Opinion
No. 500336/14.
10-14-2014
KORYEO INTERNATIONAL CORP. and Steve Hong, Plaintiffs, v. Kyung Ja HONG, Defendant.
Gary J. Wachtel, Esq., New York, Attorneys for Plaintiffs. Richard Freeman III, Esq., Rheem Bell & Mermelstein, LLP, New York, Attorney for Defendants.
Gary J. Wachtel, Esq., New York, Attorneys for Plaintiffs.
Richard Freeman III, Esq., Rheem Bell & Mermelstein, LLP, New York, Attorney for Defendants.
Opinion
CAROLYN E. DEMAREST, J.
Defendant Kyung Ja Hong moves, pursuant to CPLR 3211(a)(3), (a)(5) and (a)(7), for an order dismissing plaintiffs Koryeo International Corp. (Koryeo) and Steve Hong's first amended complaint.
Plaintiff Koryeo and plaintiff Steve Hong, the current sole shareholder, director and officer of Koryeo, allege that they are entitled to recover from defendant Kyung Ja Hong, Steve Hong's mother and the former sole shareholder, officer and director of Koryeo, for her actions in looting, converting or otherwise misappropriating the assets of Koryeo for her personal use. It is undisputed that Koryeo is a corporation formed by Yong Taek Hong, Steve Wong's father and Kyung Ja Hong's husband, in 1982. When Yong Taek Hong died in 1995, Kyung Ja Hong became the owner of all outstanding shares of Koryeo, and also became Koryeo's sole director and officer. In December 2012, Kyung Ja Hong transferred all of Koryeo's outstanding shares to Steve Hong, who became Koryeo's sole shareholder, director and officer.
According to the first amended complaint, Steve Hong started working for Koryeo after he graduated from law school. At that time, Kyung Ja Hong and Yong Taek Hong, who was still alive, agreed to transfer control and ownership of Koryeo to Steve Hong in return for Steve Hong working for Koryeo for a minimal salary. In reliance on this promise, Steve Hong chose not to pursue a legal career and worked at Koryeo, which work primarily involved his managing and overseeing Koyeo's purchasing, marketing, and warehousing of its inventory, and, to some extent, its product development. Kyung Ja Hong in fact transferred ownership and control of Koryeo to Steve Hong in December 2012. Other than the allegations that he worked for a minimal salary in return for the promise that Kyun Ja Hong would ultimately transfer ownership of Koryeo to him, Steve Hong makes no allegation that he paid any other consideration to Kyun Ja Hong in return for the transfer of the Koryeo's shares. Shortly after the transfer, Steve Hong learned that only $54,201 in cash had been deposited in Koryeo's bank account in 2012, despite previous income in the millions of dollars as shown on corporate tax returns and invoices. Accordingly, plaintiffs conclude that Kyung Ja Hong had looted or otherwise misappropriated Koryeo's corporate assets for her own financial benefit and that, as such, Steve Hong received virtually worthless shares to an indebted corporation.
Based on these allegations, Koryeo, on its own behalf, has pled causes of action against Kyun Ja Hong for breach of fiduciary duty, misappropriation, conversion, corporate waste, unjust enrichment/constructive trust. Steve Hong, in his individual capacity, has also pled causes of action for breach of contract, fraud in the inducement, fraud, breach of fiduciary duty and unjust enrichment/constructive trust. Kyun Ja Hong now moves to dismiss the complaint pursuant to CPLR 3211(a)(3), (a)(5) and (a)(7).
Kyun Ja Hong had previously moved to dismiss the original complaint, which included similar allegations, but which had pled the causes of action for corporate waste as a stockholder derivative action by Steve Hong, rather than as a direct action on the behalf of the corporation. Prior to submission of the previous motion to dismiss, plaintiffs filed and served the first amended complaint. Kyun Ja Hong thereafter withdrew the previous motion to dismiss and made the instant motion as against the amended complaint.
Initially, Kyun Ja Hong asserts that Koryeo does not have standing to bring its claims as direct claims because they constitute an improper attempt to sidestep the contemporaneous ownership rule that applies to derivative actions under Business Corporation Law § 626(b). Plaintiffs, in opposition, counter that the contemporaneous ownership rule is limited to a shareholder derivative claim pursuant to Business Corporation Law § 626(b) and does not apply to Koryeo's direct claims relating to Kyun Ja Hong's diversion of corporate assets that are brought pursuant to Business Corporation Law § 720(b). While plaintiffs correctly state the general rule (see Gabel v. Gabel, 104 AD3d 910, 911–912 [2d Dept 2013] ; Conant v. Schnall, 33 A.D.2d 326, 327–328 [3d Dept 1970] ; see also Tenny v. Rosenthal, 6 N.Y.2d 204, 210–214 [1959] ) , plaintiffs' allegations that all of the alleged wrongs at issue occurred while Kyun Ja Hong was Koryeo's sole officer, director, and shareholder, and before she transferred her interest in Koryeo to Steve Hong, compel a finding that Koryeo does not have standing to bring this action (see Diamond v. Diamond, 307 N.Y. 263, 266–267 [1954] ; Capitol Wine & Spirit Corp. v. Pokrass, 277 App.Div. 184, 186–189 [1st Dept 1950], affd 302 N.Y. 734 [1951] ; see also Bangor Punta Operations, Inc. v. Bangor & Aroostook R.R. Co., 417 U.S. 703, 713–714 [1974] ; Noland v. Barton, 741 F.2d 315, 317 [10th Cir1984] ; cf. Platt Corp. v. Platt, 21 A.D.2d 116, 121–123 [1st Dept 1964], affd 15 N.Y.2d 705 [1965] ).
Conant v. Schnall is distinguishable in that the party bringing the section 720 claim as a director on the behalf of the corporation, while a sole shareholder at the time the action was commenced, had an interest in the corporation at the time of the alleged wrongs (Conant, 33 A.D.2d at 327 ). Gabel is distinguished by the fact that lack of standing as a defense had been waived by defendants' failure to raise it either by motion or in their answer.
As stated by the Court of Appeals, “[t]he rule is that, when stockholders are individually estopped from questioning wrongs done their corporation, they cannot redress those same wrongs through a suit brought directly by the corporation or derivatively, by themselves, for the corporation” (Diamond, 307 N.Y. at 266 ). Two grounds support such an estoppel here. The first is that Steve Hong received his shares from Kyung Ja Hong, a shareholder who must be deemed to have unanimously ratified her own acts of waste and misappropriation (see Capital Wine & Spirit Corp., 277 App.Div. at 187–188 ; Zurlin v. Hotel Levitt, 5 A.D.2d 945, 946 [3d Dept 1958], rearg. denied & lv. denied 6 A.D.2d 734 [3d Dept 1958] ; General Hatters Supply Co., Inc. v. Hartman, 148 N.Y.S.2d 90, 91–92 [Sup Ct, New York County 1955] ; see also Diamond, 307 N.Y. at 266–267 ; 546–552 W. 146th St. LLC v. Arfa, 54 AD3d 543, 544–545 [1st Dept 2008] [LLC lacked standing where wrongdoers were sole members of LLC at time of wrong], lv denied in part and dismissed in part 12 N.Y.2d 840 [2009] ; Bangor Punta Operations, Inc., 417 U.S. at 710–712 ; In re Derivium Capital LLC, 716 F3d 355, 366–368 [4th Cir2013] [sole actor rule precluded exception to imputing knowledge of wrongdoing to principal] ). Any wrongdoing by Kyung Ja Hong is therefore imputed to Koryeo, which is equitably estopped from obtaining redress for its own actions (see 546–552 W. 146th Street, LLC, 54AD3d at 544). Furthermore, Steve Hong, Koryeo's current sole shareholder and the sole prospective beneficiary of Koryeo's recovery, acquired all of his shares after the alleged wrongful acts, and as such, he is barred from bringing a derivative action under section 626(b) (Capital Wine & Spirit Corp., 277 App.Div. at 187–189 ; Bangor Punta Operations, Inc., 417 U.S. at 715–716 ). With respect to both of these grounds for estoppel, a court will pierce the corporate veil and bar a direct action by the corporation when it would only benefit a shareholder who would otherwise be barred from raising the claims in a derivative action (see Capital Wine & Spirit Corp., 277 App.Div. at 187–189 ; see also Bangor Punta Operations, Inc., 417 U.S. at 713 ). Accordingly, as Koryeo does not have standing to bring the first through fifth causes of action, Kyung Ja Hong is entitled to their dismissal.
Kyung Ja Hong has also demonstrated her entitlement to dismissal of Steve Hong's individual claims. Viewing the complaint in the light most favorable to the plaintiffs and accepting the factual allegations as true, Steve Hong has failed to adequately plead his contract claim (see Nagan Constr., Inc. v. Monsignor McClancy Mem. High Sch., 117 AD3d 1005, 1006 [2d Dept 2014] ). According to Steve Hong, sometime prior to his father's death in 1995, Kyung Ja Hong promised to transfer ownership and control of Koryeo to him at some future time following his graduation from law school, which must have occurred prior to his admission to the Bar in 1992. Without providing for a specific time frame, and in light of plaintiff's failure to seek enforcement of the alleged contract for over twenty years, the alleged promise to turn over ownership and control of Koryeo is too indefinite to establish a legally enforceable contract (see Mellen & Jayne, Inc. v. AIM Promotions, Inc., 33 AD3d 676, 678 [2d Dept 2006] ; Matter of Lublin, 40 Misc.3d 1208[A], 2013 N.Y. Slip Op 51073 * 3[U] [Sur Ct, Nassau County 2013] ). In any event, Steve Hong received exactly what was promised when Kyung Ja Hong transferred the entirety of her shares to him in December 2012. While Steve Hong asserts that he received virtually worthless shares in an indebted corporation, he has made no allegation that Kyung Ja Hong promised to transfer a company with a certain amount of assets. Without a viable allegation of a breach, Steve Hong has failed to plead a necessary element of a claim for breach of contract, and the sixth cause of action for breach of contract must be dismissed (see Nagan Constr., Inc., 117 AD3d at 1006 ).The remainder of Steve Hong's claims are also deficient. The fraud and fraud in the inducement claims are not pled with specificity as required by CPLR 3016(b), do not plead a necessary element of a misstatement of fact at the time the agreement was entered into, and are duplicative of the contract claim in that they do not allege the violation of any duty distinct from the insufficient contract claim (see Beta Holdings v. Goldsmith, 120 AD3d 1022 [1st Dept 2014] ; Orok Edem v. Grandbelle Intern. Inc., 118 AD3d 848, 849 [2d Dept 2014] ; Delagrange v. Payard, 110 AD3d 491, 491 [1st Dept 2013] ; Moon v. Clear Channel Communications, 307 A.D.2d 628, 631 [3d Dept 2003] ; River Glen Assoc. v. Merrill Lynch Credit Corp., 295 A.D.2d 274, 274–275 [1st Dept 2002] ). Similarly, the breach of fiduciary claim is duplicative of the contract claim as it likewise fails to allege any violation of a duty distinct from the insufficient contract claim (see Hylan Elc. Contr. Inc. v. MasTec N. Am., Inc., 74 AD3d 1148, 1149 [2d Dept 2010] ). Finally, with respect to the unjust enrichment/constructive trust claim, Steve Hong has not alleged an unjust transfer of assets belonging to him individually, as opposed to Koryeo. In addition, as discussed with respect to his breach of contract cause of action, Steve Hong has failed to allege that Kyung Ja Hong breached any definite promise made to him (see Delzer v. Robicki, 85 AD3d 1722, 1723 [4th Dept 2011] ; Stephan v. Shulma, 130 A.D.2d 484, 485–486 [2d Dept 1987] ; Koether v. Sherry, 40 Misc.3d 1237[A], 2013 N.Y. Slip Op 51471 *8 [U] [Sup Ct, Kings County 2013]; Matter of Lublin, 2013 N.Y. Slip Op 51073 * 3).
Accordingly, defendant's motion is granted and the complaint is dismissed.
As defendant has failed to allege or demonstrate any statutory or contractual basis for an award of attorneys' fees, such request is denied (see Diamond, 307 N.Y. at 267 ).
This constitutes the decision and order of the court.