st Dept 2013] [finding that res judicata did not bar claims, where, among other things, the previous decision "[was] marked ‘non-final disposition’ "]; cf Home Depot U.S.A., Inc. v State of New York , 204 AD3d 567, 568 [1st Dept 2022] ["collateral estoppel does not prevent relitigation of a ruling that was an alternative basis for a trial level decision, where an appellate court affirmed the decision without addressing that ruling"]).
As concerns collateral estoppel, the SMI Defendants do not meet their initial burden of demonstrating that an "identical issue was necessarily decided in the prior action and is decisive in the present action" ( Color by Pergament v O'Henry’s Film Works , 278 AD2d 92, 93 [1st Dept 2000] [internal citation omitted]). Instead, they broadly argue that "[c]ollateral estoppel is applicable here where the claims now sought to be asserted by Dragons in the 2021 Complaint were already considered and rejected by the Court in the [Contract] Action" (see NYSCEF Doc No. 45, the SMI-Defendants’ brief at 14). In any event, collateral estoppel does not bar the instant action for reasons similar to the ones discussed above (see City of New York , 9 NY3d at 128 ; see also Home Depot U.S.A., Inc. , 204 AD3d at 568 ).
For the foregoing reasons, to the extent that the SMI Defendants seek dismissal of the complaint as barred under the doctrines of res judicata and collateral estoppel, the motion is denied.
iii. Sufficiency of the Claims
"[O]n a motion to dismiss a complaint for failure to state a cause of action, the complaint must be construed in the light most favorable to the plaintiff and all factual allegations must be accepted as true" ( Allianz Underwriters Ins. Co. v Landmark Ins. Co. , 13 AD3d 172, 174 [1st Dept 2004] ). The court is not permitted "to assess the merits of the complaint or any of its factual allegations, but only to determine if, assuming the truth of the facts alleged, the complaint states the elements of a legally cognizable cause of action" ( Skillgames, LLC v Brody , 1 AD3d 247, 250 [1st Dept 2003] ).
a. Fraud and Conspiracy to Defraud (First Cause of Action)
The SMI Defendants contend that the fraud claim must be dismissed as duplicative of the breach of contract claims in the Contract Action. In addition, they argue that the claim fails for the independent reason that there are no allegations of misrepresentations made by the SMI Defendants. Rather, they argue, the complaint makes clear that Dragons chose to deal exclusively with Knights Genesis/GDC, which was the source of all alleged misrepresentations and documents. The SMI Defendants contend that Dragons attempts to obscure this fact by making allegations against a broad category of "defendants."
Dragons counters that the fraud claim is in no way duplicative of the contract claims, because it is premised on a more expansive set of facts, involving misrepresentations collateral to the Facility Agreement, and is seeking recovery from defendants who are not parties to the Facility Agreement. In addition, Dragons claims that the damages are not duplicative of the contract damages, because they seek to recover pecuniary loss only, and do not include contractual interest. Dragons also argues that the complaint sufficiently alleges that the SMI Defendants executed documents that contained material misrepresentations about the Project and that the SMI Defendants intended for Dragons to rely on such documents. Dragons also points to the alleged false statements that Tom Tao made to Dragons during their June 2, 2017 meeting, including that SMI-USA was managing the Project and developing it with Knights Genesis.
To state a claim for fraud, plaintiff must allege "misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury" ( Basis Yield Alpha Fund [Master] v Goldman Sachs Group, Inc. , 115 AD3d 128, 135 [1st Dept 2014] [internal citation omitted]). "[T]he circumstances constituting the [fraud] shall be stated in detail" ( CPLR 3016 [b] ).
First, the fraud claim against the SMI Defendants is not duplicative of the breach of contract claims in the Contract Action. "[A] fraud claim may be dismissed as duplicative only as against a defendant against whom the related contract claim is viable ..." ( Richbell Info. Servs. v Jupiter Partners , 309 AD2d 288, 305 [1st Dept 2003] ). Here, while SMI-USA was a party to the Facility Agreement, the agreement does not give rise to contract claim against it. Its obligation under the put right provision—requiring it to purchase GDC SPV's 8.5% preferred interest in Project Co. from Dragons (see complaint, ¶ 49; Facility Agreement, ¶ 17.16)—could not be triggered in light of the alleged fraud. As such, Dragons’ fraud claim against the SMI Defendants is not duplicative of its breach of the Facility Agreement claim in the Contract Action (see U.S. Tsubaki Holdings, Inc. v Estes , 194 AD3d 590, 592 [1st Dept 2021] [finding that the fraud claims were not duplicative of the breach of contract claims, where, among other things, "the fraud claims (were) asserted against a distinct set of defendants from the contract claims"]; Allenby, LLC v Credit Suisse, AG , 134 AD3d 577,579, 581 [1st Dept 2015] [explaining that because, "the fraud claim (was) asserted against all three defendants but a contract claim (was) asserted against only (one), the fraud claim (could not) be duplicative as to (the other two defendants)"]). Nor is the fraud claim duplicative of the breach of the Guaranty Agreement claim in the Contract Action. Since SMI-USA claims that the Guaranty Agreement is a forgery (see NYSCEF Doc No. 45, SMI-USA's brief at 7), Dragons should be permitted to assert the fraud claim in the alternative pursuant to CPLR 3014 (see Shear Enters., LLC v Cohen , 189 AD3d 423, 424 [1st Dept 2020] [reversing the dismissal of the fraud claim as duplicative of the contract claim and permitting the plaintiff to plead it in the alternative]).
Additionally, the complaint sufficiently alleges the false statements that the SMI Defendants allegedly made to induce Dragons to fund the loan. Specifically, the complaint alleges that Tom Tao, on behalf of SMI-USA, executed the Facility Agreement, which falsely stated that: SMI-USA indirectly held a majority interest in Project Co.; GDC-SPV had a 10% preferred intertest in Project Co.; the loan proceeds would be used for the sole purpose of funding GDC-SPV's 8.5% preferred interest in Project Co.; and, in the event of default by GDC-SPV, Dragons could put GDC SPV's preferred interests to SMI-USA, which would be obligated to purchase it (see complaint, ¶¶ 45-49; Facility Agreement, ¶¶ 3.1, 14, 14.17, 17.16). In addition, the complaint alleges that during an in-person meeting with Dragons on June 2, 2017, Tom Tao stated that "SMI-USA was developing [the Project] with Knights Genesis/GDC; and that SMI-USA was managing the [Project]" (complaint, ¶ 53).
The complaint also points to numerous documents purportedly executed by the SMI Defendants, which further reassured Dragons of the truthfulness of the previous representations. These included the February 28, 2017 LLC Agreement for Project Co. and officer's certificates dated June 13, 2017 (see complaint, ¶ 55, exhibits 3, 4).
The SMI Defendants claim that these documents cannot form the basis of a fraud claim against them, since it is alleged that "Knights Genesis/GDC (through William Chen) provided Dragons with [these] documents intended to induce Dragons to fund the loan" (id. ). However, "indirect communication can establish a fraud claim, so long as the statement was made with the intent that it be communicated to the plaintiff and that the plaintiff rely on it" ( Pasternack v Laboratory Corp. of Am. Holdings , 27 NY3d 817, 828 [2016] ; see Securities Inv. Protection Corp. v BDO Seidman , 95 NY2d 702, 710 [2001] [noting the "the general and unremarkable principle that liability for fraud can be imposed through communication by a third party"]). While nothing on the face of the February 28, 2017 LLC Agreement indicates that the SMI Defendants intended that it be communicated to Dragons, the two officer's certificates begin by making express reference to the Facility Agreement (see complaint, exhibits 3 and 4) and one of them then makes various representations about the contents and accuracy of the February 28, 2017 LLC Agreement, including that "it is in full force and effect" (id ., exhibit 3, ¶ [b]). As such, the complaint sufficiently alleges that the statements in these documents were made with the intention that they be communicated to, and relied on by, Dragons.
The complaint also sufficiently alleges the remaining elements of fraud. It alleges scienter on the part of these defendants (see complaint, ¶¶ 73, 89-91, 93). It alleges that, but for "SMI's background and reputation ... SMI-USA's significant involvement in the project[,] and the ‘put right[,]’ [which] materially enhanced the credit-worthiness of the project and provided significant reassurance to Dragons[,] ... it would have never funded the loan" (id. , ¶ 54). Lastly, the complaint alleges that Dragons was damaged (id. , ¶ 114). Accordingly, the complaint states a claim for fraud against the SMI Defendants (see Basis Yield Alpha Fund [Master] , 115 AD3d at 135 ).
Notably, the allegations of the first cause of action do make frequent reference to "defendants," without specifying the defendants in question. However, as illustrated above, the complaint also contains numerous specific allegations. Because the allegations are sufficient to place defendants on notice of the precise tortious conduct charged to each defendant, they "sufficiently compl[y] with the requirements of CPLR 3016 (b) and 3013" ( Bernstein v Kelso & Co. , 231 AD2d 314, 321 [1st Dept 1997] ; see Pludeman v Northern Leasing Sys., Inc. , 40 AD3d 366, 367-368 [1st Dept 2007], affd 10 NY3d 486 [2008] ).
The court also notes that the SMI Defendants take issue with the fact that the complaint is unverified and that Dragons fails to provide any evidence, such as an affidavit by someone with personal knowledge, of the June 2, 2017 meeting. As this is a motion directed at the sufficiency of the pleadings, Dragons need not prove the truth of its allegations, which "must be accepted as true" ( Allianz Underwriters Ins. Co. , 13 AD3d at 174 ).
For the foregoing reasons, to the extent that the motion to dismiss seeks dismissal of the first cause of action against the SMI Defendants, the motion is denied.
b. Conversion and Aiding and Abetting Conversion (Second and Third Causes of Action)
The SMI Defendants contend that the conversion claim accrued when the loan was funded on June 15, 2017. They argue that, since the instant action was not commenced until May 14, 2021, after the three-year statute of limitations expired, the second and third causes of action are time-barred. They also argue that the conversion claim is duplicative of Dragons’ breach of contract claims in the Contract Action and that, without the underlying conversion, the aiding and abetting claim also fails.
Dragons responds that the conversion claim is timely under the six-year statute of limitations, which applies due to the underlying fraud. In any event, it argues, the claim is timely under the three-year statute of limitations because it accrued on September 14, 2018, when Dragons demanded repayment and was excluded from lawful possession of the funds. Dragons also argues that the SMI Defendants are equitably stopped from asserting the statute of limitations defense because they falsely represented that GDC SPV had used the funds to invest in Project Co. (see complaint, ¶¶ 65, 66, 80, 88), which delayed Dragons’ discovery of the truth. Lastly, Dragons argues that the claim is not duplicative of the contract claims, because it is not premised on a breach of a contractual duty to repay the loan. Rather, it argues, the claim alleges that the SMI Defendants, who have no contractual duty to repay the loan under the Facility Agreement, stole the money.
"A conversion takes place when someone, intentionally and without authority, assumes or exercises control over personal property belonging to someone else, interfering with that person's right of possession. Two key elements of conversion are (1) plaintiff's possessory right or interest in the property[;] and (2) defendant's dominion over the property or interference with it, in derogation of plaintiff's rights" ( Reif v Nagy , 175 AD3d 107, 120 [1st Dept 2019] [internal quotation marks and citations omitted]).
Generally, conversion is subject to a three-year statute of limitations, which runs from the date of the conversion and not its discovery ( Vigilant Ins. Co. of Am. v Housing Auth. of City of El Paso, Tex. , 87 NY2d 36, 44 [1995] ; CPLR 214 [3] ). However, where there is an underlying fraud, the six-year statute of limitations applies ( D. Penguin Bros. Ltd. v City Natl. Bank , 158 AD3d 432, 433 [1st Dept 2018] ; see William Doyle Galleries, Inc. v Stettner , 167 AD3d 501, 505 [1st Dept 2018] [finding that "(t)he cause of action for aiding and abetting conversion, which was based upon fraud, was timely under the six-year statute of limitations governing fraud"]).
Here, the conversion and aiding and abetting conversion claims are timely, because of the alleged fraud. Regardless of whether the conversion occurred in 2017 (when the loan proceeds were allegedly misused) or in 2018 (when Dragons declared default and demanded repayment), the claims are timely under the six-year statute of limitations (see D. Penguin Bros. Ltd. , 158 AD3d at 433 ; William Doyle Galleries, Inc. , 167 AD3d at 505 ).
Additionally, the conversion claim need not be dismissed as duplicative of the breach of contract claims in the Contract Action. As with the fraud claim, the conversion claim is not asserted against a party that has an obligation to repay under the Facility Agreement. As such, "the conversion claim stands on its own" with regard to the Facility Agreement ( Sebastian Holdings, Inc. v Deutsche Bank AG , 78 AD3d 446, 447-448 [1st Dept 2010] [finding that the conversion claim was not duplicative of a contact claim, where there was no allegation of a breach of an agreement between the parties "that directly relate[d] to the allegedly converted funds"]). The conversion claim would be duplicative of the breach of the Guaranty Agreement claim, which purportedly obligates SMI-USA to fulfill all of GDC SPV's obligations under the Facility Agreement (see Fesseha v TD Waterhouse Inv. Servs. , 305 AD2d 268, 269 [1st Dept 2003] [internal citation omitted] ["(a) cause of action for conversion cannot be predicated on a mere breach of contract"]). However, because SMI-USA challenges the validity of that agreement, Dragons should be permitted to plead conversion in the alternative ( CPLR 3014 ).
For the foregoing reasons, to the extent that the motion to dismiss seeks dismissal of the second and third causes of action as against the SMI Defendants, the motion is denied.
c. Personal Liability of Officers
The SMI Defendants contend that the complaint should be dismissed as against Tom Tao and Kevin Gao, because it does not allege that they acted outside of their official capacities or any facts that support piercing the corporate veil. Dragons responds that officers can be held personally liable for committing a tort on behalf of a corporation and that the complaint sufficiently alleges that Tom Tao and Kevin Gao were central actors in the fraud.
"While a corporate officer may not be held liable for the corporation's wrongs simply because of [his] status as a corporate officer, it has long been held ... that a corporate officer who participates in the commission of a tort may be held individually liable, ... regardless of whether the corporate veil is pierced" ( Ramos v 24 Cincinatus Corp. , 104 AD3d 619, 620 [1st Dept 2013] [internal quotation marks and citation omitted]; see Gateway Intl., 360, LLC v Richmond Capital Group, LLC , 201 AD3d 406, 409 [1st Dept 2022] [same]).
Here, the allegations are sufficient to support individual liability against Tom Tao for fraud and aiding and abetting conversion. The complaint specifically alleges that he made statements and executed documents that intentionally misrepresented the ownership structure of Project Co. to induce Dragons to fund the $30 million loan (see complaint, ¶¶ 47-49, 52-56, 65, 73, 89-91). These allegations are sufficient to support the fraud claim against him in his individual capacity (see Gateway Intl., 360, LLC , 201 AD3d at 409 [finding that the plaintiff sufficiently alleged that the defendant corporate officer was "individually liable because he engaged in a course of fraudulent and tortious conduct directed at (the plaintiff) and intentionally caused [the entity defendants] to defraud and breach their contractual obligations to (the plaintiff)"]). These allegations are also sufficient to support the aiding and abetting conversion claim against him, as they "giv[e] rise to a strong inference that the defendant actually knew of the underlying harm ... and rendered substantial assistance, ... enabling the harm to proceed" ( Sayles v Ferone , 137 AD3d 486, 486 [1st Dept 2016] [internal citation omitted]; cf Bankers Conseco Life Ins. Co. v KPMG LLP , 189 AD3d 402, 402-403 [1st Dept 2020] [finding that "(t)he complaint adequately allege(d) substantial assistance by alleging that defendant enabled the fraud to proceed" by lending the transaction an air of credibility]).
However, the allegations against Kevin Gao are lacking. The complaint does not allege that he made any misrepresentations to Dragons. Instead, the allegations against him seek to hold him to account for notarizing various documents (see complaint, ¶¶ 47, 55). Because a notary's "acknowledgment is the verification of the fact of execution but not of the contents of the instrument" ( Jennings-Purnell v Donner , 149 AD3d 499, 500 [1st Dept 2017] [internal quotation marks and citations omitted]), these allegations do not state a claim for fraud (see Abrahami v UPC Constr. Co. , 176 AD2d 180, 180 [1st Dept 1991] [dismissing fraud claims against defendants where there were no factual allegations that they "had made any fraudulent representations to plaintiff" or were part of a fraudulent scheme with other defendants]). Allegations that Kevin Gao was the source of numerous documents provided to Dragons after the loan was funded (see complaint, ¶ 69) and that he falsely stated that the loan proceeds had been used "by GDC SPV to invest in Project Co." (id. , ¶ 66) also fail to state a claim for fraud. "[A]ny misrepresentations made after plaintiff had already [provided] the funds are insufficient to give rise to fraud as there [is] no nexus between the alleged statements and plaintiff's losses" ( RKA Film Fin., LLC v Kavanaugh , 171 AD3d 678, 679 [1st Dept 2019] ). Lastly, the allegations are also insufficient to state an aiding and abetting conversion claim against him, as the complaint does not contain any factual allegations that permit the inference that Kevin Gao had actual knowledge of the alleged scheme (see ALP, Inc. v Moskowitz , 204 AD3d 454, 460 [1st Dept 2022] [finding that aiding and abetting conversion claim should have been dismissed because the "complaint (did) not allege that (the defendant) had the requisite knowledge" of the underlying conversion]; SH575 Holdings LLC v Reliable Abstract Co., L.L.C. , 195 AD3d 429, 431 [1st Dept 2021] [finding that "aiding and abetting conversion claims were properly dismissed, as plaintiff failed to adequately plead the moving defendants’ knowledge of (the underlying) wrongdoing"]).
Accordingly, to the extent that the motion to dismiss seeks dismissal of the complaint against Tom Tao and Kevin Gao, the motion is granted as concerns Kevin Gao only.
Notably, it appears that, following additional discovery in the Contact Action, Dragons may be able to bolster its allegations against Kevin Gao (see NYSCEF Doc No. 179).
iv. Other Action Pending
SMI Defendants and Dragons dispute whether the instant action should be dismissed pursuant to CPLR 3211 (a) (4). The SMI Defendants contend that Dragons, having failed to obtain its desired result in the Contract Action, is now bringing essentially the same claims in hopes of finding a friendlier reception in front of a different judge. Dragons counters that, whereas the Contract Action seeks to enforce the obligations under the Facility and Guaranty Agreements, the instant action includes defendants who were not parties to those agreements and encompasses wrongful conduct before and after the execution of those agreements.
CPLR 3211 (a) (4) permits dismissal where "there is another action pending between the same parties for the same cause of action" ( CPLR 3211 [a] [4] ). Dismissal is appropriate where there is "substantial identity" of the parties and the relief sought is "the same or substantially the same" ( White Light Prods. v On the Scene Prods. , 231 AD2d 90, 94 [1st Dept 1997] [internal quotation marks and citations omitted]; Sprecher v Thibodeau , 148 AD3d 654, 656 [1st Dept 2017] [same]). "The presence of additional parties ... will not necessarily defeat a motion pursuant to CPLR 3211(a)(4) where ... both suits arise out of the same subject matter or series of alleged wrongs" ( White Light Prods. v On the Scene Prods. , 231 AD2d at 94 [internal quotation marks and citation omitted]). Importantly, "the court need not dismiss ... but may make such order as justice requires" ( CPLR 3211 [a] [4] ). The court is vested with broad discretion in deciding whether to dismiss pursuant to CPLR 3211 (a) (4) ( Whitney v Whitney , 57 NY2d 731, 732 [1982] ).
Here, Dragons appears as the plaintiff and SMI-USA appears as a defendant in both actions. The presence of additional defendants—SMI-USA SPV, which Dragons unsuccessfully sought to add as a defendant in the Contract Action, and individual defendants Tom Tao and Kevin Gao, who are officers of the entity defendants—does not require denial of the SMI Defendants’ motion. Where, as here, "a plaintiff seeks the same damages for the same alleged injuries relating to the same transaction from close corporate affiliates, a court may properly make a finding that parties have ‘substantially similar’ identities for purposes of the first-in-time rule" ( Syncora Guar. Inc. v J.P. Morgan Sec. LLC , 110 AD3d 87, 96 [1st Dept 2013] ). The subject matter of the instant action and the Contract Action is substantially the same, as both actions arise out of the loan Dragons provided pursuant to the Facility Agreement and both seek the same relief, the return of the $30 million loaned (see White Light Prods., Inc. , 231 AD2d at 94 [internal quotation marks and citations omitted] [explaining that actions arise out of the same subject matter when they seek "the same or substantially the same" relief]). However, the court is not convinced that dismissal is appropriate. The first-in-time rule "is most frequently applied where the other actions have been commenced in other jurisdictions, thus implicating considerations of comity and raising questions of forum shopping" ( Roberts v 112 Duane Assoc. LLC , 32 AD3d 366, 368 [1st Dept 2006] [internal citations omitted]). Here, the SMI Defendants "raise questions only of judge shopping among justices of the same court" (id. [explaining that the first-in-time rule is not necessarily dispositive on a motion to dismiss]). As both actions are pending before this court, the consolidation of the instant action with the Contract Action is the more appropriate remedy (see id. [modifying order to the extent of reinstating dismissed claims and ordering consolidation of those claims with prior action pursuant to CPLR 3211 (a) (4) ]; see also MediaAmerica, Inc. v Rudnick , 156 AD2d 174, 174 [1st Dept 1989] [finding that "the more appropriate action (was) consolidation rather than dismissal," where "both actions involve(d) the same subject matter and parties"]).
Accordingly, the SMI Defendants’ motion to dismiss the instant action pursuant to CPLR 3211 (a) (4) is denied and, in the exercise of its discretion, the court orders the consolidation of the instant action with the Contract Action.
v. Costs and Sanctions
The SMI Defendants contend that they are entitled to costs and sanctions pursuant to 22 NYCRR 130-1.1. They argue that Dragons’ conduct, in bringing the instant action after the failed motion to amend in the Contract Action, was frivolous. In addition, they argue that Dragons named Tom Tao and Kevin Gao as defendants in their individual capacities without basis in law and with the intent to harass. Dragons disputes these assertions.
22 NYCRR 130-1.1 (a) authorizes the court, in its discretion, to award costs or sanctions upon a party or an attorney "who engages in frivolous conduct." Conduct is frivolous when it "is completely without merit in law," "undertaken primarily to delay or prolong the resolution of the litigation" or "asserts material factual statements that are false" (id. , [c]). The court has broad discretion in determining appropriateness of sanctions ( Matter of Kover , 134 AD3d 64, 73-74 [1st Dept 2015] ).
As made plain by the preceding discussion, the court does not think the instant action frivolous. Therefore, the SMI Defendants’ motion for costs and sanctions is denied.
B. The Ceruzzi Defendants’ Motion to Dismiss (Motion Sequence Number 003)
The Ceruzzi Defendants contend that their motion to dismiss should be granted, because: (1) the fraud and conversion causes of action are duplicative of the breach contract claims in the Contract Action; (2) the complaint fails to sufficiently allege the elements of fraud and aiding and abetting conversion; (3) the conversion claim is untimely; and (4) there are no allegations to support piercing the corporate veil to hold Ceruzzi Holdings and Ceruzzi Properties liable.
This being a pre-answer motion to dismiss, the "the complaint must be construed in the light most favorable to the plaintiff and all factual allegations must be accepted as true" ( Allianz Underwriters Ins. Co. , 13 AD3d at 174 ).
i. Fraud and Conspiracy to Defraud (First Cause of Action)
Ceruzzi Defendants argue that the fraud claim must be dismissed as against them, because: (1) there are no allegations the Ceruzzi Defendants made material misrepresentations; (2) there are no factual allegations from which scienter may be inferred, instead, the complaint relies on the bare allegation that the Ceruzzi Defendants must have known of the fraud; and (3) Dragons cannot demonstrate justified reliance, having failed to contact Ceruzzi during the due diligence process. They also argue that the conspiracy to commit fraud claim fails because it cannot survive without an underlying fraud.
Dragons responds that the complaint contains sufficient factual allegations—including that the Ceruzzi Defendants signed documents containing false information and were the source of numerous confidential documents that could only have been obtained with their knowledge—to permit a reasonable inference of the Ceruzzi Defendants’ participation in the fraud. As concerns the reliance argument, Dragons argues that the contention that it could have discovered the fraud by contacting the Ceruzzi Defendants earlier is speculative and presumes that they did not participate in the fraud. Dragons argues that the issue of reasonable reliance is a fact intensive inquiry that should not be decided on a motion to dismiss.
The parties also dispute whether the claim should be dismissed as duplicative of the breach of the Facility Agreement claim in the Contract Action, making many of the same arguments made on the SMI Defendants’ motion.
"New York does not recognize an independent cause of action for conspiracy to commit a civil tort.... [A]llegations of conspiracy are permitted only to connect the actions of separate defendants with an otherwise actionable tort" ( Abacus Fed. Sav. Bank v Lim , 75 AD3d 472, 474 [1st Dept 2010] [internal quotation marks and citations omitted]). Thus, to state a claim for conspiracy to commit fraud, the plaintiff must first allege the underlying fraud with specificity, which requires allegations of "misrepresentation or concealment of a material fact, falsity, scienter on the part of the wrongdoer, justifiable reliance and resulting injury" ( Basis Yield Alpha Fund (Master) , 115 AD3d at 135 [internal citation omitted]; see CPLR 3016 [b] ). Once that is done, "the plaintiff must demonstrate ... the following four elements: an agreement between two or more parties; an overt act in furtherance of the agreement; the parties’ intentional participation in the furtherance of a plan or purpose; and resulting damage or injury" ( Cohen Bros. Realty Corp. v Mapes , 181 AD3d 401, 404 [1st Dept 2020] [internal citation omitted]).
Here, Dragons fails to state a fraud claim against the Ceruzzi Defendants. There are no factual allegations that these defendants had any communications with Dragons. While "indirect communication can establish a fraud claim," this requires "intent that [the false statement] be communicated to the plaintiff" ( Pasternack , 27 NY3d at 828 ). Here, no such intent can be inferred from the allegations. Dragons points to numerous documents that it received that were executed by or on behalf of the Ceruzzi Defendants (see complaint, ¶¶ 55, 56, 60). These include the February 28, 2017 LLC Agreement, a letter of "Subordination of Equity in Project Co.," dated December 6, 2016, and a slew of documents pertaining to Project Co., including bank loan term sheets and various contracts in connection with the design and construction of the Project (see id. ¶¶ 55, 56, 60). Even assuming that such documents could not have been obtained without the Ceruzzi Defendants’ "knowledge and participation" (id. , ¶ 60), Dragons does not allege any facts from which it could be inferred that the Ceruzzi Defendants intended these documents for Dragons. None are alleged to be addressed to Dragons or to acknowledge Dragons or the Facility Agreement in any way (see, e.g., id. , exhibit 7 [letter of "Subordination of Equity in Project Co." addressed to GDC SPV and "To Whom It May Concern"]). Therefore, these allegations do not support a fraud claim against the Ceruzzi Defendants (see Mandarin Trading Ltd. v Wildenstein , 16 NY3d 173, 179 [2011] [dismissing a fraud claim, where, among other things, there was an "absence of allegations creating a bridge between" the plaintiff and the defendant]; see also Abrahami , 176 AD2d at 180 ).
Notably, Ceruzzi SPV purportedly executed the June 16, 2017 Amendment, which explicitly acknowledges the Facility Agreement (see complaint, ¶ 65; June 16, 2017 Amendment at 1 [stating that GDC SPV "used the loan proceeds under that.... Facility Agreement ... to make a capital contribution to (Project Co.)" and confirming that GDC SPV owned 10% preferred interests in Project Co., 8.5% of which was subject to a pledge in favor of Dragons]). However, because the June 16, 2017 Amendment was executed after Dragons funded the loan, Dragons cannot establish the necessary element of reliance (see RKA Film Fin., LLC , 171 AD3d at 679 ; see also DH Cattle Holdings Co. v Smith , 195 AD2d 202, 208 [1st Dept 1994] [dismissing fraud claim, where "(t)he documents provided to defendant were received after he made the investment, and thus the required element of reliance (was) absent"]). The "additional non-public documents and information about the [Project] that could only have been obtained with the knowledge and participation of ... Ceruzzi" (complaint, ¶ 69), which were provided after Dragons funded the loan, fail to support a fraud claim for the same reason.
To the extent there is a claim against the Ceruzzi Defendants, it must be premised on their participation in a conspiracy to commit fraud, which requires a viable fraud claim against another defendant ( Abacus Fed. Sav. Bank , 75 AD3d at 474 ). Here, such a claim exists against the SMI Defendants. As discussed above, the claim is not duplicative of the breach of contract claims in the Contract Action. Contrary to the Ceruzzi Defendants’ contentions, the claim also sufficiently alleges reasonable reliance.
"Typically, the principle that a party to a transaction must take [ ] reasonable steps to protect itself against deception requires a plaintiff claiming to have been fraudulently induced ... to lend to a business, to allege that, before entering into the transaction, it availed itself of the opportunity to verify the ... borrower's representations through an examination of the business's books and records" ( Basis Yield Alpha Fund Master v Morgan Stanley , 136 AD3d 136, 141-142 [1st Dept 2015] [internal quotation marks and citations omitted]).
"[T]he question of what constitutes reasonable reliance is not generally a question to be resolved as a matter of law on a motion to dismiss" ( ACA Fin. Guar. Corp. v Goldman, Sachs & Co. , 25 NY3d 1043, 1045 [2015] [internal citation omitted]). What is more, "[w]here ... a plaintiff has taken reasonable steps to protect itself against deception, it should not be denied recovery merely because hindsight suggests that it might have been possible to detect the fraud when it occurred" ( Allenby, LLC v Credit Suisse, AG , 134 AD3d 577, 580 [1st Dept 2015] [internal quotations marks and citation omitted]).
Here, the complaint contains extensive allegations of the due diligence that Dragons conducted, including: meeting with Knights Genesis/GDC and the SMI Defendants; obtaining documents related to the formation and ownership of Project Co. and various documents in connection with the development of the Project; visiting the site of the Project; and engaging counsel to conduct due diligence (see complaint, ¶¶ 37-43, 51-56, 59-61). Whether Dragons should have taken the additional step of directly contacting Ceruzzi SPV is not a question the court can determine as a matter of law. "Accepting the allegations of the complaint as true and providing plaintiff the benefit of every possible favorable inference as [the court] must do on a motion to dismiss, plaintiff has sufficiently pleaded justifiable reliance ..." ( ACA Fin. Guar. Corp. , 25 NY3d at 1045 [internal citation omitted] [finding that plaintiff sufficiently alleged reasonable reliance, where it "alleged that it sought assurances from defendant" and that the defendant responded with affirmative misrepresentations]).
Having determined that the complaint states an underlying fraud, the only question is whether the complaint sufficiently alleges conspiracy to support a claim against the Ceruzzi Defendants. Here, there are a number of factual allegations that, combined, permit a reasonable inference that the Ceruzzi Defendants conspired with the SMI Defendants to defraud Dragons. The complaint alleges, among other things, Ceruzzi SPV executed several documents that were integral to the alleged fraud, including the February 28, 2017 LLC Agreement, which misrepresented the ownership structure of Project Co., and the letter of "Subordination of Equity in Project Co.," which stated that GDC SPV owned preferred shares in Project Co. (complaint, ¶¶ 55, 56, exhibit 7). These, combined with the June 16, 2017 Amendment and Ceruzzi SPV's later acknowledgement that the February 28, 2017 LLC Agreement was never in effect and that GDC SPV never had an interest in Project Co. (see id. , ¶ 89), permit an inference "that there existed an agreement or understanding between [the Ceruzzi Defendants and the SMI Defendants] to cooperate in a fraudulent scheme" (contra Natl. Westminster Bank USA v Weksel , 124 AD2d 144, 147 [1st Dept 1987] [dismissing claim where there were no factual allegations to permit an inference that the defendant was part of an agreement to defraud the plaintiff]; cf Bernstein v Kelso & Co. , 231 AD2d 314, 320-321 [1st Dept 1997] [internal quotation marks and citation omitted] [noting that while the complaint failed to specify which defendants were involved in each of the alleged aspects of the alleged fraud, "where the facts were peculiarly within the knowledge of the party against whom the (fraud) (was) being asserted," the allegations sufficiently alleged that the defendants "secretly conspired" to commit fraud and to "to apprise defendants of the alleged wrongs"]).
Notably, the Ceruzzi Defendants deny that they executed the documents attributed to them and argue that the fact that they were the ones to reveal the fraud to Dragons undercuts the conspiracy claim against them (see NYSCEF Doc No. 51, the Ceruzzi Defendants’ brief at 3). However, this being a pre-discovery motion on the pleadings, the court may not assess the merits of the allegations ( Skillgames, LLC , 1 AD3d at 250 ). Accepting the allegations of the complaint as true and providing plaintiff the benefit of every possible favorable inference, as the court must on the instant motion ( Allianz Underwriters Ins. Co. , 13 AD3d at 174 ), the complaint states a claim for conspiracy to defraud against the Ceruzzi Defendants.
Accordingly, to the extent the motion to dismiss seeks dismissal of first cause of action as against the Ceruzzi Defendants, the motion is denied.
ii. Aiding and Abetting Conversion (Third Cause of Action)
The parties dispute whether the claim is timely, making many of the same arguments made on the SMI Defendants’ motion. The Ceruzzi Defendants also argue that the aiding and abetting conversion claim fails because: (1) the underlying conversion claim is duplicative of the of the breach of contract claims in the Contract Action; and (2) the complaint fails to allege that the Ceruzzi Defendants had actual knowledge or provided substantial assistance with the particularity required for a claim sounding in fraud. Dragons responds that the conversion claim is not duplicative, because, among other things, it is directed against defendants who do not have a contractual duty to pay. It also argues that the complaint adequately alleges that the Ceruzzi Defendants knew of, and rendered substantial assistance in, the conversion by signing documents containing false statements and acquiescing to the production of confidential documents.
To state a claim for "[a]iding and abetting conversion requires the existence of a conversion by the primary tortfeasor, actual knowledge, and substantial assistance" ( William Doyle Galleries, Inc. , 167 AD3d at 505 [internal citations omitted]).
As already explained above, the underlying conversion claim is neither time-barred nor duplicative of the breach of contract claims in the Contract Action.
In addition, Dragons’ allegations, that the Ceruzzi Defendants executed documents that misrepresented the ownership structure of Project Co. and assured Dragons that the loan proceeds had been used in compliance the Facility Agreement, "[t]aken together, ... are sufficient at this early, prediscovery, pre-answer stage," to permit the inference that the Ceruzzi Defendants knew that their misrepresentations would cause Dragons to fund the loan ( William Doyle Galleries, Inc. , 167 AD3d at 506 [internal quotation marks and citation omitted] [finding that a combination of allegation, taken together, were sufficient to allege that the defendant "aided and assisted the converter with culpable knowledge that (the property) did not belong to (him)"]). These allegations, combined with the allegations that the Ceruzzi Defendants were the source of numerous documents furnished to Dragons during the due diligence process, are also sufficient to allege that the Ceruzzi Defendants substantially assisted the conversion by lending the transaction the appearance of credibility (see cf Bankers Conseco Life Ins. Co. , 189 AD3d at 402-403 ).
Therefore, to the extent that the Ceruzzi Defendants’ motion to dismiss seeks dismissal of the third cause of action, the motion is denied.
iii. Claims against Ceruzzi Holdings and Ceruzzi Properties
Ceruzzi Defendants contend that the claims against Ceruzzi Holdings and Ceruzzi Properties should be dismissed, because the complaint neither alleges that these entities directly participated in the alleged torts nor sets forth allegations to support piercing of the corporate veil.
Dragons counters that these entities’ participation in the fraud is well-pleaded through allegations that they furnished various documents and engaged in misdirection and obfuscation when Dragons made inquiries. In addition, it argues that the allegations are sufficient to support piercing the corporate veil, because they allege that: Ceruzzi Holdings and Ceruzzi Properties dominated the day-to-day operations of Ceruzzi SPV and Project Co. by executing document on behalf of these entities; the Ceruzzi Defendants share an address; Ceruzzi SPV created Project Co. and that Ceruzzi Holding and Ceruzzi Properties use Ceruzzi SPV to invest in the Project; and the president of Ceruzzi Holding and Ceruzzi Properties is the authorized signatory for Ceruzzi SPV and president of Project Co. Lastly, Dragons argues that, should this court deem these allegations insufficient, it should be permitted to conduct discovery on the issue.
"The concept of piercing the corporate veil is a limitation on the accepted principles that a corporation exists independently of its owners.... The party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene" ( Matter of Morris v New York State Dept. of Taxation and Fin. , 82 NY2d 135, 140, 142 [1993] [internal citations omitted]).
"Factors to be considered in determining whether the owner has abused the privilege of doing business in the corporate form include whether there was a failure to adhere to corporate formalities, inadequate capitalization, commingling of assets, and use of corporate funds for personal use" ( East Hampton Union Free School Dist. v Sandpebble Bldrs., Inc. , 66 AD3d 122, 127 [2d Dept 2009] [internal quotation marks and citations omitted], affd 16 NY3d 775 [2011] ; see FX Funding LLC v Fox RX Inc. , 201 AD3d 519, 519 [1st Dept 2022] [finding allegations that "that the individual defendants disregarded corporate formalities, intermingled corporate and personal funds, used loan proceeds for personal matters rather than corporate uses, and undercapitalized the corporation" were sufficient "to allege ... that the individual defendants may be personally liable under a veil-piercing theory"]; Baltic Fourth LLC v Stern , 193 AD3d 630, 633 [1st Dept 2021] [finding "(p)laintiffs’ allegations of an absence of corporate formalities, inadequate capitalization, and the commingling of funds, as well as the specific allegations that (the individual defendant) engaged in fraud, (were) sufficient to withstand (a) pre-answer motion to dismiss the complaint, based on alter ego liability, as against (the individual defendant)"])
Here, the complaint is entirely devoid of allegations that either Ceruzzi Properties or Ceruzzi Holdings was involved in the subject fraudulent scheme. Unlike with Ceruzzi SPV, Dragons does not allege that these entities executed documents that contained false or misleading information to induced Dragons to fund the loan. The allegations against Ceruzzi Properties and Ceruzzi Holdings consist of either conclusory assertions that they participated in the alleged torts (see complaint, ¶¶ 112, 123) or factual allegations that they were the intended recipients of documents related to Project Co. or the Project and that Knights Genesis/GDC supplied Dragons with copies of such documents during due diligence (see id. , ¶¶ 60, 69). Such allegations are insufficient to state a claim for conspiracy to defraud or aiding and abetting conversion against these defendants (see generally Basis Yield Alpha Fund [Master] , 115 AD3d at 135 ; Cohen Bros. Realty Corp. , 181 AD3d at 404 ; William Doyle Galleries, Inc. , 167 AD3d at 505 ).
Nor are the allegations sufficient to support liability against these defendants based on piercing the corporate veil. None of the alleged facts permit for anything beyond an inference that there was some overlap in the management of the Ceruzzi Defendants (see complaint, ¶¶ 23, 60, 69, 90, 91 [alleging that: Ceruzzi SPV, Ceruzzi Properties and Ceruzzi Holding have the same address; various documents related to Project Co. and the Project were sent to Ceruzzi Properties or Ceruzzi Holdings; and the president of Ceruzzi Holdings executed the 2020 Acknowledgement and the related side letter]). Such allegations do not support piercing the corporate veil (cf. 149-51 Sullivan St. Co. v Lopez , 190 AD3d 597, 598 [1st Dept 2021] [finding no basis to reverse pierce the corporate veil based on allegations of shared offices and address and an overlap in ownership and management]). Even assuming that these allegations sufficiently allege that Ceruzzi Holdings and Ceruzzi Properties dominated Ceruzzi SPV and/or Project Co., "standing alone, domination over corporate conduct in a particular transaction" will not support piercing the corporate veil ( East Hampton Union Free School Dist., Inc. , 66 AD3d at 126 ). Because Dragons fails to allege that either Ceruzzi Holding or Ceruzzi Properties abused the corporate form to defraud Dragons, there is no basis for piecing the corporate veil to hold these defendants liable (compare 501 Fifth Ave. Co. LLC v Alvona LLC , 110 AD3d 494, 494 [1st Dept 2013] [dismissing claims based on veil piercing, because "the failure to allege any fraud or unjust conduct [was] fatal to the complaint"], with Cortlandt St. Recovery Corp. v Bonderman , 31 NY3d 30, 50 [2018] [finding that the complaint supported piercing the corporate veil to impose liability against the defendants as alter egos of the shell companies, "(s)ince the complaint allege(d) the existence of a corporate debt, created by defendants by their use of the corporate form to profit from fraudulent conveyances that left (the shell companies) insolvent"], and Baltic Fourth LLC , 193 AD3d at 633 ).
Lastly, Dragons cannot avoid dismissal on the mere hope that additional discovery will reveal sufficient grounds to justify piercing the corporate veil (see East Hampton Union Free School Dist., Inc. , 66 AD3d at 128-129 [rejecting argument that dismissal was premature "merely on the plaintiff's hope that something (would) turn up" to justify piercing the corporate veil]).
For the foregoing reasons, to the extent that the Ceruzzi Defendants’ motion to dismiss seeks dismissal of the complaint as against Ceruzzi Properties and Ceruzzi Holdings, the motion is granted.
C. The Ceruzzi Defendants’ Motion for a Stay of Discovery (Motion Sequence Number 012)
CPLR 2201 provides that "[e]xcept where otherwise prescribed by law, the court in which the action is pending may grant a stay of proceedings in a proper case, upon such terms as may be just" ( CPLR 2201 ; see OneBeacon America Ins. Co., v Colgate-Palmolive Co. , 96 AD3d 541 [1st Dept. 2012] ; Schwartz v New York City Housing Auth. , 219 AD2d 47 [2d Dept. 1996] ).
New York County Commercial Division Rule 11(g) places the imposition of a discovery stay, pursuant to CPLR § 3214(b), within the sound discretion of the court ( 22 NYCRR § 202.70 ; Matter of Grisi v Shainswit , 119 AD2d 418, 421 [1st Dept. 1986] [courts have the inherent power, and indeed responsibility, so essential to the proper administration of justice, to control their calendars and to supervise the course of litigation before them]).
Nothing in the record on Ceruzzi's motion before this court persuades it that the invocation of a discovery stay is warranted.
Accordingly, it is herby
ORDERED that the motion of defendants SMI USA Group LLC (f/k/a Shanghai Municipal Investment (Group) USA LLC), SMI 138 E 50 St LLC, Tom Tao and Kevin Gao (motion sequence number 002) to dismiss is granted to the extent of dismissing the complaint herein against Kevin Gao only and the complaint is dismissed in its entirety as against said defendant, with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendant; and it is further
ORDERED that the motion of defendants SMI USA Group LLC (f/k/a Shanghai Municipal Investment (Group) USA LLC), SMI 138 E 50 St LLC, Tom Tao and Kevin Gao (motion sequence number 002) for costs and sanctions pursuant to Section 130-1.1 of the Rules of the Chief Administrator is denied; and it is further
ORDERED that the motion of defendants Ceruzzi Holdings LLC, Ceruzzi Properties LLC, IC 50 Development LLC and 50 Lex Development LLC (motion sequence number 003) to dismiss is granted to the extent of dismissing the complaint herein against defendants Ceruzzi Holdings LLC and Ceruzzi Properties LLC only and the complaint is dismissed in its entirety as against said defendants, with costs and disbursements to said defendant as taxed by the Clerk of the Court, and the Clerk is directed to enter judgment accordingly in favor of said defendants; and it is further
ORDERED that the action is severed and continued against the remaining defendants; and it is further
ORDERED that the above-captioned action is consolidated in this Court with Dragons 516 Limited v GDC 138 E 50 LLC , Index No. 651690/2019, under Index No. 651690/2019, and the consolidated action shall bear the following caption:
| SUPREME COURT OF THE STATE OF NEW YORK | |
| COUNTY OF NEW YORK: IAS PART 43 | |
| -------------------------X | |
| DRAGONS 516 LIMITED, | |
| Plaintiff, | |
| -against- | |
| GDC 138 E 50 LLC, KNIGHTS GENESIS INVESTMENT LIMITED, GENESIS DEVELOPMENT COMPANY LLC, SHANGHAI MUNICIPAL INVESTMENT (GROUP) CORPORATION (A/K/A SHANGHAI CHENGTOU GROUP CORPORATION), SHANGHAI SMI ASSETS MANAGEMENT (GROUP) CO., LTD., SMI USA GROUP LLC (f/k/a SHANGHAI MUNICIPAL INVESTMENT (GROUP) USA LLC), SMI 138 E 50 ST LLC, IC 50 DEVELOPMENT LLC, 50 LEX DEVELOPMENT LLC, DUNFEI (WILLIAM) CHEN, QIANYI (VINCENT) XIE, JINCHENG (JASON) YUAN, JIA JU (TOM) TAO, | |
| Defendants. | |
| -------------------------X |
And it is further
ORDERED that the pleadings in the actions hereby consolidated shall stand as the pleadings in the consolidated action; and it is further
ORDERED that the SMI Defendants are directed to serve a copy of this order with notice of entry on the County Clerk (Room 141 B), who shall consolidate the papers in the actions hereby consolidated and shall mark his records to reflect the consolidation; and it is further
ORDERED that the SMI Defendants are directed to serve a copy of this order with notice of entry on the Clerk of the Trial Support Office (Room 158), who is hereby directed to mark the court's records to reflect the consolidation; and it is further
ORDERED that the Ceruzzi motion seeking a stay of discovery in this action motion sequence number 012 is denied.
This constitutes the decision and order of the court.